Investors and job seekers expecting more from economy

When Federal Reserve chairman Janet Yellen said last week that the central bank will be cautious about rate increases this year because inflation remains low and the economy beyond our shores is weak, the financial markets cheered.
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When Federal Reserve chairman Janet Yellen said last week that the central bank will be cautious about rate increases this year because inflation remains low and the economy beyond our shores is weak, the financial markets cheered.

Three days later, when the Labor Department said the U.S. economy created 215,000 jobs in March despite the uncertainty overseas, the markets rallied again. Stocks finished the week with a burst of optimism as the three major indexes closed at 2016 highs.

Is their optimism justified? Facts and figures increasingly suggest it is.

The primary reason the unemployment rate edged up from 4.9 percent in February to 5 percent in March is that those who remain unemployed are seeing more jobs become available and are re-entering the market to pursue them.

"Stronger labor force growth helps boost potential growth while keeping inflation pressures at bay," Renaissance Macro's Neil Dutta wrote in a client note, Business Insider reported. "That's exactly the kind of situation the Fed should want right now."

The labor force participation rate, which indicates the share of working-age people employed or looking for work, rose to 63 percent, the highest since March of 2014. As the New York Times pointed out, the rise in the participation rate moderates wage pressures by expanding the labor supply.

"This is an ideal situation for the Fed. The strong pace of job growth is being offset by the increase in entrants into the labor force, which will reduce any concerns about labor market tightness fostering outsized wage inflation," Millan Mulraine, deputy chief economist at TD Securities in New York, told Reuters.

CNBC pointed to one concern among the jobs data.

"Three months in a row temporary help has been very weak, just up 4,000 in March. That's a leading indicator," John Canally, economist and market strategist at LPL Financial, told CNBC.

Temporary help is an early sign that employers anticipate making long-term hires. Canaly told CNBC that there was a surprising decline of more than 55,000 temp workers in January and February combined.

The jobs report also comes amid a slow-growing economy. First-quarter growth is now estimated to have been less than 1 percent.

"Good jobs, rising wages and slow growth. That's a recipe for very weak corporate margins," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, told CNBC.

Two top measures of consumer sentiment suggested that the public is hopeful about the direction of the economy and their own financial prospects.

The Conference Board’s Consumer Confidence Index rebounded in March after falling the previous month as the public’s short-term outlook brightened amid rising stock prices and the improving labor market.

The University of Michigan’s Consumer Sentiment Index fell slightly, to 91, from 91.7 in February, but it has been generally steady for the past three quarters.

"Consumers widely anticipated that gasoline prices will slowly increase in the year ahead, and anticipated that the slower pace of economic growth will more than likely put an end to further declines in the unemployment rate," economist Richard Curtin, who directs the university’s Surveys of Consumers, said in a statement.

"What is surprising is that the expectation of higher prices and higher unemployment has not caused an increase in uncertainty about personal financial prospects. To be sure, the positive outlook for consumer spending is contingent on the view held by most consumers that the jobless rate will be maintained close to its very low current level and that gas prices will increase only modestly above their recent lows."

This week ahead offers few prepared reports. Reuters said the Commerce Department is likely to report today that the trade deficit widened to $46.2 billion from a deficit of $45.7 billion in January.

The Institute for Supply Management is expected to say today that its non-manufacturing index edged up to 54.0 in March from a reading of 53.4 in February.

Commerce Department data on Friday are expected to show a 0.2 percent drop in wholesale inventories in February after a 0.2 percent gain in January.

On Wednesday the Federal Open Market Committee will release the minutes of its March meeting. Economy watchers can look beyond what Yellen has said and see how the rest of the Fed’s rate-setting committee lines up.

In a presidential election year, the nation’s economy and the markets may have more surprises in store.

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