America. F#@K Yeah!! This morning’s unemployment report, showing the lowest rate since June 2008 at 5.9% confirms our status as, by far, the best block in a crappy neighborhood. This will probably be the 50th read on today’s jobs data so let me take a slightly different crack at it as a non-economist.
Not to rain on anyone’s parade here, but just think about it is this way. The Federal Reserve, in an effort to do their job (unlike the ECB) and in line with their dual mandate to manage inflation and unemployment, have spent $3 trillion over the last 5 years in an effort to encourage businesses to hire, so that consumers will have cash to spend on iPhones, LCD TVs and second homes (again) and maybe even try to cause a little inflation (which is a good thing in a liquidity trap.)
Looking at the 10 year unemployment rate back below 6%, at pre financial crisis levels, I am not sure there is much to cheer about this late in the recovery:
While the unemployment rate has had a fairly orderly drop from 10% at its highs in late 2009, I think it is important to note the drop in the labor force participation rate (alot of which has to do with the rolling retirement of the baby boom generation) that is at 30 year lows and possibly headed for 40 year lows:
Despite the gains in unemployment, there is still NO wage inflation. Average hourly earnings rose only 2% year over year, still well below the target (about 3.5%) that the Fed has indicated will help get overall inflation to their target of 2%
So if today’s morning gains hold, tomorrow’s headlines will read something like this – “U.S. equities cheer better than expected jobs data, shake-off macro concerns of the prior week”. Again this is all fine and good, but let’s think hard about what we are cheering – the fact that we did not have the another disappointment like the one in August and that we are essentially the only place in the world that isn’t falling back into its second or third recession since the financial crisis.
When it comes to the stock market, the bulls are pointing to the acceleration in GDP in Q2 at 4.6%, a sharp rise from the -2.1% in Q1. I guess from where I am sitting the Q1 print, while ancient history, largely explained away by unusually cold weather, remains a bit troubling at this stage of the recovery. Weather caused the first year over year GDP decline since Q1 2011 when the Euro debt crisis was brewing. I think it is safe to say that the recovery is fragile at best. And while the S&P 500 index is going to do its best to get back the all time highs made just two weeks ago, it will become increasingly hard to ignore what seems to be mounting pressures on global growth.
Some may have taken solace in the fact that Warren Buffet was buying stocks on Wednesday’s stock market decline (my view from yesterday on the topic, MorningWord 10/2/14: Omaha Stakes, Buffett’s risk management is a lot different than yours). However, without a stabilization in the issues causing volatility in emerging markets and Europe, I am not of the belief that the U.S. economy can de-couple from that of the world (my view from Tuesday on the topic – MorningWord 9/30/14: Conscious De-Coupling).
The U.S. , who caused the financial crisis, has been the best at dealing with its aftermath. But until the rest of the world is in the clear, we’ll simply be a flight to quality, and that can’t de-couple forever,