Early this morning the Labor Department's Bureau of Labor Statistics dropped a bomb shell on the financial markets in the form of its February Employment Situation Report.

Nonfarm payroll employment increased by 705,000 in February, twice the amount that had been predicted beforehand by even the most optimistic analyst. This followed a decline of 188,000 in January that was largely attributed to the lousy weather. The unemployed segment of the workforce dropped from 5.8 percent to 5.5 percent.

Bond traders coupled this news with yesterday's report of the strongest monthly jump in retail sales in a year and decided that happy days for the economy must indeed be here again. Amid visions of consumers on a revolving credit buying binge and businesses stepping up borrowing to meet increased demand, bond futures traders decided that interest rates had nowhere to go but up. Before the stock markets had even opened today the 30-year T-bond futures contract had been driven limit down (down 3).

In the past, major shifts in the direction of the bond market have tended to precede or coincide with changes in the trend of the stock market. So, stock traders with a predilection toward the skittish side seized upon today's bond action as an excuse to sell. Soon after the opening, the Dow Jones Industrial Average dropped 115 points and the Nasdaq Index was down by 27.

At the end of the trading day, the T-Bond futures contract was still down 3 and the 30-year bond yield had risen from 6.46 percent to 6.71 percent. The DJIA plummeted 171.24 points, and the Nasdaq dropped by 29.38.

In February, the number of unemployed persons decreased by 322,000 to 7.4 million. Total employment increased by 437,000, to 125.7 million. The proportion of the working-age population that was employed (the employment-population ratio) edged up to 62.9 percent; however, the measure was slightly lower than a year earlier. The number of persons working part time for economic reasons increased by 411,000 in February, reversing a decline of similar magnitude in the previous month.

Nonfarm employment is one of the four indicators that the Commerce Department uses in assembling its Composite Index of Coincident Indicators, an important measure of the current status of the economy. It looks like this parameter will be making a major positive contribution to the Index for February.

While the number of workers increased during February, the wage rate received by those workers actually decreased. Average hourly earnings of private production or nonsupervisory workers on nonfarm payrolls edged down by 1 cent in February, after seasonal adjustment, following a 5-cent rise in January. So, the drop in the unemployment rate in February has not been immediately translated into increased pressure for higher wages.

Average weekly earnings rose by 2.3 percent because of the workweek increase. Over the year, average hourly earnings increased by 2.9 percent and average weekly earnings by 2.6 percent. When you factor in a rise in the Consumer Price Index of 2.5 percent the net gain in real earnings drops to a small fraction of one percent.

As to the pickup in retail sales, Goldman Sachs reported yesterday that its same-store sales index rose by 4.9 percent in February. This compares with a rise of 3.5 percent in February of 1995. The 4.9 percent gain was the largest since January 1995.

On the consumer credit front, yesterday afternoon the Federal Reserve reported that consumer installment credit outstanding increased at a 12.1 percent seasonally adjusted annual rate in January, in line with the pace of recent months. Growth was strongest in the revolving credit category, which expanded at a 16.1 percent pace. Auto credit expanded at annual rate of 9.3 percent. So, even though real income is static, it seems that consumers continue to be willing to lay on debt to support their spending.

In Summary: Employment is up and consumers seem as willing as ever to spend money. Maybe happy days are really here again. Yeah -- right. Not in my portfolio they ain't.

Byline: Lafferty (MF Merlin)