Friday’s report that 195,000 new jobs were created in June was much better than the consensus forecast for 155,000, as were the upward revisions of previous reports for April and May. The only negative in the report was that, while the headline unemployment rate remained unchanged at 7.6%, U6 unemployment, which includes workers who can only find part-time jobs, or have become too discouraged to look for a job any longer, climbed to 14.3% in June from 13.8% in May.
However, as I have written before, employment is a lagging indicator. It remains weak until well after the economy has begun to recover from a recession, and remains firm for some time after the economy has begun to slow. For instance, although the 2008-2009 recession ended in June, 2009, the economy continued to lose jobs monthly until December.
So the strong jobs reports for April, May, and now June, do not change the fact that the U.S. economy appears to be in trouble.
That observation is not based on opinions related to individual economic reports, but to actual disorders.
There was the recent final report of first-quarter GDP growth, revised down from the previous estimate of an already anemic 2.4% to just 1.8%.
Then there was this week’s report that the U.S. trade deficit widened sharply in June, by 12.1%. It was the second straight monthly jump in the deficit, as imports grow and exports decline. It is a negative for the economy and has already prompted Barclay’s Bank to cut its previous second-quarter GDP growth forecast from 1.6% to just 1.0%.
And last week, the Chicago Fed reported that the three-month moving average of its National Business Activity Index (the Fed’s index of 85 individual economic indicators), designed to determine when the economy moves into and out of recessions, plunged to -0.42 in May. That was not only sharply in negative territory but getting uncomfortably close to the -0.70 level that the Fed says indicates the economy is in recession.
Note that these indications of a significant economic slowdown took place in the months when the employment reports were very positive, further indicating the lack of predictive value in the jobs reports, particularly at potential turning points in the economy.
Meanwhile, global problems of a year or two ago, which were resolved by kicking them down the road to 2013 or 2014, have apparently discovered that we’re halfway through 2013 already.
The euro-zone debt crisis has returned to the headlines. Last week, Greece acknowledged its lack of progress in meeting the economic reforms required of it by the terms of its bailout. Its officials are negotiating for more time and easing of the requirements, while EU and IMF leaders threaten to withhold the next payment of the bailout.
Portugal, which was held up as an example of a bailout country doing all the right things to get its economy back in shape, is now seeing its debt situation being described again as “very fragile”. This week Portugal raised further fears, that it is potentially on the verge of political collapse, when two cabinet members abruptly resigned in protest over how Portugal’s debt crisis is being handled.
Tensions were eased Thursday when Portuguese officials made statements assuring they will strive to preserve the coalition government. And European Central Bank President Draghi issued a statement saying the ECB will hold its interest rates low or even go lower “for an extended period of time.”
Those assurances calmed European markets on Thursday and they surged higher. But the relief was only temporary. They couldn’t hold the gains and were sharply back to the downside on Friday.
Meanwhile, back in the U.S., Fed Chairman Bernanke spooked markets on May 22 with his testimony before Congress that the Fed could begin dialing back QE stimulus as early as June. So far, May 22 marked the market’s peak.
After global markets plunged in response to those remarks, Chairman Bernanke and several Fed governors rushed out two weeks ago in an attempt to calm markets by re-stating what Bernanke meant, providing assurances that the Fed will not begin dialing back stimulus until the economy shows more signs of strength.
The calming words did work two weeks ago to halt the market declines.
However, Friday’s strong jobs report has resulted in Fed tapering prospects moving back to the front burner. Goldman Sachs Chief Economist Jan Hatzius said Friday that he is now convinced the Fed will begin to taper QE stimulus at its September FOMC meeting, just two months from now.
So, while Friday’s report was another positive employment report, it does not change anything regarding the concerns that have been affecting global markets negatively since the May top; the slowing U.S. economy; the effects of government spending cuts and higher taxes brought on by the ‘sequester’; the continuing recession and debt crisis in the 17-nation eurozone; the slowing economy of China; and the specter of the U.S. Fed soon beginning to remove the punchbowl of QE stimulus.
So, investors need to remain cautious, and not let the jobs report overly affect their judgment.
