Putnam Investments---Kelly, David---Economist
>> a busy day for economic reports. in addition to the jobs number, we also got some other data points, including consumer confidence, which rose less than economists forecast last month. the university of michigan’s final reading on consumer confidence for january coming in at 91.2. economists we surveyed were forecasting a reading of 93.4. factory orders for december came in in line with estimates, rising 1.1%. the previous month’s number was revised higher. and the i.s.m. index for services came in below forecasts for last month, 56.8, the number. back to the jobs report, unemployment fell to 4.7% in january, the lowest in more than four years. what does this tell us about the strength of the u.s. job market and the overall economy? joining us is david kelly, economic adviser to putnum investments, joining us from his firm in boston. welcome, david.
>> glad to be here.
>> now that we’ve had a day to digest the jobs number, should we focus on a healthy employment picture or perhaps concerns about rising inflation?
>> i think we should be much more comforted by a good employment number. i think the first message from this is, the fourth quarter of last year, at the end of last year, the economy seemed to slow down. we got just 1.1% g.d.p. growth. but i think these employment numbers confirm that the economy has plenty of momentum going into 2006 and that looks good.
>> how long do you suspect the pace of job growth will last?
>> i expect the economy to produce about two million new jobs during this year. i think it will be a pretty good year overall. right at the end of the year, i think job growth may tail off because i think the economy will slow in the second half of this year and that’s something i’m a little bit worried about.
>> 4.7%, unemployment number, surprised a lot of people. what was behind that? do you see unemployment rising as it did in february?
>> if you take it out another decimal point, it doesn’t look like a fluke. sometimes when that happens, you get 4.74% so a slight nudge pushes it back up but that wasn’t the case this time around so we might hold at 4.7%, which is quite welcome to see the unemployment rate come down .5% in the last year.
>> much of the talk focused on the increasing wage costs, that perhaps being inflationary. is this a concern to you?
>> not at all. in the last year, the consumer prices index is up 3.4% and average hourly earnings are only up 3.3%, which means all the productivity gains achieved by workers over the last year didn’t really help push up wages. normally you would expect to see wages grow more than top-line inflation but they’re growing less so i don’t think there’s a real inflation pressure or wage pressure out there. >> do you have inflation concerns at all as economists are talking about capacity utilization?
>> no, i don’t. i think it’s a very important point. over the last 20 to 25 years, the economy is less and less prone to inflation. i actually think you could push the unemployment rate all the way down to 4% without wage inflation and if that’s the case, i think we have plenty of running room. i’m more worried about the federal reserve overtightening here.
>> the markets reacting today on the expectation this will signal the fed to continue raising rates beyond where we are now. you’ve said quite straightforwardly that you think the fed should stop here and now. why is that?
>> i think we’ve got a balanced economy and i think the federal reserve is at a neutral interest rate and unfortunately, history is littered with cases where the federal reserve had interest rates at neutral levels, they’d been increasing them and put a few more hikes in for good measure and suddenly have been dealing with an economic slowdown. they have no excuse to micromanage the economy that way. i think they should stop right now.
>> you don’t think the fed will stop here and that frustrates you a little bit, if i’m interpreting your tone?
>> we don’t know. we’ll know more on february 15. mr. bernanke gets his first opportunity to testify in front of congress. i hope he sets the stage for a fed pause here. i think it would be a sign of a certain amount of courage in the job and a very good sign, despite people thinking he was going to raise rates if he said, you know what, we think things are balanced here, i’m not going to overdo if right away. if he pushes rates up to 4.75 or 5%, we may see a rally in the long end of the bond market because the bond market will have figured out what economists and others haven’t, which is that the economy will be in trouble.
>> you―the 30-year, the long bond?
>> if you see a strong economic report and expectations on short-term interest rates go up and the long end rallies, it tells you people think the fed will make a mistake, it tells you people think the fed will overshoot and have to cut rates later so that worries me.
>> let’s jump ahead to next week when we get the latest reading on the trade balance. what number are you looking for? you mentioned earlier in our conversation surprising g.d.p. coming in at 1.1%.
>> the government puts in an estimate for―this is the december trade number. they always have to guess at this number when they put together the g.d.p. report for the quarter. and i think when i look at the g.d.p. report, there are a lot of funny accounting issues there so i wouldn’t be surprised if the trade number came in a little bit better than the government expected and because of that, they have to revise up the g.d.p. report a little bit for the fourth quarter.
>> we’ll have to leave it there, david, thanks a lot for joining us.
>> you’re very welcome.
>> david kelly joining us from putnum investments in boston. some say a jobless rate below 5% is a sign the job market is tightening. is there room for employment growth in the u.s. economy and what of the worker skill gap? bloomberg’s economic editor, michael mckee, speaks with u.s. labor secretary, elaine chao.
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Listen Market briefing--- Lori (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
Labor market --- Kathleen (slow)
world headquarters in new york, i’m lori rothman. this is “after the bell.” the u.s. economy got bigger payrolls and less unemployment in january. let’s run through the important numbers from today’s report. employers adding 193,000 jobs, fewer than economists forecast. the labor department revised the number for previous months higher. manufacturing employment grew by 7,000, in line with the median forecast of our survey. there would have been a gain in december, but changed to a job loss. and unemployment unexpectedly fell .2 of a point to its lowest level in 4.5 years, 4.7%. most economists expected no change. the government said average hourly earnings rose .4% last month. with that background, equity markets promptly run and except for a brief run in the afternoon, markets stayed lower and ended closing lower. the dow closing close to session lows, 58 points was the deficit, 10,793. the s&p 500 lost six points, 1264 is the close. the nasdaq composite index lost 18 points, 2262. internet stocks very weak on the session today. google and amazon shares dropped. as far as industries showing weakness, technology, energy, retail and banking stocks were lower. today’s jobs report not only moving treasuries but also impacting stocks. for more on today’s trading action, here’s a report from deborah kostroun at the big board.
>> stocks were lower today and also for the week. in fact, stocks dropping for the second time in three weeks. given today’s jobs report and also we learned we had an increase in wages, that was viewed as inflationary. this is how the market took that. brian belski, equity strategist with merrill lynch, saying clearly we are positioned for another fed increase and that’s why you’ve seen weakness yesterday, rolling over into today. the simple fact is, higher interest rates usually make stocks less attractive and thus we saw the market lower yesterday and today. another reason the market was moving today, crude oil of the crude oil for the week, down 3.5% but as we closed out friday’s session, crude oil closed out higher. $65.37 a barrel, first rise in four days after iran said it would be less cooperative with the united nations. looking at laggards in the market today, in the s&p 500, real estate, of course, closely tied with interest rates. semiconductors, they were lower most of the week. and also software. taking a look at mylan laboratories, rising as much as 13% today, the biggest gain in more than five years after the drugmaker’s third-quarter profit beat analysts’ estimates. also, merck, in the afternoon, won u.s. approval for rodatec, a vaccine to prevent infection from a virus that kills children. and mato go reported a wider fourth-quarter loss and may sell its slumping hoover vacuum unit and their jade commercial oven business. the biggest gainer, honeywell, hitting another 52-week high. it was upgraded at citigroup. citigroup also raising its 2006 through 2008 annual profit estimate, citing tailwinds in honeywell’s aerospacesbusiness. i’m deborah kostroun at the new york stock exchange.
>> internet stocks led the nasdaq’s retreat this week. robert gray has details from the market site in times square.
>> stocks fell on friday as the jobs report indicated lower unemployment and higher wages. traders and investors saying that increases the likelihood of higher interest rates from the fed, and that would, in turn, slow the economy, a bad environment for growth stocks, particularly technology stocks. we saw that playing out in the markets friday and throughout the week, combined with earnings disappointments. peter boockvar with miller tabak telling me investors are revaluing internet stocks with respect to growth rates and competition. we saw them re-evaluating and selling many of these stocks this week. in friday’s session, internet stocks the worst performer, down more than 2% on the session. also we saw semiconductors lower as well as software stocks. for the week, you’ll see internets and the semiconductors, the worst performers. software stocks more than 2.5%, as well. looking at friday’s session at the individual names as far as internet stocks go, take a look at amazon.com, falling, as it disappointed investors with its earnings report thursday night. falling short of both its revenue forecast, its revenue report as well as its earnings forecast for the full year. google shares continuing to fall after disappointing investors with its report tuesday afternoon, down some 20% from its record close on january 11. also, one of its venture capital backers, sequoia capital, dumped most of its stake in google. bear stearns also dropping the stock from its focus list. ebay shares continuing to fall, all three stocks among the worst performers on the week, as well. google shares falling to a three-month low. that’s a look at the nasdaq, i’m robert gray.
>> jobs gyrations, one big part of the bond market story today. but action ahead of next week’s big refunding options is also a big part. kathleen hays has more on the story.
>> an interesting one it was today, lori. when the employment news broke at 830 a.m. new york time, the market reaction was swift and knee-jerk reaction all but unanimous on wall street and in the white house.
>> what we see here is strengthening in the labor markets that’s very promising for rising incomes and very promising for continuing g.d.p. growth.
>> on the key question, now, where the federal reserve is going with interest rate increases, how far will they go? the report had two big flags. first, the unemployment rate falling to 4.7%. as recently as november, it was at 5%. is that getting too close to full employment in the fed’s eyes? especially after the fed signaled on tuesday in its post-meeting policy statement that it’s worried about tighter use of resources, resources like workers. that leads to the second red flag, accelerating average hourly earnings, simply put, wage inflation. that was up .4% in january and december. the yearly rate has risen to 3.3%. two years ago, that number was youer 2%. the jobs report reinforced a widespread view of one more fed rate boost and possibly more. the long-term bond sold off and recovered. why? two lesser watched economic reports helped. the university of michigan consumer confidence survey showed less confidence and a key service industry survey showed less steam. one analyst said it looks like yields got high enough today to entice buyers and a technical level around 4.56 will hold for now. when the yield topped 4.56, selling stopped and buying resumed. one seller told me selling in long-term corporate bonds could lead some to park money in long-term treasuries while they wait to see how the refunding performs next week. bond bulls say bonds look good because rate hikes will slow the economy and bring bonds lower.
>> thank you. to the energy story today, the latest rhetoric about iran and its nuclear program helped push crude prices higher for the first day in four sessions. in new york trading, crude futures rose 1%, closing above the $65-a-barrel mark. yet, on a weekly basis, prices fell more than $2 a barrel due, in part, to unexpected gains in the nation’s fuel supply. checking out the rest of the energy trade today, natural gas futures, biggest mover, climbing more than 3%. one energy investor called today one of the choppiest sessions he’s seen in a while, saying, when the u.n.’s nuclear watchdog committee laid until tomorrow its meeting on how to deal with iran, it heightened tensions. also today, iran’s government warned of retaliation, such as scaling back cooperation with atomic inspectors if it’s referred to the u.n. security council for sanctions. other analysts a there is no longer an urgent nature to the issue and that the committee may wait until its march meeting to make a formal decision.
>> a lot of diplomacy between now and then. i think it will be a factor and nigeria won’t go away overnight but we are seeing fundamentals coming back into play stronger so we could see another $5 off oil potentially in the next little while but i think there’s still going to be a lot of strength to the price.
>> he says crude futures to fall to $60 a barrel before heading higher and he’s not alone. our weekly bloomberg poll on the direction of next week’s oil trading shows the least bullish results since november. less than half, 17 of 43 analysts, traders and brokers, or 40%, see prices rising next week. while 14, or 33%, forecasted declines, that is double the number of bearish predictions compared to the week before. much more ahead. the u.s. jobless rateat its lowest in four years. how long can the momentum continue? we’ll ask putnum investment’s david kelly, next.
