Friday's Job Report And Implications

Includes: DIA, SPY
by: Codespeed

Non-farm payrolls were released today and the figure was a disappointing 20% less than expected.

U.S. labor markets are still struggling to gain traction this summer, even though it will soon be three years of expansionary policy by the government. At the time of writing this articles, the jobs report was about to be released and S&P futures had already started trending down ahead of the data.

Looking at the non-farm numbers since January 2012, we have seen a significant downward trend so far already. Since the past three months, a total of 225,000 non-farm jobs were gained, less than the single month figures of January and February!

Details from Friday's Job Report

  • Non-farm payrolls were 80,000 vs. 100,000 that was expected.
  • Private sector jobs disappointed as well, at 84,000 vs. the expected 105,000.

    Note: Initial consensus was 82,000 but the number was revised ahead of the report.

  • Unemployment rate stays at 8.2%.
  • Highest growth sectors in terms of jobs, were Temporary help (25,000), Professional and Technical services (18,000), and Healthcare (11,000).
  • Durable manufacturing industry gained 14,000 jobs.
  • Durable goods industry gained 13000 jobs.
  • Construction industry gained 2000 new jobs, also first YTD increase.
  • Federal and State Government payrolls contracted.
  • Education jobs decreased by 14,000 (maybe summer has something to do with this, so hopefully temporary).

What this means to us

If you have ever taken your kid to Chuck E. Cheese, you probably remember that Smash-A-Munch game where you use a hammer to smash those little monsters popping their heads out of a board. The Europe situation is similar -- the leaders try to hammer down one problem, and another rears it's head. And it appears this will continue for a while.

The European leaders have had as many as 19 meetings to discuss a resolution for their sovereign debt levels, and they have yet to come up with something solid and comprehensive and investors are running out of confidence.

In the U.S., the investor community has already been murmuring about the "fiscal cliff" and the whispers are getting louder. Over the past year and half, politicians in the U.S. have behaved childishly, causing a great deal of harm to the investment community indirectly. 2012 is the election year, so this pseudo battle related to fiscal and monetary policies (or any other policies for that matter) between the Democrats and Republicans will continue going into the Q4 of 2012.

Then in China, new PMI numbers and the government's interest rate cut only suggest a further contraction in PMI and more softened data in the summer.

In this sad macroeconomic environment, it is likely that average job growth for 2012's second half will stay around a dismal 125,000 number. From the government's standpoint, the rate of return on their investment (read stimulus) is quite dismal considering they have been lending a helping hand for three years now.

More QE?

Inflation expectations are still a bit high but note that a downward trend has started, and it seems that late summer might see more weakness. If this continues, Uncle Sam would have no choice but to us a gift of QE.

Like the maker of the killer gun AK-47 regretted coming up with his own invention that is now used to kill innocent lives, John Maynard Keynes could be very well regretting his own theory from his grave. The market has got so used to stimulus that it is forgetting to behave on its own.

After three years of various expansionary monetary policy measures, we are seeing disappointing growth in jobs. How do we know whether another QE will help?

The best scenario for the U.S. is if the labor markets start seeing organic growth and stop relying on government stimulus.

Friedrich Hayek must be smiling in his own grave.

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