Sluggish Recovery In The US Economy And Employment

So I've been looking at the government figures of their latest unemployment report from last week. The government figures beat consensus by a fairly large number.

130,000 jobs expected to be lost, while figures came in at 11,000 lost. While this was much better then expected figures were a bit inflated. As Rob Carnell from ING states the following:

In our view, the only potential fly in the ointment of this labour report is how believable it is. Payrolls has been making very, very slow progress in recent months, and such a dramatic turnaround will raise eyebrows, and may not be taken at face value by many. An improvement in the payrolls series always looked on the cards from last month. But most of the labour market data in the run up to this release had been consistent only with a very small step forward, so we may need to see this backed up again next month before concern about the labour market can really be filed away as ‘last year’s worries’.

We are also slightly curious about the apparent surge in government jobs, which on revision have risen by more than 50K in the last two months. When state and local finances are in such a deep mess, even the Obama fiscal package is unlikely to have generated this rapid turnaround in the public sector. More believably, goods producing, construction and manufacturing jobs all saw continued large falls.

So I would tend to continue to be cautious to a continued pick up. I don't believe that with higher taxes, increased regulations, and health reform in the United States pipeline that the government is going to have some epiphany to creating mass jobs.

Temporary employment firms ran up on these numbers however a closer look still states that most businesses are still relatively concerned with where this economy is headed, and have remained very non committal to hiring more workers. With wage growth that continues to be depressed, there is no sign that companies will hire a dramatic number of workers if they can wring out increased productivity from their current staff which has been under utilized, with full production at only 75-80% of their overall capacity.

US Federal Beige Book Nov 2 2009

Employment, Wages, and PricesLabor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts. However, contacts in the Atlanta, Cleveland, and Richmond Districts reported that the pace of job cuts generally slowed in their regions, and most contacts in the Dallas District reported stable employment levels. Despite generally weak employment conditions, some signs of improvement were noted. For example, contacts in Boston reported that they were beginning to hire and reverse pay cuts or freezes that were implemented earlier in the year, and contacts in the St. Louis District reported that the service sector had started to expand recently. Expectations for the holiday season were mixed across Districts, with contacts in the New York and Dallas Districts reporting lighter-than-normal seasonal hiring and/or increases in the hours of existing employees, as opposed to hiring temporary workers, to meet the seasonal demand. On the other hand, most retailers in the Richmond District have hired the usual number of seasonal workers this year.

Districts generally reported little or no upward wage pressures, while some Districts noted upward pressure in commodity prices, and most Districts reported stable selling prices. Wages were largely reported to be holding steady in the Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Most Districts reported stable prices overall, although some reported higher input prices, largely for energy and other commodities used in production, with a limited ability to raise selling prices. Prices were reported as moderately lower in the Kansas City District, and downward price pressures were cited for some professional services and intermodal transportation firms in the Dallas District. Some makers of food products and chemicals in the Philadelphia District reported raising prices, and the prices of computer memory chips continued to firm in the San Francisco District. Retailers in several Districts indicated that they have managed inventory levels in an effort to prevent the steep price discounting that occurred last year, however, some promotional price discounting is expected through the holiday season.

Source: US Federal Reserve

Manpower MAN Valuation Dec 2 09

Source: Yahoo

I am not recommending a position for MAN. This is my own observation of the valuation for Manpower (MAN). Please do your own research regarding the investment of any equities or bonds.

It is really amazing the run that the temporary employment sector has taken. However is this run up justified when revenue is still down double digits compared to its year over year comps. And down significantly over a two year period.

Take note of the following :

- Manpower's p/e is at one of the industry's high. This stock trades at multiples much higher then the S&P. This as Manpower's revenue and net income have taken an extremely hard hit.

Manpower for the fourth quarter has already warned that their estimates will come in below estimates. This comes as analyst have not raised Manpower's estimates that far from the median. The notion that Manpower is unable to meet already low expectations speaks volumes with regards to the condition of the macro economy.

There's talk of how management has been managing Manpower beat the industry with its superior management. I tend to disagree when your revenue and net income have taken a significant hit for the past couple of years, along with the baggage of significant debt on its balance sheet. If we are in for another dip in the economy as a number of economist have suggested, credit conditions will become increasingly tight. Already there is worry concerning the 2010 pending tax increase, and pending health care costs forced by the government.

- PEG ratio. Normally a PEG ratio near 1 means that a stock will have a higher chance at out performing. However MAN is at a significant premium based on the PEG ratio alone. MAN trades at over 8x the mean, while the industry is trading at 3x multiples. This is a significant premium to pay for a company that has declining revenue, and net income, and increasing debt.

- P/B. The price to book looks cheaper compared to the industry. However when you look at the Manpower's historical p/e ratio it has not significantly traded higher to its current multiples. And that is with significantly higher sales, and revenue. S&P which had changed their metrics of evaluating MAN from P/E to P/B, downgraded their rating to SELL, and lowered it price target to 46.

So I would trend very carefully as employment will not rocket back with a vengeance. Consumers have not significantly increased their spending, and manufacturing has ticked down. There are many issues in the economy that continues to need to be resolved before employment stocks begin to look attractive again.

Economy still too weak to create jobs

"The recent economic data have been consistent with our view that the economy is recovering, but at a distinctly subpar pace," wrote Jan Hatzius, chief economist for Goldman Sachs, in a note to clients. "Growth looks too sluggish to lower the 10%+ unemployment rate to a meaningful degree anytime soon."

Ultimately, however, it's the economy's fundamental strength that matters, not any particular number. Most economists -- in the private sector and at the Federal Reserve - continue to believe in a disappointingly sluggish recovery that will only slowly bring the unemployment rate down.

Source : Marketwatch

Unemployment compensation tax skyrocketing

Unemployment compensation tax has not been a widely discussed issued among the rising unemployment rate. States in the US are having difficulties paying unemployment claims due to the significant rise in unemployment. States have to resort to bumping up compensation tax such as an example with Florida, which has to increase unemployment tax by 12x from $8.40 for every employee to $100.30.

There are 33 states which will increase their compensation taxes next year. This will make small businesses which continue to be cautious with regards to credit, and expansion will now find hiring or retaining employees more expensive. Although contract and temporary workers may see a slight uptick, these positions will likely be mute to the unemployment rate, and claims will continue to be at elevated levels. Without sustained job creation and longer work hours for current employees, these temporary positions will likely see very minimal increases. Hence, why I've been very cautious with regards to investing in these employment services stocks.

Unemployment rate hits 10.2% vs. 9.9% expectation OCT 09

Nonfarm payrolls dropped by a seasonally adjusted 190,000 in October, bringing to total number of jobs lost in the recession to 7.3 million in the United States.
5.6 million had been out of work longer than six months, representing a record 35.6% of the unemployed.

The employment-population ratio fell from 58.8% to 58.5%.

Discouraged workers and those forced to work part-time, rose to 17.5%

Administaff ASF 3Q 2009 Earnings

For the third quarter 2009, the company reported net income of $5.8 million, or $0.23 earnings per diluted share. For the nine months ended September 30, 2009, the company reported net income of $19.4 million and earnings per diluted share of $0.77

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Administaff beat EPS by .01, while revenues were light of consensus. Administaff is in a bad segment of the economy. With credit continued to be constrained and health costs continues to pressure employers, Administaff will have to pray that the economy can right itself in a positive direction.

I remain cautious on the business services sector till there is a defined upturn in employment demand.