Economy Adds Jobs!

The U.S. economy added 308,000 jobs in March, almost three times economists’ expectations and the largest gain since April 2000.  Treasury Secretary John Snow said “strength is apparent across the board, including strong job growth in construction, retail, and business services.”  The increase follows gains that were revised upward to 46,000 for February and 159,000 for January.  Manufacturing may soon be joining the party as this was the first month without a decline since August 2000.  The Unemployment rate rose to 5.7% from 5.6% as more people returned to the labor force to seek jobs. 

The chart below demonstrates that the economy’s job creation strength is approaching levels enjoyed before the Bubble burst in the late 90’s.

The news which was welcomed by the Administration and stock investors sent bond prices lower.  Interest rates will likely be headed higher in the coming months as bond buyers fear the Fed must eventually move back to a neutral stance to counter the inflationary pressures of a rebounding economy.  But recent comments from Fed governors indicate they are willing to risk a little inflation (which is not yet apparent) by keeping rates lower longer rather than risk damaging the recovery by raising them too soon.  Banks and other financial stocks were down as rising rates may stunt their earnings prospects.

Earlier in the week we saw that manufacturing in theChicagoarea continued to expand, but at a slower pace.  Orders placed with U.S. factories increased less than expected in February, government and private reports showed.  Economists suggest that the pace of economic expansion is slowing to a more sustainable level.  U.S. Treasuries rose as investors saw the reports as signs of a slowing economy that diminishes chances the Federal Reserve will have to raise interest rates soon.  What a difference a couple of days make, huh?  It’s reasonable to expect bond prices to be pretty volatile in the coming weeks as speculation of a Fed move intensifies.

Over the past several months we have reduced bond maturities and their overall weightings in our portfolios.  Accordingly, we have invested more in stocks of companies that typically do well in expanding economies.

The recovery is for real and has staying power.  The market correctly anticipated what we are seeing now in government reports.  But future moves higher are a function of earnings releases and forward-looking comments by management.  We expect that corporate earnings released over the coming weeks will exceed, once again, analysts’ expectations for growth.  This year is shaping up to be another good one for investors.