Half Full or Half Empty?

Although the payroll report continues to lag, other indicators show strength in the economy

By Joseph Lisanti

Over the 12 months ended September, the U.S. economy created 1.7 million jobs, according to the payroll report from the Bureau of Labor Statistics. It sounds impressive until you realize that economists estimate it would have taken about that many new positions just to keep up with population growth.

In September, 96,000 jobs were added, down from 128,000 in August. Things were looking much sunnier in the spring, and most economists were expecting a stronger report for September.

David Wyss, Standard & Poor's chief economist, believes that the hurricanes could have cut payrolls in the Southeast by 50,000 or so jobs last month. To have been excluded from the survey, a person had to have been off the payroll for the entire period. Given the massive evacuations, that's possible in some cases, says Wyss, who notes that in 1992 Hurricane Andrew precipitated a drop-off of 62,000.

Whatever the cause, the relatively weak September report means that the U.S. economy has created an average of only 101,000 payroll jobs per month since June.

On the other hand, third-quarter economic growth appears to have accelerated. We now estimate that U.S. gross domestic product advanced at a 4.5% annual rate in the third period, up significantly from the second quarter's 3.3% rate. And corporate earnings continue to grow. We estimate that the S&P 500 will end 2004 with operating earnings up 21.4% from last year. In our opinion, they should continue to grow, albeit at a slower rate. In 2005, we see the "500" posting an earnings gain of 9.7%. That kind of growth strikes us as respectable.

We suspect that uncertainty over the price of oil and its effects on consumers has restrained hiring in the U.S. When that uncertainty will lift, it is almost impossible to say. But when consumers and businesses finally adjust to oil prices, the underlying strength in the economy is likely to be reflected in stocks.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook