The Monthly Jobs Number Disappoints - Again

Posted on September 7th, 2012

When formulating an outlook on the markets, you have to formulate an outlook on economic growth. To do that, you need to formulate an expected view on jobs growth. Economies just can’t grow in a robust way without meaningful jobs growth. You can achieve productivity gains that can reduce the need for jobs – but history shows that there has never been a robust period of economic expansion (ie, GDP growth) without corresponding robust job growth.
 
And that is why these monthly jobs numbers continue to be so disappointing. No one will believe that we have turned the corner on the economy until the jobs numbers improve. The markets will continue to play the Jekyll and Hyde game until the jobs numbers improve. The markets have been rallying lately on expectation of some form of QE from the Fed. They expect the Fed to act BECAUSE of the lack of job growth. That is not a fundamental reason to rally.
 
The jobs problem in the US is an interesting one. US Corporate Profits after taxes have reached all time highs the last 2 quarters. The profits are more than 20% higher than the pre-recession levels. So, with all of this profit growth, why have there been no jobs?
 
You can’t ‘blame’ productivity gains. They have been muted really (ie, in low 1% range) for the last several years. Inflation isn’t driving the gains in profits either. There are a handful of industries (those whose profit is driven by commodity prices) that have benefitted but that won’t explain the 20% growth in profits with no corresponding increase in jobs.
 
From 2008 to 2010, the US Economy lost 8 million jobs and it has only regained 4 million since. This is truly a jobless recovery. Some of the folks in the White House have complained that we should stop calling it a ‘jobless’ recovery. I think we should stop calling it a recovery. Remember that we need to add 200,000 jobs per month just to keep up with population growth. It’s hard to think of this as a recovery.
 
Certainly some of the problem with job growth is driven by the movement of US companies to outsource overseas. In fact, it could explain the entire difference between our expected job growth and actual job growth. Companies have a right to seek out the best service at the best price. As a country, we need to provide better reasons for US companies to keep those jobs in the US.
 
At this point, most economists expect the Fed to implement some form of bond/asset purchase program by the end of September. I continue to believe that they will wait. I think they want to avoid a move before the election. In addition, as we approach the Fiscal cliff related to our country’s debt limits, the Fed needs to keep its powder dry for that event in early 2013.
 
With or without a QE program, I expect the S&P 500 to remain range bound with a top near $1475 and a bottom around $1350.  I think the buying in this market continues to be driven by value investors that believe that earnings growth justifies the current price levels. Ultimately, the earnings in the last quarter of 2012 will determine whether they were right to start buying now - or whether they were a little early.


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