Euphoria Over Job Gains

by: John M. Mason


Job gains came in much stronger than expected and some analysts and many journalists pounced on the number as an indication of how the economy was picking up steam.

But, many analysts and journalists have been looking for "good news" for six-and-a-half years.

In looking for "good news" using old ideas means that these individuals are missing the story that is going on and distracting others from working with things as they are.

People need to be optimistic.

If an athlete is not optimistic about winning the next game, he might as well not play it. Personally, I have never lost a game in my life.

If a groom is not optimistic about his upcoming marriage, he better not get married.

If an investor is not optimistic about his prospective investment, he better not invest in that opportunity.

But, people also need to be realistic. In golf, I won a lot of money from many competitors, and although at one time I had a zero handicap, I never played or bet with Tiger Woods or Jack Nicklaus.

I am very happily married.

I have done well investing, and, have a good, but not exceptional rate of return for a value investor. I have never, knock on wood, taken a "big hit" on any investment.

What I am having trouble with at the current time is the optimism of journalists and some analysts with respect to the state of the economy. As I write about from time-to-time, I am amazed at the search for "green shoots," the search for convincing information that the economy is just on the verge of faster, "more normal" growth.

The latest evidence of a "green shoot" was the jobs report that was released last week.

JObs Job gains in the economy totaled 292,000 in December 2015 and the unemployment rate stayed stationary at 5.0 percent.

The article read "The U.S. economy closed out last year with robust job gains," and "The jobs numbers 'put the kibosh on any fears that the U.S. would slip into recession this year with all the oddball things going on in the world,' said Wells Fargo& Co. economist Mark Vitner."

Good news!

Yet, "the other oddball things going on in the world" seemed to dominate market performance as the stock market closed down again…substantially.

The thing is, the economy is going through a lot of pain right now, a lot of the pain coming from something called "restructuring". Expectations of inflation are low. People did not spend that much during the end of year holidays. And, uncertainty seems to pervade the financial markets.

The employment thing, however, really gets me.

How can one put so much emphasis on one data series and leave out all else that is going on.

The Wall Street Journal, in the article cited above, has an article that gives the picture some perspective. There is a chart accompanying the article titled "Strong Job Growth Masks Middling Gains Elsewhere." This chart covers some of the economic performance of the United States over the past 15 years, year-by-year.

In terms of job gains, 1915 comes in second out of the 15 years in terms of average monthly job gains. Only 2014 is higher.

In terms of the unemployment rate, 2015 came in third, behind 2006 and 2007.

In terms of real GDP growth, 2015 came in eighth out of the fifteen, with 2014 and 2013 just above it. In terms of wage growth, 2015 was ninth, with 2010 through 2014 below it in the rankings.

But, the real "stingers," I believe are these. The labor force participation rate stands at 62.6 percent. One has to go back to the last half of the 1970s to find a rate so low.

And, as the Wall Street Journal shows, people aged 25-54 working or looking for work comes in fourteenth place, with only 80.9 percent of this age group fitting this description.

How can people feel good about the 5 percent unemployment rate and the job gains figures when there is apparently so much dislocation in the economy?

Only by looking at the world with blinders on.

And, by placing too much emphasis on these "green shoots" policymakers look past what needs to be done in the economy and continue to carry on with the same old outlook and the same old policies.

Even former US Treasury Secretary Larry Summers points to a situation in China that, historically, mirrors the American experience. Mr. Summers is speaking of why Chinese growth is having trouble sustaining economic growth these days. "Over the past year, about 20 per cent of China's growth, as reported in its official statistics, has come from its financial services sector, which is now about as large relative to gross domestic product as in Britain..."

The consequence, "This is hardly a case of healthy or sustainable growth."

John Kay of the Financial Times, in his book "Other People's Money," lays out a similar picture of the United States in the latter half of the twentieth century. As governments pushed credit inflation and financial innovation grew, more and more people went to work in financial institutions and fewer and fewer of the workforce went into the production of goods. In such cases, overall domestic growth slows down.

Furthermore, since jobs in the financial space seem to require more education and experience, this industry draws from the part of the employment demographic that has an unemployment level of 2.5 percent according to the Labor Department. This just adds to the dislocations that occur in job markets.

As we are seeing, not only in the United States, but also in Europe and Japan, such an environment is not favorable for monetary stimulus, even as extreme as quantitative easing. Even fiscal stimulus seems to be highly inefficient in today's world in terms of creating more rapid economic expansion.

So, just advocating more in the way of monetary ease and an end to fiscal austerity holds out little hope to resolve some of the issues we are now facing.

It seems to me, however, that if we quit looking every place for "green shoots" and focused more on what the problems we face really are, we might get some more effective solutions. However, it is my feeling that these "more effective solutions" will not resolve the problems quickly and will not meet the needs of politicians that are only interested in the next election.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.