While last Friday’s disappointing monthly jobs report doesn’t herald the end of the US recovery, it’s a reminder of the recovery’s fragility and that improvement in the US economy will most likely continue to be slow and characterized by fits and starts.
When you view the jobs data in a context of longer than one month, there is evidence that the US labor market has improved since last year. Net new job growth has averaged 211,000 a month during the first quarter of 2012, up from 153,000 in 2011 and a scant 85,000 in 2010. Non-farm payrolls are now up approximately 1.5% year over year, the fastest rate of growth since 2006. Other metrics – including hours worked and initial unemployment claims – are also showing improvement.
However, while the labor market is improving, it’s improving from a very low base at an agonizingly slow pace. In addition, there is some evidence that the labor market has structural problems that may prove to be a drag on growth for some time.
For instance, while the unemployment rate has fallen by nearly 2 percentage points from its 2009 peak, the drop has been flattered by millions of individuals leaving the work force. Labor force participation in the United States is now down to 63.8%, close to a 30-year low. Meanwhile, the recession seems to have exacerbated a longer-term trend of stagnating real-wage growth, meaning those who remain in the labor force can’t get a raise. This problem is particularly acute for lower- and middle-income workers paid on an hourly basis. For these workers, wages are growing roughly 1% below the inflation rate.
Looking forward, I expect that the labor market will continue to improve but at a slow and fitful pace. In addition, to the extent that job and wage growth remain weak, the recovery is also likely to remain soft, with the US experiencing growth of around 2% for the remainder of this year.
What does this mean for investors? First, as the economy slowly recovers, expect more volatility and that interest rate rises will likely be slow and modest. Second, consider dividend paying stocks, which typically outperform in a slow growth world. Finally, as consumers are experiencing little-to-no income growth, I’d suggest remaining cautious on stocks – such as US retailers — that rely on a consumer who is willing and able to splurge.