The jobs report for June was super good news. There were 288,000 new jobs created, and the unemployment rate dropped from 6.3% to 6.1%. The consensus forecast was for only 215,000 new jobs.
On the negative side, analysts are warning that with the economy accelerating so strongly, the Federal Reserve will have to begin raising interest rates sooner than expected to prevent the economy from over-heating and creating excessive inflation.
But does the strong employment report really indicate a surging economy?
Back in 2009, when I claimed the government’s massive rescue efforts were working and would pull the economy out of the ‘great recession’; critics told me that was crazy talk. How could the economy recover with jobs reports still showing 200,000 and 300,000 jobs being lost every month? My reply was that jobs are a lagging indicator. Businesses were continuing to cut costs, squeezing more production out of existing workers, would not begin hiring until the economy recovered to the point that they would have to add workers.
And that is how it worked out. Later data showed that the ‘great recession’ ended in June 2009, but the jobs reports continued showing monthly job losses into 2010.
Jobs are also a lagging indicator in the other direction.
For instance, the 2007-2009 recession began in December 2007, with the employment picture still looking great. The October 2007 BLS jobs report was that “payroll employment rose by 166,000 and the unemployment rate was unchanged at 4.5%”. The November report was that “payroll employment continued to trend up”, and the unemployment rate remained unchanged at just 4.5%. Yet the next recession was underway a month later.
So, indeed the jobs picture is a lagging indicator in both directions.
Therefore, let’s look at other recent economic reports. There have been several in the last two weeks. They are painting a quite different picture of the economy.
My biggest concern is the housing sector since it is a leading indicator, leading the economy in both directions, into and out of economic slowdowns, even recessions.
Recent reports show new housing starts fell 6.5% in May, and permits for future starts fell 6.4% to a four-month low. The Housing Market Index, measuring the confidence of homebuilders came in at 49 in June, under 50 indicating the majority remained on the pessimistic side in June.
This week the report was that Pending Home Sales were up 6.1% in May, but that was not a recovery back into positive territory from the winter plunge, but just a bounce off the bottom, with pending sales still 5.2% below their level of a year ago.
Meanwhile construction was up only 0.1% in May, and within the report, construction of residential projects fell 1.5%.
[Read: Housing Starts, Permits See Big Rebound]
That was reports for May.
This week it was reported that new mortgage applications fell again last week, were down sharply for the month of June, for the year-to-date, and are at multi-year lows.
Those reports do not indicate a sharply rebounding housing market, but rather that the winter slide probably continues.
Meanwhile, away from the housing industry?
As noted, the jobs picture sure looks good.
And Consumer Confidence ticked up from 82.2 in May to 85.2 in June. Headlines made much of that as a sign of an economic rebound after the winter slowdown, and an indication we can expect consumer spending to pick up.
[Read Also: The Big Four Economic Indicators: Employment Data Strengthens Optimistic Outlook]
That would be great, since consumer spending accounts for 70% of the economy.
However, a closer look reveals that at 85.2, consumer confidence is still below its level of last fall, in fact barely above its level at the bottom of the 2001-2002 recession.
What does consumer confidence look like in a healthy economy? In the late 1990’s it reached above 110. In the healthy economy of 2003-2007 it ran between 90 and 98 most of the time.
At just 82.2, it hardly indicates a strong consumer-based economy.
Then there were this week’s reports that Durable Goods Orders fell 1.0% in May, and factory orders declined 0.5%. The Chicago PMI Index declined from 65.5 in May to 62.6 in June. The national ISM Mfg Index ticked down from 55.4 in May to 55.3 in June. The ISM non-mfg Index, which covers the services sector of the economy, ticked down from 56.3 in May to 56.0 in June.
And after being up 11% in May, auto sales were up only 1.2% in June.
Now, I am not saying the economy is in deep trouble. Economic reports for April, May, and June do not indicate that 2nd quarter GDP is going to be another quarter of negative growth like the first quarter.
However, in spite of the strong jobs report, neither do they indicate the big rebound is taking place that was going to justify the stock market’s further spike-up into record territory.
Nor is the jobs report likely to change the Fed’s mind about the economy needing interest rates kept at current low rates for some time to come.
