Economic Update 3-10

Top 5 Takeaways This Week

• February payrolls showed a loss of 92,000 jobs, well below expectations for job growth.

• The unemployment rate increased slightly to 4.4%, though still below last year’s peak.

• Retail sales remain strong, rising 3.2% over the past twelve months due to higher personal income.

• Geopolitical conflict in the Middle East is dominating financial markets, overshadowing economic data.

• Oil prices have risen due to the conflict, though we currently expect the increase to be temporary.

Labor Market Update

We had the first critical economic releases of last week on Friday morning, and unfortunately the numbers were somewhat disappointing. While the ongoing military actions against Iran by the U.S. and Israel are dominating the news and significantly affecting financial markets, we still need to be aware of and follow economic trends.

Early today we had the Nonfarm Payrolls release for February. The U.S. economy saw a decline of 92,000 jobs in February, the largest loss of employment since October. The consensus forecast was an increase of 59,000 jobs.

Two sectors most responsible for the decline were healthcare and the federal government. Reductions in government employment were expected, but strikes in the healthcare industry resulted in larger declines than anticipated. There were also disappointing job losses in manufacturing during February.  For comparison, the adjusted employment number for January was 126,000. 

Not surprisingly, the unemployment rate increased slightly to 4.4% from 4.3% in January. This remains below the highest level of last year, which was 4.5% in November.  Weekly average hours remained stable at 34.3 hours for both January and February. Average hourly earnings, on a year-over-year basis, increased slightly to a gain of

3.8%.

Consumer Spending

We also saw January retail sales rise 3.2% over the past twelve months. This compared favorably to the gain of 2.4% reported in December.  The ongoing rise in personal income is primarily responsible for the positive movement in this important economic indicator.

Geopolitical Developments

While the economic reports are always important, they are currently being overshadowed by the war in the Middle East.  We are now about one week into the initial attacks by the U.S. and Israel against Iran. In this relatively short period, our combined effort has degraded Iran’s naval and air capabilities to both defend itself and attack other countries.  In addition, Iran has had major leadership losses and the command structure has moved to a more decentralized power structure.  We remain hopeful that this engagement is short and has a limited impact on markets.

Investment Perspective

From an investment standpoint, the most worrisome impact of the conflict has been the sharp rise in oil prices.  From a short-term perspective, there is potential for oil supplies to be reduced. However, we currently expect this upward movement to be temporary. The next week or two will be critical as we factor energy costs into the broader economic outlook.  We have invested a small portion of our excess funds during this modest downturn and will continue to assess additional opportunities on a daily basis.

Economic direction remains a critical part of our longer-term analysis, but the unrest in the Middle East must be our primary focus in the near term.  Fortunately, the emphasis on U.S. energy independence allows us to maintain a broader perspective as we evaluate recent developments.

Stay calm and try to enjoy your week.