The March Employment report hints at across the board economic weakness

Friday's release of the March employment report triggered new doubts over the vitality of the economic recovery and especially the sustainable strength of employment gains. That led to a Friday partial reversal of the recent back-up in Treasury note and bond yields. And in the equity market, which was closed for the Good Friday holiday, a retreat in the futures market indicates a decline in Monday's stock market prices.

The sharp jolt to market confidence came from a modest 120,000 increase in March nonfarm payrolls, versus expectations of a 200,000 rise, and other signs of employment report disappointment. Even though the March unemployment report edged down to 8.2% from 8.3%, the decline was primarily due to a perverse 164,000 drop in the labor force, which countered a 31,000 drop in employment. Thus,both elements of the labor force calculation point to employment weakness, not strength.

The March employment report of aggregate hours worked also edged down, indicating a slower than anticipated first quarter real GDP rise, probably 2.0% or less, versus the 3.0% fourth quarter increase. That would also confirm that special and unsustainable one-time forces that were at work to boost the economy in last year's fourth quarter and employment in recent months. These included the need to boost inventories to make up for supply disruptions due to the Japanese earthquake and tsunami, as well the Thai floods. In addition, as Fed Chairman Bernanke theorized, Corporations may have reduced employment too severely and were merely reinstating some of that excessive cutback. Moreover, the unusually warm winter significantly, but artificially, boosted seasonally-adjusted employment reports in prior months. Like March, subsequent monthly employment reports are thus likely to be paybacks for the abberrant winter weather. However, there are still signs that the economic recovery, though sluggish, is still intact. For example, weekly Initial Claims for Unemployment Benefits, at 357,000 in the latest week, are well under the 400,000 claims level that is viewed as the threshold level indicating economic recovery. But that would not be inconsistent with a sluggish pace of economic growth.

A likely sluggish pace of economic growth and employment gains would cause the Fed to no only persist in its accomodative policy through next year and into 2014, but could even lead them to reinstate quantitative easing, which recent Fed minutes appeared to rule out. That prospect will help boost purchases of safe-haven US Treasuries.

The recession brewing in Europe and the slowdown in China'a economic growth, with even a hard landing possible, create an increased vunerabliity for the US economy. A return to recession for the US, though unlikey, can not be ruled out. But, just slow US economic growth will likely cause increasing doubts over the strength of corporate profits, which will probaby top out in the first quarter. The massive bailout of Greece,Portugal and Spain does guarantee success or rule out a return to major credit strains. That certainly seems the message of the extreme widening to 400basis points in the yield spread between the soverign credits of Spain and Germany. Though China has cut its real GDP growth target to 7.5% from 9%, their actual growth could fall below that target as export sales to Europe falter and a shift to production to meet domestic demand disappoints.

As a result, look for weaker demand and prices for commodities,and restrained inflation of 2.0% or less. Expect vulnerability of equity prices, especially with the approach of May, when the old dictum suggests investors liquidate so as to buy back in October. The other equity rule to follow is to sell when the equity market indices decline in excess of 4.0% for a single Friday to Friday week. And for Treasury notes and bonds, the outlook still calls for significantly lower yields, with even new lows possible in the second half of the year, if not before.

Philip Braverman, President
Braverman Economic and Fionancial Consulting
One Hewlety Square #249
East Northport, New York 11731

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I can be reached at philipbraverman@gmail.com