U.S. Unemployment Preview: Look for an Upside Surprise

As the new year begins, the U.S. employment picture is brightening.

Jan 9, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

With more good news regarding the labor market, stocks were mixed on Thursday morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.09% and down 0.06%, respectively, at 10:15 a.m. EST.

When the Federal Open Market Committee decided in December to start slowing its asset purchases beginning this month, the decision was predicated on improving economic fundamentals, including a strengthening job market. As we head toward tomorrow's release of the Labor Department's December employment report, this week has already produced several data points that appear to support the Fed's assessment:

  • On Wednesday, payroll processor ADP released its National Employment Report for December, which showed the private sector added 238,000 jobs in that month. That figure significantly exceeded expectations of 200,000 in a Reuters poll and made December the strongest month for hiring since November 2012. Moreover, November 2013 additions were revised upward to 229,000 from 215,000.
  • The Labor Department announced today that initial claims for unemployment benefits fell by 15,000 last week to a seasonally adjusted 330,000, in line with expectations of 335,000 in a Reuters poll of economists.
  • Also today, a report from consultants Challenger, Gray & Christmas suggested that the number of planned layoffs at U.S. companies fell by nearly a third in December relative to the previous month, to 30,263 -- the lowest monthly tally in 13 years.

What are expectations for tomorrow's headline numbers? According to (yet another) Reuters poll of economists, the Labor Department is expected to report that nonfarm payrolls rose by 196,000 last month (November saw 203,000 jump), with the unemployment rate remaining at 7%. In light of the positive developments mentioned above, there appears to be some room for an upside surprise tomorrow.

What would that mean for stock investors? Short-term movements are essentially impossible to predict, but some of last year's phenomenal performance appears to have been "borrowed" from this year on the premise of just such surprises. So I wouldn't expect stocks to catch fire tomorrow, even if we obtain a better-than-expected report. On a longer-term basis, the most recent data suggest the U.S. economic recovery is gaining traction, which can't be anything but good news -- for investors and workers alike.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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