Today’s employment report is a compelling reminder that the US economy isn’t as fully recovered as many would have us believe. Despite the fact that the economy added 175,000 new jobs last month and a more than expected 129,000 in December, the unemployment rate actually ticked up from 6.6 percent in January to 6.7 percent in February.

Why would that be the case? As with so many other government statistics, the official unemployment rate is grossly misreported.

The official rate that is always reported is actually the narrowest measure of unemployment, including only those who are actively engaged in the search for work. It excludes those who have taken part-time work but are still looking for full-time positions and those who would like to work but have given up on the job search temporarily.

There is a broader measure of unemployment maintained by the US Bureau of Labor Statistics known as the “U-6” that includes not only those actively searching for work, but those who took part-time positions for economic reasons and “discouraged” workers. The U-6 unemployment is now running at 12.6 percent after falling 0.1 percent, as those U-6 workers are being lured back into the job market and once again joining the official statistic.

So why, if my position is that inflation is a growing concern, would I point out that there are more unemployed workers than actually believed? After all, if people aren’t working there’s not nearly as much demand for goods and services and less price pressure in the economy.

I bring it up because Washington Post financial reporter Ylan Mui published an interesting chart this morning from HSBC (NYSE: HSBC). It shows inflation becomes increasingly unpredictable after the official unemployment rate falls below 6.5 percent, with inflation about as likely to go up as to go down.

One of the main reasons my colleague Richard Stavros and I have been making the case that inflation is a growing concern but not quite here yet is precisely because of the fact that there have been so many disaffected workers in the economy.

Over most of the prior decade, when we were close to a level considered full employment, the U-6 averaged about 9 percent. The fact that they are now being lured back into the jobs market brings us one step closer to a full-fledged inflationary problem. Over the past year, the U-6 has fallen from about 14.5 percent to 12.7 percent in January and the pace of the decline is accelerating.

Inflation hawks at the Fed have mostly been derided as cranks in the media. By now, most of you have probably seen that inflation was mentioned hundreds of times during crisis meetings versus just dozens of mentions of unemployment and risks. But inflation is a perfectly valid concern right now. The simple fact is that the Fed doesn’t have as much control over inflation as it would like us to think — and those “cranks” are trying to keep the central bank honest.

Now, don’t get me wrong, the fact that the U-6 rate is declining is good news. It means the economy is continuing to improve and getting back to what passes for humming, something which should make us all happy. But it also means that those inflationary hawks who have largely been written off as alarmists over the past couple of years are also getting closer to being the talking heads who will soon dominate the media conversation.

Portfolio Updates

Despite lower sales in Sanderson Farms’ (NSDQ: SAFM) first quarter, earnings received a boost from significantly lower feed prices.

Net sales for the quarter totaled $584.9 million compared to $595.8 million in the same period last year, as sluggish restaurant demand brought down sales. However, the company’s average feed cost per pound of poultry processed fell 25.1 percent versus last year as corn and soybean prices — the two primary feed components — declined by 38.8 percent and 12.8 percent, respectively. Consequently, the company reported significantly lower costs of $539.7 million this quarter versus $605.4 million in the same period last year, a huge improvement on margin.

Earnings per share (EPS) bounced from a loss of $0.31 in the same period last year to a positive $1.25 in the first quarter, while the dividend was increased from $0.17 to $0.20 per share.

The company’s directors also approved the extension of the company’s stock repurchase program of up to 1 million shares to February 2017. The extension isn’t likely to have a significant impact on reported earnings, though, as the program is mainly used to offset the dilution caused by the company’s equity compensation program.

I doubt the company will be able to produce such strong results in the coming quarters, because corn prices are already on the rise following the US Department of Agriculture’s reduction in its corn and soybean carryover forecast. The government now believes that only 1,792 million bushels of last year’s corn is carrying over into this year, down 95 million bushels from the November forecast. The soybean forecast declined by 20 million bushels to 150 million bushels.

Despite higher feed costs, an expected improvement in demand should support if not boost average chicken prices thanks to supply constraints. The industry continues to face limited breeder stock supplies and, as a result, production isn’t likely to pick up until the second half of the year.

While feed prices will likely pick up as the year progresses, Sanderson Farms remains a buy up to 80 as supply constraints support prices.

Pall Corp (NYSE: PLL) is also trading significantly above our target price of $80, following a strong second quarter.

A 3 percent year-over-year decline in Industrial sales — down from $333 million to $324 million — was more than offset by a 7 percent increase in Life Sciences sales, which rose from $329 million last year to $353 million.

Industrial segment sales were impacted by a 12 percent decline in aerospace sales and a 9 percent drop in system sales, while microelectronics was up 19 percent and process technologies were flat. Food and beverage sales were flat in the Life Sciences divisions, but all other categories posted increases: biopharmaceuticals were up 9 percent, medical sales were up 7 percent and system sales grew by 20 percent.

Consolidated revenue totaled $677 million compared to $662.5 million last year, with local currency sales up 4 percent. Profit margins were also boosted by 0.6 percent in Life Sciences and 0.1 percent in Industrial thanks to improved cost controls, helping to take diluted EPS up to $0.75 versus $0.73 a year earlier.

Total sales for the first half of the year totaled $1.3 billion, up 1 percent over the same period in last year. EPS for the period came in at $1.52 versus $1.41.

Management continues to execute well on controlling costs and improving margins. That allowed it to tighten its full-year earnings guidance to between $3.35 and $3.45 for the full year. While that is significantly below last year’s earnings performance which included a number of one-offs, it is generally better than market expectations.

Given this strong operating performance, I’m boosting my buy target on Pall Corp to 92.