“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:


The U.S. economy needs to create over 200K new jobs per month to keep up with the expanding labor force AND significantly reduce unemployment.  During the 1990's, the U.S. created an average of 182,000 jobs per month. 

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:

How the BLS Labor Reports Might Influence QE Tapering

The market has been obsessed with when the Fed's QE program might slow down or end.  On May 22nd, Fed Chairman Ben Bernanke said that the Fed could reduce its $85B-a-month of debt purchases “in the next few meetings” if the labor market is strong enough to warrant it (but the metrics were not quantified).


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.