The Coming Week: Employment Report Rivets Investors' Attention
By Diane Hess
Staff Reporter
3/4/01 12:30 AM ET
NOTE: interesting last paragraph....DG
Wall Street swamis may not be able to presage where the major stock market averages will finish on Friday, but they can definitely foresee that this week's events will boil down to one piece of economic data: the February employment report.
By all accounts, the data are a big deal. Containing information about job and wage growth, the report is considered the single best measure of the health of the economy, tracking three key ingredients baked into the condition of the labor market: nonfarm payrolls, the unemployment rate and average hourly earnings.
Released on Friday, the stats are expected to reveal that labor conditions weakened in February, after showing some strength in January. Economists polled by Reuters predict that nonfarm payrolls grew by 68,000 in February, compared with 268,000 a month before. They also expect a one-tenth percentage point rise in the unemployment rate to 4.3%, from 4.2% in January. And they are looking for average hourly earnings to have increased 0.4%, after remaining unchanged last month.
What should investors make of the numbers? For starters, a slackening in the labor market reinforces the notion that the economy is slowing and gives the Federal Reserve greater incentive to lower the fed funds rate at its upcoming meeting on Mar. 20.
What's more, "a very weak employment report," says Brian Jones, economist at Salomon Smith Barney, "could raise expectations for more than a 50 basis-point interest-rate cut on March 20." For his part, Jones is betting on zero growth in nonfarm payrolls, an extremely bearish wager, and contends that if he's right, a steeper-than-expected rate cut could be a real possibility.
There is no doubt that seasonal factors were responsible for January's job gain of 268,000, an abnormal increase given deteriorating economic conditions. Due to unusually cold weather in November and December, hiring was depressed in those months and, as a result, there were fewer layoffs. When the weather improved in January, construction jobs saw a gain of 145,000, compared with a loss of 18,000 in December.
"The January employment report didn't bear resemblance to the facts, because the weather was so good that month," adds Jones.
Other economists agree that last month's job number was a fluke, but their projections for February's edition of the employment report are less pessimistic. "We're expecting a return to a slower pace of economic growth, one that is more in line with the trend and the three-month average," notes Mary Dennis, economist at Merrill Lynch. Still, Dennis is forecasting an increase of 85,000 nonfarm jobs in February.
"In the outside surprise that the payroll number is negative, the Fed cut could be greater than 50 basis points," adds Dennis. "But I'd put that at a low probability." Though she expects the February unemployment figure to come in higher than January's, the economist does not think it will affect the central bank's thinking. "The Fed anticipates a low potential for GDP growth, which is consistent with a rise in unemployment."
To be sure, a low number for new nonfarm payrolls could spark stocks to rally. "The market would react positively to a slowdown in the economy," says Brian Belski, market strategist at U.S. Bancorp Piper Jaffray. "That would solidify expectations for a rate cut."
In the coming days, Belski believes that investors may flock to stocks with low valuations, as they look at fundamental conditions to position themselves. "People are now wrestling with the notion of valuation," he says. "They are levitating back to using the price-to-earnings ratio, as the price-to-sales ratio is too risky in this climate."
Companies meeting to update the investment community on their status this week include Veritas Software (VRTS:Nasdaq - news), Xilinx (XLNX:Nasdaq - news), Gemstar (GMST:Nasdaq - news) and i2 Technologies (ITWO:Nasdaq - news).
Even as the Nasdaq Composite Index ended down 65.74 points to 2117.63 on Friday, market pros believe the chances for a rally this week are pretty good.
"Investors are going to key in on the fact that the market has bottomed out," notes Arthur Hogan, chief market analyst at Jefferies. "At this point, people are more afraid of missing a bottom than they are of making bad investment decisions." |
