Better than expected employment data. No spin here, the numbers were truly better than expected. The Nonfarm Payrolls report indicates a gain of 151,000 jobs. The service industry led the way. There were 28,000 new jobs added to the retailing sector, 46,000 jobs were added to the Professional and Business Services sector. The economy also added 35,000 temporary workers. Manufacturing, information, financial activities, leisure & hospitality and government all reduced the number of workers employed. Pending home sales unexpectedly fell as moratoriums on foreclosures and tighter lending standards are creating headwinds.
In normal times a report of 151,000 new jobs would induce yawns around the street. However, we are not living in normal times (unless this is the new normal). That being said, 151,000 new jobs is lifting the spirits of market participants this morning (to say nothing of those who actually found employment). There is still a long way to go before the jobs lost since the recession began in December 2007 have been replaced. Thus far, over 1,000,000 jobs have been added this year. However, that still leaves the economy down just under 7,000,000 jobs since the recession began.
The real question is: Where are nearly 7,000,000 jobs (accounting for population growth we need to add even more) going to come from without the economic activity provided by an over-stimulated economy? That is the challenge. Critics have pointed fingers at the banks for their reluctance to lend to anyone who does not have excellent credit. These critics correctly point out that many people who can get credit do not need credit at this time. However, what incentives do banks have to lend to higher-risk borrowers when they have difficulty securitizing such loans and cannot simply sit on such loans as they would soon run out of lendable capital and incur huge amounts of risk? There is also no way banks can help borrowers who are upside down on their homes (owe more than the homes worth). Home prices will have to drop further to unfreeze the housing market.
Jobs are the key, people. Without jobs there can be no economic recovery, at least not the kind most people expect or desire. The problem is how to replace millions of jobs which would not have existed previously if not for two asset bubbles (tech then housing). I asked a friend who is a senior strategist at a major investment bank if he had any ideas about how the economy can replace millions of jobs which appear superfluous at this time. Unfortunately he is just as perplexed as the rest of us. He did suggest that NAIRU may come back into vogue.
NAIRU stands for Non-Accelerating Inflation Rate of Unemployment. This is the unemployment rate below which inflation rises. This is a way of determining “full employment.” In may short 22-year career in the fixed income markets, I have was around when full employment was considered to be around 6.00%. I remember when it as believed to be below 5.00%. Where is it now? I wish I knew, but I would not be surprised if it was above 7.00%.
What about this great stock market recovery? Thank Ben and Bernakettes for the soaring stock market. Strength in the equity markets (and the weakening dollar) is directly related to Fed policy. So much so that one pundit stated that he believes that market participants prefer continuous accommodative Fed policy than economic strength. If the Fed decides that it managing inflation is now the top priority, the stock market could be in for a violent correction. Fortunately for equity investors Helicopter Ben is at the controls. The money will be falling like WKRP turkeys at Thanksgiving.
There are critics who, following yesterday’s jobs report, are questioning the Fed’s decision to launch QE2. I am not a fan of QE. I believed from the beginning that if home prices were permitted to fall in early 2008 when, bargain hunters could have still obtained credit, the recession may have been more shallow and shorter-lived. However in the wake of the financial crisis, the Fed was left with little choice but to provide a record level of monetary accommodation. To of you equity bulls who are now criticizing the Fed for being too pessimistic and not understanding the recovery story: The only reason for your soaring stock markets is Fed policies, including QE2.
This is not to say that I am in favor of QE2. I would prefer a bloodletting which changes the business mindset in this country to one which favors long-term strength. However, as long as we live in a CNBC culture and equity wonks are considered experts while experts from other areas of the business are considered worriers, clueless and obstructions to growth, we will continue to live for the short-term boom while our trading partners steal our position of prominence and standard of living sinks into mediocrity.
Disclosure: No Positions
Disclosure: No Positions