Watch Out for Black Ice

Originally posted at Briefing.com

My wife and I left Chicago (more like escaped) in early January on a trip we had been planning for a year. Our destination was Puerto Rico. When we left Chicago it was minus 15 degrees. When we landed in San Juan it was 85. I knew then we would most certainly retire one day south of the Windy City. I also knew that my presence in Puerto Rico meant I would be out of the office for the release of the December employment report.

While keeping tabs on things under a palm tree, it became clear to me that the market was caught off guard by the weak report for December. It also became clear that it was being written off largely as a weather-related distortion, notwithstanding the seasonally adjusted nature of the employment data.

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We headed back to Chicago (in body only) the Sunday after the employment report. Two days later, I was served a cold reminder that (a) my vacation was over and (b) black ice is nasty stuff.

Riding my bike to the train station, I hit a patch of black ice. In no time at all, I was skidding along with my bike on the asphalt. I had the good sense to wear a bike helmet, but that couldn't prevent me from bruising my ribs. Cursing Mother Nature, I picked myself up, carried on to the train station, and went to work.

To be sure, I am very grateful — with and without bruised ribs — to be counted among the employed. Not everyone who is willing and able can say the same.

According to the January employment report, 10.2 mln people are unemployed. That's a nice improvement from 12.3 mln a year ago, but it nonetheless appears that the labor market has hit a patch of black ice — and that doesn't have as much to do with the weather as advertised.

Tough to See

Merriam-Webster defines black ice as a "thin layer of ice on a paved road that is very difficult to see." On that note, it is fair to say few economists were expecting nonfarm payroll growth for December and January to average 94,000 after averaging 221,000 for October and November (prior to the recent revisions).

We'll venture a guess that the Federal Reserve certainly wasn't. No guesses are needed, however, to suggest the Federal Reserve isn't overly concerned by the latest two-month average. Several officials have said they believe the weather has had some undue impact on payroll growth and that the trend is not enough to alter their thinking that the Fed should stay on its steady tapering path.

The tacit message in such proclamations is that the economy and the labor market are still expected to accelerate in short order as the pent-up demand from the winter shutdowns is released with the arrival of more tolerable weather. It is an encouraging thought. The stock market seemed to run with that subjective view after the release of the January employment report, which showed just 113,000 jobs were added to nonfarm payrolls following a meek addition of 75,000 jobs in December.

Coming Undone

The stock market had its biggest percentage gain of the year the day before the January employment report. That advance was attributed in part to speculation that January nonfarm payrolls would be better than expected (Briefing.com consensus 175,000) and that the December nonfarm payrolls number would be revised significantly higher. Part of the optimism for January was wrapped around the understanding that the household survey was conducted during the week of the 12th, which featured the best January weather (relatively speaking).

The vibe of good weather in the survey week, however, didn't resonate in survey responses. Strikingly, nothing was given back in the stock market even though the reality of the employment report fell far short of the speculation.

Another point of contention — and our biggest one at that — is that the subjective weather excuse was effectively undone by the objective data for construction hiring.

Everyone can agree that construction activity is heavily influenced by the weather, yet 48,000 construction jobs were added in January, which was the most since March 2007. In brief, the weather was colder and snowier than usual, but it did not freeze hiring activity in the most weather-sensitive sector.

What we are left to conclude then is that the labor market is not as vibrant right now as it was believed to be at the end of 2013 when optimistic growth forecasts for 2014 were being released left and right.

What It All Means

In his weekly Economic Insight piece, Briefing.com Chief Economist, Dr. Jeffrey Rosen, reminded readers that one month of bad data can be discounted as an unexpected shock. Two months of bad data, however, can be looked at as a potential starting point for a new trend.

What we can gather from the stock market's bullish response to the disappointing employment report for January is that it continues to bank on the idea that future months of data will be loaded with charms that support the house view that labor market growth, and overall economic growth, will be accelerating in indisputable fashion.

That view manifested itself in the outperformance of the cyclical sectors after the employment report. Curiously, it didn't manifest itself in the Treasury market, which also traded higher after the report, or in the US Dollar Index, which traded lower.

We suspect there was both a flat squeeze and a short squeeze in the stock market, which is to say participants waiting things out jumped in on concerns about missing out on further turnaround gains while those positioned for a sell-off in the event of a jobs report disappointment were forced to cover those positions.

That is a short-term trading dynamic that can be made to look as if it is a vote of confidence in the long pull ahead for 2014. Something still isn't sitting right, though, given the trading dynamic in the Treasury market.

Things might look okay on the surface of the stock market's recovery effort, but we're not convinced yet that there isn't more black ice lurking in the data and elsewhere.

About the Author

Chief Market Analyst