The Bureau of Labor Statistics released February employment figures on Friday which showed continued, yet far from robust, improvement. Payrolls dropped by 36,000 in February, nearly half the consensus expectation for losses. In another positive sign, prior month losses were reduced, indicating that the massive layoffs of a year ago have abated. In addition, the unemployment rate was unchanged at 9.7%. Many economists believe the recent figures were negatively distorted by the record snowfall experienced in many areas of the country, leading to expectations of big increases in employment for March and April. That may well be the case, although the percentage of people working part-time for economic reasons jumped by 500,000, causing the broader underemployment rate to rise to 16.8% from 16.5%.

The equity markets cheered the news, with the Dow Jones Industrial Average and the S&P 500 posting 2.3% and 3.1% gains, respectively, for the week. The S&P 500 closed at 1,138 and seems poised to clear the high for 2010 at 1,050. Should the index clear this level, the bull market that began one year ago would have a strong chance of continuing.

However, a cautious approach is still warranted. It should be obvious that much of the recovery in the economy over the last several months is due to the massive fiscal and monetary stimulus programs that will soon end. Despite such stimulus, the economy is still a long way from the robust job creation required to significantly dent the high unemployment rate. And while most economic indicators point to recovery, data from the housing market have taken a significant turn for the worse in recent weeks – this despite loud forecasts that housing had bottomed.

As a result, this economic recovery is much less impressive than those following previous deep recessions, calling its sustainability into question as stimulus fades. Next month, the Federal Reserve will no longer be a buyer of mortgage-backed securities, and most of its emergency programs will have expired. Together with the still anemic pace of bank lending, economic growth faces significant challenges in the second half of this year.


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