All Signs Point To Recovery

The BLS jobs report released on Friday morning understandably gained a lot of attention.  In January, the US economy gained 243,000 non-farm payroll jobs and the unemployment rate dropped from 8.5% to 8.3%, blowing away analyst expectations.  As if the top-line numbers of the report weren't good enough, the jobs numbers from November and December were revised upward by a total of 60,000.

Digging deeper in the January report provides even more encouraging news. 44,000 jobs were created in the leisure and hospitality industry, signifying that people are feeling more confident in their personal financial situation and therefore more willing to spend on restaurants and other non-essential services.  50,000 jobs were created in manufacturing, with most occurring in the production of durable goods.  The 22,000 jobs in metal fabrication and machinery production is a good indicator that demand is up for base materials and equipment used in construction--an extremely positive macroeconomic sign and also good news for the beaten-down housing market.  On top of that, 21,000 jobs were added in construction in January, an exceptional amount considering it was in a winter month. 

While the January jobs report was very good, I have to say I was surprised at the shocked reaction by analysts when it was released.  The positive signs have been trickling out for almost a month as companies released their quarterly earnings and forecasts.  Leading up to the jobs report, almost every indicator from companies that serve as macroeconomic bell-weathers showed the US economy was on a solid upward trajectory.  Caterpillar Inc, the world's largest manufacturer of construction and mining equipment reported a 60% increase in earnings in the last 3 months of 2011 and forecast a certainly-low-balled 25% rise in earnings over the course of 2012.  Manufacturers of base metals have also recently seen a significant uptick in sales and made positive forecasts for the year.  Alcoa, the worlds largest aluminum supplier, serving in its traditional role of kicking off earnings season, topped revenue forecasts by $300 million in the 4th quarter despite historically depressed aluminum prices.  The company also projected demand for aluminum to increase 7% in 2012.  Steel manufacturers Nucor and Steel Dynamics both released far better than expected 4th quarter earnings and projected the trend to continue in the 1st quarter of 2012.  Whirlpool Corporation, the world's leading appliance manufacturer, saw 4th quarter profits rise 20%.  Even more encouraging for the domestic housing market, their profits in North America tripled on the quarter and they expected up to a 3% increase in shipments for the continent in 2012. 

Economists are understandably skittish about proclaiming that we are truly seeing a burgeoning economic recovery.  But they can't deny the data, and the data suggests that this is precisely what is happening.  Jobs are being created, but more importantly, they are being created in sectors that point to long term economic growth: durable goods manufacturing and construction.  The earnings reports by companies in these sectors (which are key indicators of macroeconomic trends) provided a sneak peek to the booming January jobs report. 

Certainly the economy is still fragile and rife with potential pitfalls.  Europe looks to be heading toward a recession and their handling of Greece's debt crisis has managed to do the impossible--make the US Congress seem efficient.  Even if the Greece situation is resolved, there are numerous other countries in the Eurozone on deck to potentially default, starting with Portugal.  I do remain optimistic that Europe will come up with a short-term solution to the debt problems plaguing many of its members (though I'm much less optimistic about the prospects of certain member-countries implementing necessary structural changes to get on solid footing long-term).  However I also believe that the US economy is sufficiently decoupled from Europe that even a prolonged recession there won't significantly stifle the domestic recovery.  

In my view, all the evidence throughout the month of January pointed to significant improvements in the US economy, in both the short-term and long-term.  The jobs report released on Friday was simply the final verdict being read.  I expect 2012 to be a good year domestically, with significant employment gains and GDP growth.  I also expect that the long-languishing housing market will start to pick up over the next few months.  I may simply be an optimist, but the view looks pretty good from here.