M A R C H  2 0 1 3








Economic and Market Review

By: Ryan McCarroll
Risk Analyst


The February employment figures came in stronger than expected, continuing the trend of moderate labor market improvement. Total non-farm payrolls grew by 246 thousand while the unemployment rate ticked down to 7.7%. The employment gains were broad based, with the construction industry adding a surprising 48 thousand workers. Average weekly hours and hourly earnings each improved 0.2% during the month, helping to offset some of the sting of the increase in gasoline prices. Initial claims for unemployment benefits have also improved, implying that the labor market momentum could continue into March. The four week moving averages for initial jobless claims were 348.8 thousand, the lowest reading in 5 years.

While the February employment figures were a positive sign, downside risks to the labor market and overall economic recovery remain. More specifically, the federal government spending sequester and its implications for labor market momentum. Opponents of the sequester paint a dire picture of its repercussions, while proponents claim that lost jobs will shift to more productive areas of the economy, with some of the impact softened by furloughs in lieu of layoffs. Economists surveyed by Bloomberg estimate that employment growth in the last three quarters of the 2013 will average 171 thousand per month, just 10 thousand less than the current 6 month average of monthly gains.

Equity prices continue to rise during March, with the Dow Jones Industrial Average reaching a record high as of the writing of this commentary. According to the Federal Reserve, household net worth increased $1.1 trillion in the fourth quarter of 2012. The actions of the Fed have succeeded in increasing household wealth through equity prices. The ultimate effect on consumer spending and the related costs of such actions remain less clear.

Perhaps more important to household wealth would be a continued increase in housing prices in 2013. December home prices rose 6.8% year-over year according to the S&P/Case-Schiller 20 city index. Indeed, many indicators point to a continued recovery in the housing market. U.S. housing inventory levels are very low at 4.2 months supply--six months is considered normal historically. Bloomberg’s estimate of shadow inventory (distressed properties that may eventually come to market) is down 1.85 million units from its peak of 5.37 million in 2009. These factors, coupled with extraordinarily low interest rates, could begin a positive feedback loop.

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