On Friday, it's all about the jobs data.
The February employment report, which will be released at 8:30 am New York time, is likely to set the tone not only for Friday's markets but for the economic outlook in the coming weeks.
While investors always closely watch the monthly employment report, Friday's data has taken on added significance because of the market's recent selloff and worries about subprime lending.
Any suggestion that job growth is slowing will spark concerns that consumer spending, which makes up two thirds of the U.S. economy, will decline as well. And it could fuel worries that more people will be unable to meet their mortgage payments, worsening the already battered subprime lending industry--and perhaps prime mortgage lenders as well.
“Without these jobs, then we have a big, big problem,” said Mark Zandi, chief economist at Moody’s Economy.com.
Jobs growth is, in fact, expected to have slowed last month, mainly because of winter storms. The unemployment rate, however, is expected to remain at 4.6% for a second month.
On average, economists surveyed by Dow Jones expect a 100,000 increase in payrolls in February. Although that number is a little weaker than recent trends, it is still robust enough to say that the labor market remains on solid footing.
“The stock market would react very negatively if payroll employment grew by less than 50,000 jobs,” said Zandi. “It would be very happy if payroll employment rose by more than 150,000. If the number falls anywhere in between that range, it shouldn’t make a significant difference in investors’ thinking.”
Gary Thayer, a chief economist at A.G. Edwards, also expects there would be a stronger reaction in the market if the report tops consensus expectations.
“The weather was a factor. We know the weather was poor,” Thayer said. “If it is weak, there’s an explanation for it.”
On Wednesday, the ADP employment report showed an increase of 57,000 private-sector jobs. This number suggests Friday’s employment report will come in at around 70,000, said Merrill Lynch Economist David Rosenberg, in a research note. That’s even lower than Rosenberg’s below-consensus estimate of an increase of 90,000 jobs.
Housing a Wildcard
At the moment, the housing recovery remains a wildcard. A sharp decline in housing starts and new home sales in January suggests it is too soon to call a recovery. But the Federal Reserve’s Beige Book on Wednesday said housing remained weak, “but signs of stabilization were noted in several districts.”
Still, with rising rates of delinquencies on subprime mortgages and financial troubles at firms specializing in risky mortgage lending, a broader credit crunch remains a top concern.
Recent comments by Fed officials shows that they remain firm that the economy will grow this year. Although some have argued that comments from Chicago Federal Reserve President Michael Moskow amount to a slight downgrade in his economic outlook.
Moskow stuck to his long-standing position that interest rate hikes might be needed to tame inflation, which is a bigger concern for him than the risks associated with slower growth. However, Moskow noted the outlook was made more uncertain in light of the recent volatility in capital markets.
Federal Reserve policymakers will meet again on March 20 and 21. The Central Bank has left the benchmark federal funds rate at 5.25% at each of its last five meetings.