3 Stock Picks as Unemployment Falls

The US jobs market is going from strength to strength, hitting record levels at regular intervals. Now the unemployment rate has hit a 6-and-a-half-year low—a new milestone for the job recovery powering the economy. This pace is also within the Fed’s target range, signaling a return to full employment. Stocks slipped on Friday, reflecting market fears that the central bank will now begin considering a rate hike.

Record Lows, Highs

The year 2014 was the strongest for the labor market in the last 15 years in terms of new job additions. According to the US Department of Labor, the US economy created 2.95 million new jobs in 2014, its highest tally since 1999. This momentum continued into January with the economy, creating 257,000 new jobs. However, the unemployment rate increased marginally to 5.7% from December’s rate of 5.6%.

Now, the unemployment rate has dropped to 5.5%, its lowest level since early 2008. Additionally, the US economy has added 295,000 jobs in February, a substantial improvement over the 257,000 new jobs created in January. The US economy has now created a minimum of 200,000 jobs for 12 consecutive months. This pace of hiring is the highest witnessed in more than 20 years.

Wage Growth Flags

Yet, wage growth remains an area of serious concern. Signs of improvement had surfaced in January, when average hourly earnings increased 0.5%, or 12 cents, to $24.75 in January, stronger than the consensus estimate of 0.3% gain. Year-on-year growth in average hourly wages came in at 2.2% in January.

In contrast, wage growth increased only 0.1% in February, 50% lower than the consensus estimate. This is also an indication that jobs of lower quality were on offer, and therefore offered little in terms of wage increases. Additionally, year-over-year gains came in at 2%, also lower than the January increase.

Will the Fed Act?

The slide in unemployment to 5.5% has triggered market concerns that the Fed will now move toward higher rates. This is because it has hit the upper bound of the 5.2%-5.5% range which the Fed believes signals full employment.

Some market-watchers believe that the Fed is likely to remove the word “patient” from its next policy document, scheduled for release after the next FOMC meeting starting Mar 18. However, Fed Chair Yellen had earlier stated that dropping the word "patient" from the Federal Open Market Committee’s (FOMC) statements does not imply that the Fed will raise interest rate immediately.

This is why other investors are of the view that tepid wage growth will continue to delay a rate hike. Additionally, inflation remains another area of concern. A strong dollar, global economic weakness and a slump in oil prices have ensured that sluggish inflation remains one target which still some ways off.

Our Choices

Increased job additions and expectations of this trend continuing should keep the staffing companies busy. These companies are poised to gain from increased job creation in the economy. Below we present 3 stocks which will gain from these trends, each of which also has a good Zacks Rank.

TrueBlue, Inc. (TBI - Snapshot Report) offers managed services, staffing and recruitment process outsourcing across the US, Canada as well as Puerto Rico. TrueBlue has 2 operating segments, Managed Services and Staffing Services. It focuses on offering its services to small and mid-sized companies.

TrueBlue holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 19%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.10.

Resources Connection Inc. (RECN - Snapshot Report) offers business initiative support services as well as consulting services across Europe, the Asia Pacific and North America. Resources Connection offers finance and accounting services, information management services and also human capital services.

Apart from a Zacks Rank #2 (Buy), Resources Connection has expected earnings growth of 32.1%. It has a P/E (F1) of 22.97x.

Korn/Ferry International (KFY - Snapshot Report) has 3 operating segments, Futurestep, Executive Recruitment and Leadership and Talent Consulting (LTC). Executive Recruitment primarily recruits senior executive positions across a number of sectors. Futurestep provides recruitment process outsourcing among other recruitment services. LTC offers talent management and leadership solutions.

Korn/Ferry International holds a Zacks Rank #2 (Buy) and has expected earnings growth of 17%. It has a P/E (F1) of 16.42x.

Considering the lack of wage increases, it seems a rate hike may still be some way off. Additionally, another record addition in jobs will provide more confidence to the economy and markets. Adding these stocks to your portfolio would make for a prudent choice.

This article originally appeared at Zacks.com. Reprinted with permission.

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