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Employment Growth on A Trajectory

Economic prospects continue to improve, although investors are distracted by turmoil in the Middle East and the risk premium being built into crude oil prices. The globe is highly likely to remain a dangerous place, but oil supplies are not likely to be disrupted sufficiently to undermine the U.S. expansion.

Payroll employment continues to gather momentum, as shown in the graph above. After a severe recession that caused huge job losses, the labor market is now exhibiting solid growth. Faster job growth provides households with the income needed to finance household spending, the single most important driver of economic growth. As households earn more, they are able to increase spending, and the rise in sales induces firms to increase hiring, which reinforces the trend. This is very much how the expansion becomes self-sustaining.

Even so, the expansion can be derailed. As is also evident in the graph above, growth was ramping up very nicely in 2010 when the Greek debt crisis struck and slowed the expansion for several months, as consumers and businesses became more cautious. Such a reaction could occur again, as rising oil prices undermine consumer and business confidence. The rise in oil prices, at least so far, has not been sufficient to significantly damage growth prospects. The contractionary effect of higher crude prices has merely offset the expansionary reduction in payroll taxes. And oil supplies have not been disrupted, as the Saudis have increased production to make up shortfalls from Libya. Moreover, the Obama Administration could release some oil from the petroleum reserve to ease market concerns. So rising employment should be sufficient to keep the expansion on a solid trajectory. (Wages rates appeared to be unchanged in the latest employment report, but this appears to be nothing more than a statistical distortion.)

Clearly, the situation remains in flux. Everyone will be following developments. But don't write off the expansion. The economy appears to be building momentum, which can carry it through the latest tumult, as long as oil supplies remain ample.

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