“Goldilocks” Jobs Report Great For
Wall Street But Only So-So For Main Street
by The Curmudgeon
|
For the
second consecutive month, Wall Street cheered a mediocre employment report -
not too hot or not too cold (as in Goldilocks' porridge). The market rallied strongly on Friday to
celebrate "muddle through" jobs numbers, which participants believe
will keep the Fed's QE program going while preventing a consumer led
recession (due to concerns of high unemployment). More on the market's obsession with QE
later in this article. The Bureau of
Labor Statistics (BLS) report stated that a total of 175,000 nonfarm payroll
jobs were added in May.
But the net revisions for March and April were down 12,000. The May non- farm payrolls increase was in
line with the average of 172,000 jobs created per month over the last 12
months. A few other data points from
the May BLS report: ·
Unemployment
ticked up – from 7.5 percent to 7.6 percent.
·
The
number of long-term unemployed (those jobless for 27 weeks or more) was
unchanged at 4.4 million. These individuals accounted for 37.3 percent of the
unemployed. ·
The
average workweek for all employees on private nonfarm payrolls was unchanged
in May at 34.5 hours. ·
Hourly
earnings for all employees on private nonfarm payrolls were up a penny at
$23.89. ·
The
labor participation rate was little changed and remains near a 32 year low at
63.4 percent. ·
U-6,
the most comprehensive measure of unemployment, declined only 0.1 to 13.8
percent. [U-6 includes: total
unemployed, all persons marginally attached to the labor force, total
employed part time for economic reasons (as a percent of the civilian labor
force), plus all persons marginally attached to the labor force]. That's hardly
great news for main street to cheer about!
“The United States is way below where it should be,” said Lawrence F.
Katz, a Professor of Economics at Harvard. “We had a massive downturn and a
tepid recovery.” Indeed, the
U.S. is a full four years into an "economic recovery," yet overall
U.S. employment remains 2.1% below where it was at the end of 2007 (when the
"great recession" began). By comparison, over the same period,
between December 2007 and March 2013, the number of jobs was up 8.1 percent
in Australia; Germany, the biggest economy in the troubled euro zone, has
managed a 5.8 percent gain in employment, according to the NY Times. We can see
how little progress has been made over the past couple of years in creating
U.S. jobs in the chart below:
Each month,
The Hamilton
Project examines the
"jobs gap," which is the number of jobs that the U.S. economy needs
to create in order to return to pre-recession employment levels while also
absorbing the people who enter the labor force each month. Job creation would
have to average 208,000 per month to close the gap by 2020; 320,000 by 2017;
or 472,000 by mid-2015. This can be
clearly seen in this chart:
That is what
the Street calls "tapering."
Many market analysts have forecast that tapering would begin after the
Fed's September 2013 meeting, but the timing will likely depend on the Fed's
interpretation of future BLS employment reports. Evidently, the latest jobs report was strong enough to
reinforce the belief that tapering is coming, but the labor market is not
showing the kind of growth that would prompt the Fed to end its QE-debt
monetization programs in the next few months. That explains the market's strong rise on
Friday. But the situation could
quickly change. "Equity
markets are in a period of adjustment," said Anastasia Amoroso, global
market strategist at J.P. Morgan Funds in New York, which has about $400
billion in assets. "If there's an unannounced change in policy that
could be a shock to the downside." Closing
Thoughts & Viewpoint The
CURMUDGEON emphatically claims that the markets rally since the latest QE
program was announced (in September 2012) is based on a "house of
cards" that could collapse at any time.
Central banks have created the illusion of growth, based upon
re-inflating asset prices through artificially low interest rates and debt
monetization programs (AKA quantitative easing, or "creating money out
of thin air," or "printing money"). Michael Pento wrote: "In the
U.S., the publicly traded debt jumped by $7 trillion since the start of the
Great Recession. Our total debt hit a record $49 trillion (353% of GDP) at
the end of 2007—which precipitated a total economic collapse. But by the
start of 2013, total U.S. debt increased to $54 trillion, which was still
350% of our GDP. It is clear, once that interest rate “pin” is pulled, the
entire house of cards will collapse." Our view: At some point in time, the economy
will recover- unemployment will decrease below 7%, banks will start lending
again, money velocity will increase, and so will inflation. As inflation starts to pick up and long
term interest rates rise, the Fed will have to stop bond purchases and raise
short term rates. But we think the Fed
will ALSO have to "unwind" its massive balance sheet by
selling some of the $T's of bonds and mortgage securities it's purchased over
the last few years. Otherwise,
inflation will accelerate sharply and the US $ will collapse. That will be the day of reckoning for the
both the financial markets and the economy.
The long term outlook is NOT good. |
Till next time.....................................
The Curmudgeon
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.