With a strong January and February, we are pleased with where the economy is going in 2011. The markets rallied this week not because of the price of oil, Congress’ stopgap funding bill, or events in the Middle East, but because employment is increasing. Both ADP and the Department of Labor reported increases in hiring and the ISM Manufacturing Index indicates productivity is up. Additionally the ISM Services Index rose to 59.7, reaching its highest level since August 2005. We feel this indicates companies are going to have to hire more employees soon.
During the economic downturn, our economy lost more than 8 million jobs, but our productivity levels remained near the same. However, we expect that because manufacturing and operations are run so efficiently. Technology has become so unbelievable that we are looking not at companies that make things, but at companies that make machines that make things. Manufacturing is up with its sixth consecutive increase, but we do not expect to see many of the manufacturing jobs to return. Unfortunately, the level of unemployment is still higher than we would like to see it. Even with our economic growth, it will take a long time to recover all of the lost jobs.
We continue to recommend, large, strong companies: With inflation, we expect interest rates to rise and find this environment is good for big companies. We seek strong companies to invest in, and those companies will usually have a large cash position, so they should not have a need to borrow.
European Central Bank looking to raise interest rates: European Central Bank President Jean-Claude Trichet said that the ECB might raise interest rates to fight inflation. This would be the first increase since May 2009.
- Rising interest rates in Europe may cause the value of the U.S. dollar to go down versus the euro, which will be good for our exports.
- Money has not been flowing in Europe for some time.
Interest rates on U.S. Treasury resumed their upward climb: After two weeks of decline, U.S. Treasuries rose this week, with the five-year Treasury yielding 2.25% and the 10-year Treasury yielding 3.52%.
- Federal Reserve Chairman, Ben Bernanke, said that he did not see a need for a Quantitative Easing 3 program. QE2 was meant to drive interest rates lower to stave off inflation, but with the growth in the economy for three quarters and definite signs of inflation, people are moving out of bonds to stocks, thus interest rates have risen. Those remaining in bonds will demand higher interest rates.
- In general, people do not invest in U.S. bonds for the interest rates, investors look to the United States for stability. We still believe the increases in gold and oil are speculation, as there is no rational reason for them to rise.
Unemployment: Employment appears to be increasing in almost every sector.
- ADP announced employment increased by 217,000 in February, beating estimates. Initial jobless claims decreased by 20,000 to 368,000 hitting the lowest level since May 2008.
- The U.S. Department of Labor announced Friday unemployment rate fell to 8.9% in February, the lowest rate in nearly two years. Nonfarm payrolls rose by 192,000 last month as the private-sector added 222,000 jobs. The January number was revised to show an increase of 63,000 jobs, from a previous estimate of 36,000.