Podcast: May 2010 Jobs Data

Welcome, my name is Sean Simko. I am Managing Director of SEI Global Fixed Income Management. Today’s commentary focuses on the jobs data for May, including the nonfarm payroll number and the market’s initial reaction.

If possible, ignore for one moment all the negative headlines around the European woes. Forget the fact that the global economic recovery is increasingly intertwined. Look the other way about geopolitical concerns surrounding the Koreas and Iran, as well as all actions that China is or is not taking which may or may not lead to a double-dip recession.

If you were in this vacuum, you could focus completely on the labor market and payroll data. However, prudent investing, not to mention common sense, acknowledges that these discouraging news items cannot be ignored. Still, there needs to be a return to a focus on the fundamentals of the economy, which includes the health of the labor market. These fundamentals may not always be positive or supportive of a strong recovery, but they help paint an accurate picture and shouldn’t be ignored.

This week’s payroll release was marked with heightened anticipation and uncertainty, driven by a wide range of forecasts for job growth. According to Bloomberg, consensus estimates forecasted an increase of 533,000, with a range from 220,000 to 750,000. One reason for this wide range is the uncertainty around U.S. Census hiring. The problem with census hiring is that the jobs are not permanent. The duration of a census job can range from as short as a week to a couple of months; therefore, the addition of these jobs should be discounted.

The headline number of an increase of 431,000 jobs looked decent. The underlying components told a different story. Private payrolls were a disappointment, increasing only by 41,000. Construction figures were also disappointing, showing a decrease of 35,000 jobs. The manufacturing sector added 29,000 jobs, down from last month’s increase of 40,000. Temporary help added 31,000 jobs, again showing a decrease from recent trends.

This report reflects the importance of separating job growth in the public sector from job growth in the private sector. With only 41,000 jobs coming from the private sector—a better barometer of the health of the labor market—I can’t read this report with anything other than concern. This modest growth of permanent jobs is not the significant increase the economy needs to see for sustainable growth.

That noted, the report was not all bad. The length of the workweek continues to improve, showing an increase to 34.2 hours in May, and the unemployment rate ticked down to 9.7%. But the bottom line is: the job market is still in a difficult place.

The dismal labor report fueled the next leg to the Treasury rally. The overriding tone in the market is once again the flight-to-quality trade. The curve flattened after the release with the 10-year rallying 11 basis points to 3.26% and the 2-year rallying by approximately 8 basis points to 0.79%. The five- and seven-year notes outperformed the curve, each moving lower by 13 basis points to yield 2.02% and 2.69%, respectively. This action continues to show the fragility of the market and and the depth of investor anxiety.

Please keep in mind that recoveries, economic or otherwise, do not move higher in a straight line, and the labor market is no exception. Volatility will likely remain front and center, but it is important to not get too caught up in it. The next few months are important, as they will help show whether the initial strength in job growth early in the year will continue or if it will start to fade.

If you have any questions about this podcast or the financial markets, please contact your SEI representative. Thank you.

SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).