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Will Tomorrow’s Jobs Report be Another Dud?

Tomorrow morning at 8:30 eastern, the Bureau of Labor Statistics (BLS) will release the unemployment report for April. You may recall that the unemployment report for March, which was released on April 5, was simply awful. Only 88,000 new jobs were created in March, instead of the nearly 200,000 that were expected.

So what’s expected in tomorrow’s jobs report for April? The consensus estimate is that the headline unemployment rate will remain unchanged from March at 7.6%, although a good number of forecasters think it could jump back up to 7.7%.

As for the number of new jobs created in April, the consensus is a number around 150,000. It remains to be seen if we’ll get another disappointing jobs report tomorrow. Whatever the numbers are in the morning, everyone will continue to ask the same basic question: Why aren’t more companies hiring more workers?

I ran across some interesting data this week that helps answer the question of why companies are not hiring more. As you know, this is earnings season for public companies. So far, about half of the companies in the S&P 500 have reported 1Q earnings. Of those, 69% reported that profits were better than Wall Street expected. That’s the good news as you can see in the chart below.

Q1 Earnings

Source: FactSet.com

The bad news is that revenues have been falling over the last year as you can see above. Only 43% of companies that have reported so far had better than expected revenues.  Normally that number should be 62%. So in terms of revenues, the 1Q was a dismal time. You might be asking: How can companies with falling revenues report better than expected earnings?

The answer is that the CEOs who run these big S&P 500 firms are cutting spending on just about everything, including new workers hired, to keep profits high. Most of these CEOs own a lot of their company’s stock and they want to keep Wall Street happy, and hope the investing public is not paying attention to falling revenues.

As noted above, analysts are looking for a new jobs number around 150,000 tomorrow, but as we saw last time, the consensus can be way off. It is estimated that it takes 200,000 to 250,000 new jobs a month just to keep up with population growth, so 150,000 will be better than in March but still disappointing.

Also, April is one of those months when the BLS adds a generous amount of new jobs that it believes are being created by small businesses that it does not survey. Last year in April, the BLS added 206,000 of these so-called “phantom jobs” that it can’t prove were actually created. It remains to be seen what this number will be tomorrow.

The government did report last Friday that GDP increased 2.5% in the 1Q (annual rate). But most of that growth occurred in January when consumers had more money to spend, and then tapered off in February and March. No one knows what the economy will do the rest of the year.

Nevertheless, Wall Street is forecasting a huge increase in corporate earnings for all of 2013, based on the assumption that economic growth will continue to rebound. But if growth remains slow, I think it’s safe to assume that most CEOs will continue to limit new hiring. There could even be more layoffs. Let’s hope not.

Finally, in case you missed it, be sure to read this week’s E-Letter on the upcoming significant revisions to how GDP is calculated. It may be the most interesting thing I’ve written this year.

Have a great weekend everyone!

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