The Straw That's Breaking the Camel's Back

It's been a couple of hours since the jobs numbers were released this morning, and the initial market gains have almost been wiped out. I must admit we were shocked to see a reading of a job loss of only 20,000 jobs and a decline in the unemployment rate to 5%. By no means do I want to downplay that number or dance in the streets knowing that Americans have been losing jobs for four consecutive months; on the other hand, it was a nice relief given the estimates by many economists for a loss of 75,000 jobs this month, if not more.

Here's what we need to consider:

1. This number was released on the 2nd of the month. That means that the Bureau of Labor Statistics has not had much time to review the numbers and prepare for revisions. History suggests that the earlier the jobs numbers are released the following month, the greater risk to revisions. For example, in January the initial claims number was for a decline of 17,000 but the following month it was revised up to a loss of 76,000. Will we see the same thing happen next month?

2. It appears as though there is a disconnect between what the jobless claims suggest and what this data shows. Don't forget just yesterday the four week moving average for jobless claims hit a four year low. Keep in mind jobless claims numbers do tend to be volatile.

3. Average hourly earnings rose by only one penny this past month after a six cent rise in February and March. Lowest increase in a year!

4. The number of workers filing for temporary work who prefer a full-time job but have to work to pay the bills is piling up.

5. Some suggest the risk to a downward revision is just as likely as a risk to an upward revision given some of the details.

6. Health care is firing on all cylinders creating 36,000 jobs this month. It has been a big source of growth this year.

7. Financial services reported a gain of 3,000 jobs. That doesn't appear to take into account the job losses that we're hearing about every day in the financial community. This number has to change.

Should we be thrilled? Euphoric? Relieved? Skeptical?

I would probably say somewhere in the middle. According to the many experts I talked to there are several issues that you have to take into account.

1. This is one number and you can't put too much faith in one number.

2. This is not a recessionary number. It gives the Fed room to pause and an opportunity for the dollar to rise.

3. This is just what the market needed. A sign of confidence that the economy make be sustaining a slow growth period without a recession.

What I want still don't fully understand is where we go from here... Have we willed ourselves into anticipating bad economic news and now when it's not as bad as expected, we're pleasantly surprised? Is that upside surprise enough to will those sitting on the sidelines to step up and buy the market? Does any of this talk matter if we can't get inflation costs down? I'm starting to think that Trichet was right all along in his unwillingness to cut rates. Inflation could be the straw that breaks the camel's back.

Personal Income and Spending....not bad. Q1 GDP up 0.6%....not great but certainly not negative growth. A loss of 20,000 jobs not near the average monthly job losses of '91 and '01 when they averaged 150-175,000. Inventories building....yes. Consumption...weakening. Consumer sentiment....26 year low. This is the kind of economic data that will divide almost every economist straight down the line. It's not clear and it may not be clear where this economy is headed for several more quarters. For now we ride the wave and prepare for bumps in the road!