Friday's jobs report should offer some clarity on what's been a confusing month for the U.S. economy.
Investors learned Wednesday that the economy shrank in the fourth quarter of 2012.
Yet stocks have been climbing since Christmas. On Friday the S&P 500 closed above 1,500 for the first time since 2007. Stock markets across Europe have been bullish since mid-November, and market volatility has fallen to record lows. This is all despite plunging consumer sentiment in the U.S. and signs of weakness in manufacturing at the end of the year.
But the news and the market can't go in opposite directions forever.
"If the economic picture doesn't soon confirm this recent uptick in financial performance, the hangover for the markets could be palpable," said Scott Anderson, chief economist for Bank of the West in San Francisco.
He believes either Friday's jobs report will confirm the market's recent exuberance or investors will feel pain.
News that the economy contracted in the fourth quarter for the first time since 2009 doesn't inspire confidence, but there's reason not to be discouraged. The data showing a contraction is preliminary and will be revised Feb. 28. Even if it is not revised, it mostly reflects defense and other government spending cuts, falling exports and delayed buying of inventory by businesses.
Analysts expect the employment report to show that the economy added 168,000 jobs in January, according to Marketwatch, compared with 155,000 in December. Hiring in Minnesota hit doldrums in the summer and early fall, then closed out 2012 with a bang, adding 21,000 jobs in November and December. On average, the state added about 4,300 jobs per month over the year.
The state has recovered 111,000 of the 156,000 jobs it lost in the recession.
"Overall the job creation numbers have been a little disappointing," said Anthony Becker, who teaches economics at St. Olaf College in Northfield. "They've been steady, which is good, but I think they've been a little disappointing."
Sorting through the economic signals can be difficult. Durable goods orders in December beat expectations, but a January survey from the Philadelphia Fed showed manufacturing activity declining. Sentiment among executives is up, and yet consumer confidence is down.
GDP also fell thanks to government uncertainty leading up to the fiscal cliff negotiations, said Jack Ablin, chief investment officer for BMO Harris in Chicago. The economy's weaknesses are partly offset by a strengthening housing market. The S&P/Case-Shiller home price index rose 5.5 percent over the 12 months that ended in November.
"We do see a boost in housing activity, so that's good news," Ablin said. "We do certainly have a boost in manufacturing. And then we've got this abundant supply of natural gas."
Ablin said a better-than-expected job report would "signal that a lot of these favorable trends are starting to gain some traction." A disappointing report, however, would fall neatly into a narrative of economic decline that's sustained by political gridlock in Washington.
"It would be sort of the overall economic backdrop," Ablin said. "We've got negative growth in the fourth quarter and now we're imposing taxes on people."
The Bureau of Labor Statistics will release its nonfarm employment and unemployment report at 7:30 a.m. Friday.
Adam Belz • 612-673-4405 Twitter: @adambelz