Does July’s Strong Job Report Mean Happy Times are Here Again?

by the Curmudgeon with Victor Sperandeo

Analysis of Jobs Report (Curmudgeon):


The BLS reported on Friday that US employers added 255,000 non-farm payroll jobs last month, Job gains occurred in professional and business services, health care, and financial activities. Employment in mining continued to trend down.  June’s gain in non-farm payrolls was revised upward by 5,000 jobs, and May's by 13,000.


Wages for private-sector workers were up 2.6% over the last 12 months.  That matched the strongest annual pace of wage growth in seven years.  More Americans joined the labor force in July, keeping the jobless rate steady at 4.9% and the number of unemployed persons was essentially unchanged at 7.8 million. Both measures have shown little net movement since August 2015. 


Yet other measures of the labor market suggest that underlying joblessness is higher than the official 4.9% unemployment rate (also see John Williams' comm entary below).  The broadest measure of unemployment calculated by the Labor Department, which includes workers who want full-time positions but cannot find them, stood at 9.7% in July. 


In addition to the 7.8 million currently counted as unemployed, there are more than 50 million Americans above the age of 55 who say they don’t want to work and are, for the most part, retired. It also takes into account 13.5 million Americans age 16 to 24, most of them in school, and millions of women who have chosen to stay home to care for their young children. None of those people are considered unemployed by the Labor Department.


According to the above referenced BLS report (did the reporters/commentators read all of it?):


Both the labor force participation rate, at 62.8%, and the employment-population ratio of 59.7%, were little changed in July. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 5.9 million in July. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.


In July, 2.0 million persons were marginally attached to the labor force, about unchanged from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.


Reconciling Strong Jobs Report with Anemic GDP (and declining Productivity):


The July increase in payrolls stands in sharp contrast to data released just last week showing disappointing US economic growth of only 1.2% in the 2nd quarter of 2016.


According to Saturday's NY Times, a big reason for the difference is that parts of the economy are still suffering from the continuing fallout from low oil prices as energy companies cut back on investment. Government spending also has been weak and many companies have deferred investment in new plant and equipment that would increase their efficiency and production output. 


The Curmudgeon emphasizes that US business (capital) spending has been incredibly weak, which does not bode well for future economic growth.  American companies, dogged by shrinking profits (five or six consecutive quarters of down earnings – depending on the source), have cut investment for the third straight quarter.  Alongside steady hiring, that’s led to slumping labor productivity growth.



Sidebar:  Productivity is a key to rising living standards.  Steady gains in productivity are needed to support higher incomes without sparking inflation.   On June 7, 2016, BLS reported that US non-farm business sector labor productivity decreased at a -0.6% annual rate during the 1st quarter of 2016.  [Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.].















Chart Courtesy of Trading Economics.


Bottom Line:  An economy can't grow with GDP at 1% and productivity DECLINING! 



Also, the economic outlook is weak outside the US, representing another potential drag on the US economy (e.g. US exports and repatriated earnings abroad). The International Monetary Fund (IMF) last month downgraded its forecast for global economic growth after Britain’s vote to leave the European Union weighed on consumer confidence and investor sentiment. 


“This apparent inconsistency— a willingness to absorb the high cost of labor, yet completely shut down business capital spending—illustrates how cautious CEOs remain given the uncertainties about the US election, the fallout from Brexit, and the health of the global economy,” said Bernard Baumohl, chief global economist at the Economic Outlook Group consultancy.


If business and government investment continue to lag, that could undermine the long-term ability of the American economy to be more productive and raise living standards for most workers.


“The question at this point remains, which data point is more telling of the underlying momentum in the US economy: an average 1% GDP or an average of 200,000 payrolls (for the 1st half of 2016),” said Lindsey Piegza, chief economist at Stifel Fixed Income.


John Williams' ShadowStats Opinion: 


In letter number 824, John writes:


·       Month-to-Month Unemployment Data Remained Meaningless, Nonsensical and Heavily Skewed by Inconsistent and Not-Comparable Seasonal Adjustments

·       Heavily Bloated by Seasonal-Factor Distortions and Add-Factors,

·       Annual Payroll Growth Effectively Held at a 29-Month Low

·       July 2016 Unemployment: U.3 Held at 4.9%, U.6 Notched Higher to 9.7% and the ShadowStats-Alternate Rate Rose to 23.0%


From John's commentary (subscribers only- and we strongly recommend readers subscribe!):


·       In Continued Misreporting, Payroll Activity Remained Massively Overstated; Monthly Unemployment Details Remained Not Comparable.

·       Underlying reality for July 2016 US labor conditions was in the realm of a 23.0% broad unemployment rate, with the actual monthly payroll-employment change likely on the downside of flat.

·       The “unchanged” headline U.3 unemployment at 4.9% in July was continued nonsense, simply reflecting not-comparable and meaningless month-to-month changes in the Household Survey data.

·       Consider that headline Household Survey detail showed the number of employed increasing by 420,000 in July 2016, while the number of unemployed declined by only 13,000 (-13,000)? This general pattern was seen repeatedly earlier in the year. Normally, large swings in the count of the employed have some meaningful offset in the count of the unemployed, going either way. That did not happen here, because the seasonally-adjusted June and July data were not reported on a consistent basis and simply were not comparable month-to-month.

·       The gimmicked, headline payroll gain of 255,000 more realistically should have come in below zero, net of built-in upside biases. Discussed in the Birth-Death/Bias-Factor Adjustment section in the Reporting Detail, subsequent to the downside payroll-benchmark revisions of February 2016, the usual, excessive monthly biases added into the headline monthly payroll detail by the Bureau of Labor Statistics (BLS) were revised to the upside.

·       This less-obvious use by the BLS of the Birth-Death Model (BDM)3 artificially has inflated headline month-to-month payroll gains with meaningless add-factors that currently are well in excess of 200,000 jobs per month. Such is separate from the constantly shifting seasonal adjustment patterns that can boost headline data in a given month (as in May 2016), with no prior-period offset accounting.


Note 3.  Victor has many times called out the BDM as an extraordinarily phony tactic the BLS uses to artificially increase non-farm payroll gains.  You can read about it in Note 2. of this post and in the sub-head Phantom Jobs Created by "New Companies" Which Don't Really Exist in this one. 



Victor's Analysis of the non-farm payroll numbers and its impact on the markets:


This is the second month in row where the "highest estimates" of the consensus predictions of the payroll jobs number has been under estimated.  Let's take a closer look at the job numbers. The payroll number propaganda is weighted to the number of jobs, not what kind of jobs.


·       Retail jobs (minimum wage paying) with less than 30 hours a week was +289,000 year over year (YoY).

·       Leisure and Hospitality, also very low paying added +421,000 YoY.

·       Business services +550,000 YoY, and

·       Health Care + 476,000 YoY - the highest paying jobs of the bunch.

·       Government jobs for the MONTH were the highest of the year at +38,000.


The market’s reaction was mixed:


·       The increase of 255,000 new jobs caused the S&P 500 and the Nasdaq 100 to close at new all-time highs. The US equity markets no longer appear to be concerned about a Fed rate increase.

·       Other markets were definitely worried that the Fed might raise rates at the next (September 20-21st) FOMC meeting. The US dollar rallied, Treasury bonds & notes sold off, while gold and silver declined -1.90% and -3.51%, respectively.


My strong view is ZERO chance of this with 48 days before the next Presidential election.


Ironically, the stock market seems to be saying: if the Fed raises rates that's “good," because it means the economy is finally breaking out of its 2.07% record low growth rate from June 2009 to date1 and only 1% in the first six months of this year.


Note 1. The current economic “recovery/expansion" is the lowest in history (NOT from just 1949 as reported by the WSJ last Saturday, July 30th).


Conversely, when the jobs numbers are worse than expected (many times over the past 12 months)2, equity buyers presume that the Fed will not raise rates, and that is also "good” and so bullish for the stock market!


Note 2.  On May 6, 2016 BLS reported that the US economy added only 11,000 jobs (way below analyst estimates).  The S&P 500 dropped to 2,039.45 intraday, but then rallied to close at 2,057.73 - up 7 points on the day. 


→So the markets theme is apparently: either heads or tails, you win by being long stocks!


Lastly, the markets are looking at the well-respected Atlanta Fed GDP NOW forecasts, even though it was dead wrong on 2nd quarter GDP prediction of +2.3% one day before the number was released to actually be only 1.1%. The Atlanta Fed GDP NOW is predicting 3rd quarter GDP to be +3.8% as of Friday. Perception is reality until the recognition comes.


The US stock market is very expensive, based on P/E ratios (and other metrics also). The S&P 500 has a current 12 month rolling P/E of 25.26 and the S&P Industrials is at 29.88. Even the DJ Utility Average P/E is 26.38.


→So whatever causes the end of the old bull market, and economic expansion, the results will be awesome.


Jobs, the Economy and the Presidential Election (Victor):


The obvious reasoning from most market thinkers is the party which controls Presidential power wants to retain that power. But sometimes it doesn't work out that way:


·       After the GOP (or the "Stupid Party" as Pat Caddell calls them) permitted the markets to crash by letting Lehman Brothers go bankrupt, Democrat Barrack Obama won the 2008 Presidential election.

·       The mother of all administration blunders was led by the dumbest President of all time -the GOP's Herbert Hoover (1929-32), whereby both market declines were associated with the "Great Recession" and "Great Depression "which caused a 100% loss of government power to the Democrats.


You can certainly see why the current Fed, and everything else the Democratic administration controls will attempt to influence the November elections such that the Democratic party will be victorious. Such control is especially true for the markets and the economy.


This is not your ordinary election. the Neo-Con GOP/libertarians, and the Progressives/ Liberals/ Democrats all hate Donald Trump because he can change the system (which is a racket), and that is the greatest fear of the establishment. Therefore, more media propaganda and by hook or crook tools will be used in an attempt to get Hillary Clinton elected as our next President. This includes economic fabrication, including the polls.


Victor's Conclusions:


Can two consecutive months of strong jobs reports (a lagging economic indicator) compensate for sub-par economic growth?   OF COURSE NOT!  However, traders don't care as they have very short term mentalities and so they trade the headlines.  I believe the Fed manipulates stock prices to its desires and personal goals, but that has nothing to do with the politics of power. 


The current administration has the power.  They are doing a hell of a job to make people believe things are good. Does the government actually believe itself?  See this 30 second video of a State Department spokesman and then decide for yourself!


Statements from the Fed and virtually all government agencies, bureaus and officials are now largely “spin.” Which means, according to Criss Jami:


"Just because something isn't a lie does not mean that it isn't deceptive. A liar knows that he is a liar, but one who speaks mere portions of truth in order to deceive is a craftsman of destruction."


That leads to our current political/economic/financial state of affairs. The reality of the consequences of this “spin” is the oldest, truest quote known to man:


"La plus belle des ruses du diable est de vous persuader qu'il n'existe pas."

Translation: "The devil's finest trick is to persuade you that he does not exist."


From -Le Spleen de Paris- a collection of poems by Charles Baudelaire.


Good luck and till next time...

The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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