The Red Warning Flags In Today's Employment Report

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Summary

The December job numbers show that nothing has changed.

The US economy remains locked in slow gear, slowly slowing.

The exciting stories about growth are mostly noise or cherries picked from the flood of economic numbers.

Combined with a hawkish Fed and high valuations = a dangerous market for investors.

The monthly employment reports provide one of the most important economic signals by which to steer your portfolio. Begin with the key factor: job growth, measured by the establishment survey. The number of jobs created tells you nothing. Economic numbers usually have meaning only as ratios. In this case, percentage growth. I watch the year-over-year (YoY) changes, which wash out the noise and show the underlying trend. In this case, an ugly trend.

Employment Growth from the Establishment Report, percent YoY thru December 2016

Non-farm payrolls rose by 156 thousand, down from the three month average of 165 thousand. Far more important was the 1.4% YoY percentage growth, the slowest since August 2011 -- continuing the decline from the February 2015 peak of 2.3%. Not only is the slowing bad news, but so is the peak. Since WWII, job growth in expansions has usually peaked at 5% (this is the second consecutive slow cycle).

Low real interest rates are normal under these circumstances. Extraordinarily high equity valuations and Fed rate increases are quite mad under these circumstances. Perhaps America's rising and fantastically high consumption of antidepressants and coke explains these anomalies.

But "jobs" are too imprecise a measure for our post-modern economy. A job can be full-time with overtime or a part-time gig. Shifts from the former to the latter can create illusory job growth. Let's look at total hours worked in the private sector -- perhaps the best measure of the economy's vitality. Unfortunately, we see the same sad picture.

Index of Aggregate Weekly Hours Worked by Private Sector Workers

Watch Wages

Perhaps we are at "full employment." For years conservative economists have pointed to the {mythical} widespread shortages of skilled workers (e.g. STEM workers, airline pilots). We need not guess or rely on esoteric calculations to find the answer. In a growing economy, wage growth accelerates in response to either of those conditions. This is "wage inflation", supposed bad even if productivity is rising faster than wages. (Note that economists seldom talk about "profits inflation".)

Worry not about accelerating hourly wages for the 82% of workers who are "production and non-supervisory employees -- aka the middle and lower classes! While businesses frantically outsource jobs and implore the government to allow in even more immigrants, most Americans have a 2.5% YoY increase in hourly wages (that's 0.66% after inflation). That's too much for most Wall Street economists and the Fed (two rate increases so far, perhaps more coming!).

Off-topic question: who were all those Trump voters? Why aren't they happy?

Conclusions

The employment report is highly valued by the Fed's governors, and should be closely watched by investors. There were no trend changes in the December data. No sign of lift-off for the economy. Just more slowing. This is a warning light on your portfolio management dashboard.

This suggests either that the Fed will stop raising rates -- or it will continue to raise rates and help spark a recession. Since we cannot reliably predict what the Fed will do, this is another warning light on your portfolio management dashboard.

The brightest red light should be today's high equity valuations, unjustified by any rational analysis.

Surprises lead to investment mistakes. Surprise is an event that occurs in the mind of an investor. Watch the data to prepare your portfolio for bumps and curves in the road, and so avoid expensive accidents. If you are a slow methodical investor, begin to reduce your exposure. If you are a trader, either place protective orders, hedge, or go to a higher state of alertness.

See these Seeking Alpha posts for more information

  1. Why Investors Are Deceived By News About The Economy.
  2. Why New Home Construction Is Slow, And Will Remain So For A Long Time.
  3. The Fed Is Not Suppressing Interest Rates.

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.