Yellen's Speech May Soothe Markets Rattled by Gloomy Jobs Report

The market's now looking to Federal Reserve Chair Janet Yellen to soothe its worries about Friday's poor jobs report in a speech this afternoon. That job should be easier than one might expect from all the renewed speculation about recession since the news hit.

The truth is, all the jobs report probably means is that the Fed's next interest rate hike comes in September rather than July. The mere 38,000-job gain reported by the Labor Department was simply too far out of whack with other economic indicators to ring true, suggesting that either the stall won't last or that it never really happened at all.

The case for the latter begins with the Labor Department's subtraction of 35,000 workers who were on strike from Verizon Communications during the week that the survey of households for the jobs report was done. Add them back in, and the job gains rise to a still-tepid 73,000, which would at least be enough that we wouldn't be hearing speculation about a recession.

Then you add in the unusually low response rate for the monthly survey of employers the Labor Department uses to calculate job gains -- about 74%, versus 82% normally -- which could (no one knows if it did) exaggerate the survey's already-large margin of error.

But questioning whether the unemployment stats were wrong didn't work out so well for ex-General Electric (GE) CEO Jack Welch in 2012 (who didn't believe joblessness could go below 8%, let alone the 4.7% reported on Friday). So let's focus instead on how inconsistent they are with other data.

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Economists are still seeing a growth rate of 2.5% to 3% for gross domestic product in the second quarter, and there is plenty to back that up.

Pending home sales rose 5% in April, to the highest rate in 10 years. New-home sales -- more important for the economy because it takes more people to build a home than to sell one -- rose nearly 17% in April and 7.3% for the first four months of the year, bringing decent (if somewhat mixed) results for builders like PulteGroup (PHM) and Toll Bros. (TOL) .

U.S. vehicle sales are chugging along at a consistent clip of 17.4 million per year, and auto makers like Ford  (F) , General Motors (GM) and Toyota (TM) have seen shares rise since February.

Consumer incomes rose 0.4% each of the past two months, and consumer spending rose 1% in April alone, the biggest gain in seven years. Even retailing -- the ultimate dog sector -- may be doing better than it first appears.

A report by Barclays argues that all of the recent weakness in retailing, especially in clothing, can be explained by falling prices. Consumers are apparently buying as much stuff as ever -- it's just not costing them as much, and they're not spending their savings in retail stores like Macy's (M) or Nordstrom (JWN) .

Most of all, the largest alternative look at the job market, the ADP survey of employers, found 173,000 new jobs in the quarter.

Basically, believing the terrible Labor Department number requires some suspension of disbelief. Did construction companies really cut 15,000 workers with the data looking good? Doubtful.

Did hoteliers like Marriott International (MAR) really lay off more than 1,000 people with revenue per available room at all-time highs? Not likely. But yes, there are some pockets of weakness: There were 10,000 more layoffs in mining, mostly reflecting less oil drilling, and export-led sectors like machinery (which dropped by 7,300) shed jobs. The export problem would be worsened by higher rates in the short term, because they would likely strengthen the dollar and raise export prices.

More likely, the economy is about where we thought it was last Thursday -- growing slowly, at about the 2.4% annual pace of recent years or a little more slowly, with wage gains slowly pushing workers' inflation-adjusted incomes back toward the peaks reached during the Internet boom.

If that happens, the jobs numbers will take care of themselves. And that will keep the Fed on broadly the same course it has been talking about.

That's essentially what usually dovish Boston Federal Reserve Bank President Eric Rosengren said in Finland today, arguing that the Fed will just wait a short time before the next rate hike, and he's right.

Fed governor Lael Brainerd, perhaps the most dovish member of the Federal Open Market Committee, emphasized the weak three-month moving average of jobs growth in a speech Friday as a reason to delay raising rates, but the prior reports were strong enough for a full-employment economy and featured solid wage gains.

The situation is different since the jobs report only in that the Fed has shown reluctance to act when there is an obvious, new short-term risk in the mix -- and the jobs report certainly provides that.

As it has done before, the Fed is likely to wait until new data -- in this case, a couple more jobs reports -- show whether the May data is a passing rainstorm or a more-meaningful change in economic conditions. That points to the next rate hike coming in September, which is also what futures prices now predict.

The weight of the data still indicates this report is just a blip. Even if the same people who wanted you to believe last winter that recession was imminent and that robots are on the verge of taking all the jobs are now cranking up their hype machine again. Wrong then, wrong now.

See full coverage on the Fed's upcoming interest-rate decisions.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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