Earnings and Housing Report

April’s Job report was released on Friday, May 2, 2014, and showed a very obscure picture. While at first glance the job report would seem to show that April was a great month for hiring and unemployment, with further analysis you can find some worrying trends. There were a total of 288,000 jobs added in April, bringing unemployment down to 6.3%, a 6-year low. Even though almost 300,000 jobs were added, the main contributor to the declining unemployment rate would be the fact that the labor force fell by 806,000 last month, the 2nd largest decline in 36 years. The reason for the decline in the labor force is because less people are entering the labor force than usual.

        Even with the gains in employment and average working hours, wages have stagnated, remaining unchanged at $24.31.  This has limited the year-over-year gains to just 1.9%. This is obviously a concern as it could be a potential impediment for future U.S. economic growth. Unless income increases sharply consumers will not be able to spend quickly enough to cause the boost in the economy that it is looking for.

Along with the job report, the first quarter earnings report was released last week. For the Dow Jones Industrial Average, 80% of the companies reported their earnings. And 75% of the S&P 500 reported. Based on the DJI report, analysts expect a 3.3% decline in total earnings. They also predict a fairly stagnant growth rate of 0.4%. Despite the projections, the Dow hit a record high last week which is likely due to growth acceleration after a growth slump in three of the previous five quarters. For example, Microsoft earnings fell 6% this quarter compared to last quarter. But analysts predict that in the second half of the calendar year, Microsoft should expect about a 7% year-over-year earnings gain.

For the S&P 500, the expectations were more positive than those of the Dow. Of the 374 companies that reported, 68.2% beat analysts’ earnings expectations while 21.9% were below expectations. Therefore, roughly 80% of the S&P 500 met or exceeded expectations for this quarter. The discrepancy between the Dow and the S&P 500 can likely be explained by the difference in size between the two indices. The Dow consists of just 30 (large) companies, while the S&P 500 contains 500 companies. If 5 or 10 companies in the Dow have negative earning expectations, then the entire Dow is likely to see a negative earning expectation. There is more leeway in the S&P 500 as no one company has enough leverage to affect the entire index.

        Housing has fallen to a 19 year low, with only 64.8% of American’s owning a home during the 1st quarter of 2014.  The main reason for the decline in homeownership is the fact that young people are not forming households at the same rates as they used to. Younger people are striking out when trying to buy homes, and are more likely to rent instead of buy. Also, the construction of multi-family homes is rising at a faster rate than single-family homes.

-Kevin Garcia & Viraj Patel