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ADP Says Private Payrolls Rose 91,000 In September
Wednesday, October 05 2011 | 09:58 AM
James Picerno

The ADP Employment Report for September reveals another month of mediocre job growth in this data series, but that’s better than what the crowd’s been expecting. It sets us up for somewhat brighter expectations that Friday’s employment report from the government will confirm a mild revival in the labor market compared with August’s dismal number a la Washington's bean counters.

Employment in the U.S. nonfarm private business sector rose 91,000 on a seasonally adjusted basis last month, according to ADP. That’s only slightly higher than the 89,000 gain in August, based on ADP’s accounting. The question is whether the September data will bring the Labor Department’s estimate of job growth back from a near-death experience in the last report.

The ADP update suggests there’s reason for hope, as the chart above shows. The monthly gap between the two employment series wanders, but last month’s gap was the widest in absolute terms since January. The implication is that the spread will narrow in favor of growth. With the September ADP number in hand, the odds look a bit stronger that that the government’s report on Friday will bring us a higher number than August’s 17,000 net gain for private payrolls. A bounce back is expected even without the ADP support since the government's previous estimate was reportedly skewed to the downside because of a Verizon strike—a burden that evaporated when the strikers returned to work in late August.

Economists are inclined to agree that Friday's update will show some improvement over the August numbers. The consensus outlook is that the government's employment report for September will reveal an 83,000 net gain in private payrolls, according to That's still weak by historical standards, but it'd be a lot better than the 17,000 private-sector rise for August. Last week’s encouraging update for initial jobless claims offers some additional support for thinking that the next data point will at least be moving in the right direction.

Even if the optimistic forecasts for Friday prove accurate, the best you can say is that the economy appears to be resisting the gravitational forces of recession, which some analysts are predicting is inevitable. It's premature to dismiss calls of a fresh downturn, but the ADP report offers a counterpoint, mild as it is. There’s no law that says a recession can't commence with private-sector job growth rising by 90,000 a month. But if we’re in or near another recession, it would be unusual to see the labor market expanding. We’ve heard of a jobless recovery; is there such an animal as a job-growth recession too?

Hold that thought as we wait for tomorrow’s weekly update on jobless claims and Friday’s employment report.

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Housing Activity Weakens In April & Industrial Production Is Flat
Wednesday, May 18 2011 | 05:26 PM
James Picerno

Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.

The residential real estate market remains in a deep slump and there’s nothing in today’s numbers from the Census Bureau to tell us different. The only questions: 1) Will the slump worsen; and 2) if the answer to first question is yes, will it drag down the rest of the economy?

Answering no in both cases is still reasonable, although the level of confidence with that outlook is far from robust. The main bit of evidence for thinking that we’re not looking at a new leg down comes from reviewing history. As the chart below reminds, starts and permits have been moving sideways for three years. Unless you think a new recession is lurking, there's a case for predicting that the range will hold. Today’s update brings us into the lower realm of that range, but there’s nothing unusual here, judging by recent history.

Then again, if the broader economy is set for another rough patch, the housing market may suffer even deeper levels of pain. Unfortunately, the margin for comfort is now unusually thin. Last year at this time, starts and permits were moderately higher. That didn’t stop the summer slump of 2010 from taking a toll. But the worst levels in starts and permits of last year are now north of current numbers.

It doesn’t help to learn that industrial production was flat last month vs. March, or that manufacturing production slipped 0.4% in April after nine straight months of growth, according to the Federal Reserve update today.

The good news is that the broad trend for industrial production is still positive, as the second chart below shows. Indeed, the 5% year-over-year increase for this series last month is well above average. Historically, that's a strong number. Of course, it’s destined to fade as the cycle ages, and perhaps by more than the crowd expected just a few weeks ago.

Analysts say that industrial production stalled last month because of a drop in auto production, which was hit by the blowback from supply-chain disruptions due to the Japanese earthquake in March. In other words, technical difficulties are to blame. Maybe so, but that doesn’t change the fact that housing is still weak and possibly set to get weaker. Meantime, new questions about the labor market’s strength are still bubbling.

The focus now shifts to Thursday’s update on new jobless claims. The consensus forecast calls for a modest drop. A negative surprise of any magnitude, however, may bring a major attitude adjustment on the general outlook.

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Fresh Reminders That The Economic Recovery Continues To Struggle
Thursday, April 28 2011 | 05:12 PM
James Picerno

Is the labor market headed for a fresh round of trouble? Today’s weekly jobless claims report provides some new motivation for going over to the dark side on this question. The usual caveat applies, of course: divining the future from any one number in this volatile series can be misleading. Unfortunately, the jump in new filings for unemployment benefits is no longer an isolated data point.

“It’s clearly disappointing,” Michael Feroli, chief U.S. economist at JPMorgan Chase, tells Bloomberg in the wake of today's update. “It may be that the pace of improvement is slowing.”

Peter Boockvar of Miller Tabak + Co. agrees , writing in note to clients today: "The trend over the past few weeks is clearly disappointing as signs were pointing to a more sustainable pick up in the labor market.”

A chart of recent history tells the story. New filings jumped to a seasonally adjusted 429,000 last week—the highest since January. More worrisome is the recent rise in the four-week moving average for weekly claims, a trend that increased to more than 408,000 last week. Save for one week earlier this month, the four-week average has risen continually since this measure bottomed out in early March at just under 389,000. And while we’re reviewing distressing signals in this corner, let's note too that the four-week average is now above the 400,000 mark for the first time since February.

Is it all just noise? Possibly. Much depends on whether there’s corroborating evidence from other corners of the economy, starting with the next report on nonfarm payrolls, which is scheduled for release next week (Friday, May 6). The last report revealed a fairly strong number: private job creation advanced by a net 230,000 in March. That's hardly a cure-all for the various ills that afflict the U.S., but it's far too strong to inspire writing the epitaph for the current recovery. Even with the concerns embedded in the latest jobless claims report, it still requires an especially negative interpretation of the vast majority of economic reports to argue that the labor market is set to crumble.

One reason for thinking positively is the recent momentum in U.S. corporate earnings and manufacturing. Ed Yardeni reminds that the news on these fronts has been quite positive recently. Even so, “the growth rate in earnings may be peaking,” he notes. “However, that doesn’t mean that it won’t continue to grow along with world exports.”

But the rough rule of thumb that jobless claims under 400,000 imply continued expansion in the labor market will weigh heavily on sentiment until (or if?) a fresh batch of numbers re-boost confidence.

Today’s estimate on Q1 GDP certainly isn’t up to the task. The U.S. economy expanded at a much-slower 1.8% real (inflation-adjusted) annual rate in the first three months of this year—a sharp downshift from the 3.1% pace in last year’s fourth quarter, the Bureau of Economic Analysis reports. The blame for the slower economic growth was a “sharp upturn in imports,” a “deceleration” in consumer spending, “a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports.”

Nonetheless, the bigger risk for now is that the economy’s rebound moderates rather than evaporates. In fact, that’s been the concern all along. There’s still forward momentum in the broad trend, but it’s not as potent or persistent as some have argued. And with various corners of the economy still firmly on the defensive, starting with the residential real estate market, there's little reason to assume that we're set to grow out of our troubles any time soon.

In short, the real danger is less about a new recession than coming to terms with an economy that struggles (still) to grow.

“There are some concerns going forward,” reminds Scott Brown, chief economist at Raymond James. “We think gasoline prices will continue to dampen the recovery,” he writes. “We are looking at a moderate recovery here. It will still some time before we see the economy fully recover.”

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The Recovery Isn't Jobless, But Job Growth Is Still Weak
Wednesday, March 09 2011 | 04:32 PM
James Picerno

A number of pundits warn that the U.S. is suffering from an era of jobless recoveries. It's a popular complaint and it's surely grounded in legitimate concerns about the labor market's strength. But taken at face value, the claim that we're in a jobless recovery is false. The economy's recovering and new jobs are being created. Since the private-sector labor market started growing in the latest cycle in March 2010, total nonfarm private payrolls are higher by 1.5 million through February 2011, based on seasonally adjusted figures, which are used in the analysis below as well. That's a fraction of the jobs lost in the Great Recession, but modest job growth isn't the same thing as a jobless recovery.

The real issue is deciding how the trend in job creation compares with history. To start, let's look at a graph of the monthly change in private nonfarm payrolls over the last 30 years. The average monthly rise for those decades is roughly 93,000, as indicated by the blue line in the chart below. Obviously, the economy has a history of creating jobs over the previous three decades. But it's also true that running a linear regression over those years on the month numbers reveals a gently falling trend (red line). In other words, it appears that the strength of job creation has been weakening through time.

Analyzing the trend over long stretches of time has limits, of course. A more productive focus is comparing job creation during the recovery phases. Considering that there are several ways to proceed, the challenge is deciding how to evaluate the data. One possibility is adding up the total of monthly changes in nonfarm payrolls for each post-recession growth period, based on NBER's cycle dates. By that standard, the last full growth cycle was weak for minting jobs. Nonfarm private payrolls rose by just 6 million from December 2001 through December 2007. By comparison, the gain in jobs during previous cycles was far higher: nearly 22 million for 1991-2011, and 18 million from 1982 to 1990.

Other measures of the labor market's strength also show that the 2001-2007 period looks weak vs. its predecessors. Average monthly job creation was substantially lower in 2001-2007 vs. the earlier periods, for instance. The trend doesn't look any better if we measure the total net change in private nonfarm payrolls as a percentage of the civilian labor force at the peak of each cycle.

Clearly, there's a subpar recovery in jobs in recent years. The big question is whether the 2001-2007 period was an exception or a sign of things to come? Based on the trend since the Great Recession was formally declared history, the case for optimism looks weak.

Measured from the first month of the current expansion, the net change in total private nonfarm payrolls is a mere 362,000. This figure includes the first eight months of the current "expansion," when the economy continued to lose jobs. Before the next recession arrives, surely many more jobs will be created. Indeed, the recent economic news is relatively upbeat for thinking that the recovery is picking up speed. February's jobs report, for instance, was the best in nearly a year.

But it's also true that we are now 21 months into the recovery and total job creation is, at best, modest on both relative and absolute levels. The hope is that this expansion runs longer than usual (the post-World War Two average is 59 months) and/or the labor market accelerates. The prospects on these fronts are mixed. What is clear is that there's a huge amount of ground to make up from the Great Recession and the record so far in repairing the damage is uninspiring. It's not a jobless recovery, but that's cold comfort given the hole we're in.

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Vinny Catalano, President & Global Investment Strategist, BLUE MARBLE RESEARCH

Say What?
Tuesday, March 01 2011 | 10:22 AM
Vinny Catalano CFA
President & Global Investment Strategist, BLUE MARBLE RESEARCH

Yesterday, I had the opportunity to be a guest on Bloomberg radio's "Taking Stock" program and NDTV (New Delhi Television) Profit's program discussing the current market and economic environment. A key focus explored was one of the two major themes of my recently concluded Market Forecast series (10 events, 10 cities, 34 expert panelists, 920 attendees, in 6 weeks): once the the US economy is taken off stimulus steroids, will it achieve a private sector led sustainable expansion (what economists lovingly refer to as "escape velocity")? The answer will almost certainly disappoint you.

To listen to the "Taking Stock" segment, click here.

To view the NDTV segment, click here.

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Jobless Claims Fall As Oil Prices Rise
Thursday, February 24 2011 | 04:02 PM
James Picerno

Today's weekly update on new jobless claims offers a fresh reason for hope, but the crowd isn't likely to take the bait. The back and forth in this series in recent months has given rise to false hopes several times in the last few months that job growth is poised for better days. Is it different this time? Last week's tally of new filings for unemployment benefits dipped to 391,000 on a seasonally adjusted basis, the Labor Department reports. That's the lowest since the summer of 2008. But just when things are starting to perk up (maybe) for the labor market, it's all a moot point suddenly, thanks to the upheaval in Libya and the resulting spike in oil prices.

Yes, one could argue that the rise in jobless claims in previous weeks was a temporary blip. Maybe it was related to harsh winter weather. But as our chart below suggests, the rough patch seems to be passing.

“The labor market has been on the upswing,” opines Millan Mulraine, a senior U.S. strategist at TD Securities Inc. “As the pace of layoffs continues to decline, it is an indication that not only are businesses not firing as fast they used to, but they may in fact begin hiring.”

But just when the data may have been poised for a round of improvement, Middle East turmoil intervenes and throws a sizable wrench in the revival machine. Oil prices in New York are trading just over $100 a barrel this morning, the first visit to the land of triple digits since September 2008. The Libya mess may or may not have legs, but for the moment there's a lot more uncertainty in the world. Last week's news on jobs is a touch dated.

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Malay Bansal, Managing Director, CAPITALFUSION PARTNERS

Tackling the US Unemployment Problem-Infrastructure Investments Without Increasing Taxes or Deficit
Friday, February 11 2011 | 09:44 AM
Malay Bansal

High unemployment is one of the most important issues the US economy is facing, and one of the most effective ways to tackle this problem is investments in productive infrastructure. Here is an idea that will encourage private investment in infrastructure without requiring increases in deficit or taxes, along with steps needed to ensure that the program will be effective.

High level of unemployment at 10%, or 17% if you also count the under-employed, is one of the biggest challenges the US economy faces today. Consumers are about 70% of the economy. People without jobs can’t spend as much on goods and services, and can’t buy houses, which does not help housing situation, another significant issue. US companies have managed to increase profits but partly by reducing costs and spending, which also does not help the economy grow. The QE2 program undertaken by the Federal Reserve is meant to help unemployment indirectly by driving interest rates lower, but its effectiveness is far from certain, and is being questioned by many.

Why Infrastructure Investments?

One generally agreed approach to increasing employment is investment in infrastructure projects. The jobs created are local and cannot be exported, and the jobs will be created in sectors like construction that are facing higher unemployment (about 21% of the eight million jobs lost in 2008 & 2009 were in the construction sector, which still has unemployment at 17% level). Also, spending on infrastructure generates demand for products and services from a variety of industries, creating more jobs.1

Another consideration in favor of infrastructure investments is that deteriorating US infrastructure is sorely in need of maintenance. American Society of Civil engineers estimates that US needs $2.2 trillion in infrastructure spending over next five years2. The collapse of the I-35W bridge over Mississippi River in Minneapolis in Aug 2007 was a vivid example of this need. Increased spending also makes sense comparatively - US spends 2% of GDP on infrastructure, while China and Europe spend 9% and 5% respectively.

Also, several factors make this a good time to make investments in infrastructure – raw materials and labor are cheap, as is cost of financing. The maintenance is necessary and overdue. Not doing it now just means that it will have to be done at a later time when it will likely cost more.

Issues in Investing in Infrastructure

The biggest issue is finding funds without increasing deficit or taxes. US National debt for the $14.5 trillion economy has already ballooned to more than $13 Trillion. In Sep 2010, the Obama administration proposed a plan to spend $50 billion on infrastructure investments. However, the congress has not approved the plan, and the increased focus on reducing deficit and spending in the newly elected congress will constrain spending by the federal government. The state and local governments have lower tax revenues due to weaker economy and lower real estate values, and are constrained in their ability to spend.
Need for funds is one problem. Another problem is picking projects that are productive and not just a waste of money. Government may not be the best judge for picking the best projects. Solution to both problems is increased involvement of private sector.

Investment in Infrastructure without Increasing Deficits or Taxes

To get the private sector to invest in infrastructure projects, the government has to provide incentives, but in a way that does not increase deficit or taxes. One possibility for doing this may be by using the estimated $1 trillion of unrepatriated profits US companies hold in foreign subsidiaries. American companies can generally defer paying taxes on foreign profits as long as they keep the money outside US. When they bring the money back to US, they have to pay the top corporate tax rate of 35%. To defer taxes, US companies generally have left large sums of profits in their foreign subsidiaries.

These untaxed profits are part of the reason large multinationals have lower overall tax rates for which they have been criticized at times. Earlier this year, the administration proposed restricting companies from deferring taxes on profits earned oversees (estimated to raise $210 billion in revenues over next 10 years), but faced strong opposition since that would put the US companies at a competitive disadvantage.

On the other end, US companies are arguing that they could bring back the earnings in their foreign operations if the US government offered a tax amnesty and permitted them to repatriate foreign earnings at a low rate of around 5% instead of the 35% federal tax they face at present (see editorial in Wall Street Journal on Oct 20, 2010 by John Chambers, the CEO of Cisco, and Safra Catz, the President of Oracle). They argue that 5% tax could bring $1 trillion back to US for increased economic activity and could generate $50 billion in federal tax revenue.

The tax amnesty does not cause an increase in deficit or taxes, as government is giving up what it is not getting anyway - without it, these funds will not come back into the US economy, and the Treasury will not get the additional tax revenue. However, the funds brought back will not necessarily generate jobs. The companies could use the money for M&A activity, stock buybacks, and paying out dividends. A better idea will be to offer the tax amnesty only to the funds brought back that are invested in infrastructure and clean energy projects in the US. A limited time tax amnesty will encourage US companies to repatriate earnings back to US. A requirement to invest in infrastructure projects for a minimum fixed number of years (say something between 3 to 5 years) will ensure that the funds brought back create jobs. Companies will be allowed to invest in either debt or equity depending on their risk-reward preferences. All investments will be chosen and managed by private fund managers, who will pick projects and investments based on sound economic calculations of cost-benefit and expected returns. The companies will be able to pick any fund manager based on their judgment of manager’s capabilities.

This basic framework could be enhanced in several ways. Companies could be encouraged to invest for a longer period by offering to reduce any taxes on the earnings from the infrastructure investments, if the investments are held for say 7 to 10 years or more. Also, companies could be allowed to use part of funds brought back to build new plants for their own use.

Will Private Investors Invest In Infrastructure?

If the government did allow repatriation at low tax rates for money to be invested in infrastructure, would there be demand for it? Can these projects generate returns that investors will find attractive? The answer to both is affirmative. Prequin reported recently that 28 US Infrastructure debt funds were on the road trying to raise $26.4 billion. Europe, smaller in size, but with better developed Public Private Partnership programs in the sector, had 38 funds trying to raise $29.3 billion. Large investors have expressed willingness to invest in these projects. Zhou Yuan, head of asset allocation at China Investment Corporation (CIC), said in November that CIC would be willing to invest in large projects like high speed links between US cities, and super high-voltage transmission lines that provide a good risk-return profile, and suggested US should invest $1 trillion over next 5 years in form of public and private equity partnerships to create jobs (instead of QE2) and improve competitiveness.

Ensuring the Program is Effective

An editorial in New York Times on Oct 23 opposes the idea of tax holiday for repatriating foreign investments citing the experience of 2004. In 2004, after strong lobbying by the US multinationals, the Congress passed the American Jobs Creation Act in which the Homeland Reinvestment provision gave US companies a one-time break to pay 5.25% rather than 35% in taxes on the repatriated foreign profits, with the intention that the repatriated money would prompt investment in the United States economy and spur job growth. To qualify for the one-time tax break, companies had to promise to use the money to invest in their domestic operations. They could not use it to pay dividends, or compensate executives.

The program was heavily used by large corporations – many in the pharmaceutical and technology industries. For example, Pfizer brought back $37 billion, and Hewlett-Packard repatriated $14.5 billion. The amount of repatriation exceeded expectations. In all, 843 corporations took advantage of the offer, bringing back $362 billion in foreign profits. Of that amount, $312 billion qualified for the tax break, giving those companies total tax deductions of $265 billion claimed from 2004 through 2006.

According to analysis later, of the $299 billion companies brought back from foreign subsidiaries, between 60 and 92 percent of it went to shareholders, through increased share buybacks or increased dividends. Repatriations did not lead to an increase in domestic investment, employment or R&D, even for the firms that lobbied for the tax holiday stating these intentions. For example, Dell, which repatriated $4 billion, spent $100 million on a plant in Winston-Salem, N.C, which they said they would have built anyway, and used $2 billion two months later for a share buyback. Also $100 billion was estimated to go right back to foreign subsidiaries.

The provision requiring domestic investment had wide definitions of the term investment and allowed corporations to use repatriated profits to shore up their domestic finances, pay legal bills and even bankroll advertising. While companies did make investments in their domestic operations, the repatriated money also freed up a corresponding amount of cash to pay out to shareholders or buy back stock.

Money is fungible. It can be easily moved from one bucket to another. Hence, to ensure that the tax break really results in investments that create jobs, that money has to be separated. Hence, for this idea to be effective, the funds brought back must be invested with third-party private fund managers for a minimum number of years to qualify for the tax break.

Longer term, the US needs to develop regulations that clarify and encourage private sector investment and involvement in the infrastructure sector. Public-Private Partnerships and securitization of infrastructure financing can play a very useful role in developing this sector which is essential for the growth and competitiveness of the US economy in the longer term.

1An Oct 2010 report from the Council of Economic Advisors & the US Treasury (An Economic Analysis of Infrastructure Investment) discusses the benefits of infrastructure investments in detail. Also, see Jan 2009 article How Infrastructure Investments Support the U.S. Economy: Employment, Productivity and Growth from PERI & AAM.

2Also see CBO Testimony on Current and Future Investment in Infrastructure.

Note: This idea was originally published at

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Bill Carrigan, Founder, GETTINGTECHNICAL.COM

Me see bond, Me run away
Wednesday, February 09 2011 | 09:37 AM
Bill Carrigan

Our anticipated A-B-C correction is postponed as the U.S. FED continues to throw dollars at the capital markets with QE causing the U.S. to export food inflation which will likely end with a commodity bubble. The Double Dip Recession Issue is dead and the recovery is on thanks to the US Fed and QE2. A strong recovery may be pending as U.S. private payrolls increased 50,000 but in spite the smaller-than-expected increases, the headline unemployment rate fell sharply to 9.0% from 9.4% in December. Fed Chairman Bernanke just stated that the economic recovery hasn't been strong enough to significantly reduce unemployment

Not strong enough? Be careful what you wish for - the Fed won’t let up until the recovery gets out of control – inflation is the next big problem. Keep an eye on the US 10-yr T-Note which is now breaking up to the 4% level almost back to pre-financial crisis peaks – yes interest rates are rising in spite of QE2! Our weekly 10-yr T-Bond yield chart displays a bullish higher 18-month low (bullish for yields – bearish for bond prices) positive departure analysis and early positive relative outperform vs. the S&P500.

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Did Snow Freeze Job Growth Last Month?
Friday, February 04 2011 | 04:29 PM
James Picerno

There’s mixed news on the labor front today, according to this morning’s payrolls report for January from the Labor Department. The unemployment rate fell to 9.0% last month from 9.4% in December—that’s good. But January’s private sector growth in nonfarm payrolls rose by a slim 50,000, down sharply from December’s revised 139,000 gain—that’s bad. Analysts say that snow kept a lid on stronger job growth. Perhaps, but the crowd is stuck singing a familiar refrain once again: Next month’s job report will be better.

“Job growth is also much stronger than the payrolls suggest,” says Eric Green, a strategist at TD Securities, via He predicts that “payrolls will be much higher next month, and so will unemployment.”

Ward McCarthy, chief financial economist at Jefferies & Co, agrees. “This looks like quite a firm report once you get those frozen-out workers off the tables,” he tells Bloomberg.

Meantime, the Labor Department revised the last two years of employment data, but the changes don’t improve the profile of sluggish job growth of late. As the chart below reminds, private-sector payroll increases have been modest at best. Unfortunately, the trend seems to be weakening. The revised numbers show that last month’s net change in private payrolls was the smallest since last May.

The leading sources for the deceleration in overall private-sector job growth last month: an acceleration in the loss of construction jobs and a dramatic slowdown in the rise of services employment.

Spring can't come too quickly for the labor market, but until stronger numbers arrive maybe it's prudent to keep expectations in check. "One might be tempted to read something positive also from the fall in the unemployment rate from 9.4% to 9%," notes Rob Carnell of ING via The Guardian today. But there's still reason to stay cautious, he adds. "Despite a 117,000 gain in employment measured by the household survey in Jan, most of this fall in the unemployment rate was the result of a further 507,000 decline in the civilian labor force, which contributed most of the 622,000 decline in 'unemployment' this month. Moreover, adding to the sense that all is not entirely well with the US labor force, the average duration of unemployment continues to drift higher."

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