05 Oct 2007 Jobs Report Bodes Well For Economy

The sky may not be falling after all. Today the Labor Department reported that employers added 110,000 workers in September and they revised the August data to reflect that 89,000 jobs were added. The data correction is the larger news in that it reverses an earlier report that indicated the first loss in jobs four years. The employment scare raised fears that recession was more likely and probably played a significant role in the Fed’s decision to drop rates last month.

Given the improvement in the economic outlook by this and other recent measures, the speculation is that the Fed may be finished with rate reductions for the time being. Fed Bank presidents have been outspoken lately about improving signs in the credit market crisis. On Sept. 28 St. Louis Fed Bank President William Poole said it would be wrong for “markets to bake into the cake the assumption of ongoing rate cuts.” Philadelphia Fed chief Charles Plosser and Richard Fisher of Dallasboth even broached the possibility of raising rates to keep inflation in check. “Should further correction” in rates be needed in either direction, “we will make it,” Fisher said on Sept. 24^th.

A more balanced assessment was given by Vice Chairman Donald Kohn today in Philadelphia as he said the Fed must be “nimble” in setting interest rates given the risks of both slower U.S.economic growth and faster inflation. “We do not know how financial markets will evolve, and we do not know how households and businesses will respond to financial developments. We will need to be nimble in adjusting policy to promote growth and price stability.” 

Futures traders scaled back their bets that the Fed will lower rates again on Oct. 31^st. The odds fell to less than 50% today after the Labor Department’s jobs report. 

Analysts seem to agree that the economy will resume its growth trajectory as they expect corporate earnings to rise into double digits next year. The current forecast of analysts polled by Bloomberg for earnings of S&P 500 companies is for an increase of 11.7% in 2008. The increase follows on the heels of a 0.7% trough in the third quarter of this year and an expected 10.9% in the fourth. 

Earnings estimate revisions both up and down over the past month have been almost even, but there are some standouts with Information Technology leading the way. Analysts have raised their growth projections .77% and .45% for the third and fourth quarters of this year, respectively. All other sectors except energy and technology show declines. 

In the coming weeks we will get a better read on how badly the credit market turmoil is impacting corporations as they report their third quarter earnings. Just as important will be their outlook for future earnings and whether they see improvement in their ability to get needed financing.

 While the banks will be closed on Monday in observance of Columbus Day the stock and bond exchanges will be open as will our office. Please call if you need anything.

Have a good weekend.