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Is the Labor Market Really Strengthening?

Dow Continues to Gain


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It seems the job market really is gearing up. Or is it?

An interesting trend has recently emerged. Over the past month, Labor Department data indicated that the number of people filing for jobless claims averaged 346,750, which is the lowest level since March of 2008.

Bloomberg reports:

“This is better than we could have expected,” said Lou Crandall, chief economist at Wrightson Icap LLC in Jersey City, New Jersey, and the second-best forecaster of jobless claims for the past two years, according to data compiled by Bloomberg. “We’re slowing the pace of layoffs, which is a good first step. Things appear to be improving.”

A mix of soaring stock prices, boosts in employment, and a resurgent housing market are all contributing toward a general upward trend in the economy. The S&P 500 was up 0.6 percent at 1,563.23 at the close of trading yesterday in New York. That’s barely shy of its record high of 1,565.15 in 2007.

Adding to this encouraging news, consumer confidence seems to be on the rise too. Bloomberg’s Consumer Comfort Index rose for six straight weeks, gaining a total of six points. It seems almost 51 percent of Americans now have a positive view of their personal finances, and that percentage represents an eight-month high.

Another index, measuring the buying climate, went up, based on nearly 31 percent of Americans saying that it’s a good time to buy things either needed or wanted, Bloomberg reports.

Unemployment for February was down to 7.7 percent from January’s 7.9 percent, with the economy adding 236,000 jobs overall.

And the Dow Jones was up for the tenth straight day yesterday, which is its longest streak since 1996. Bloomberg’s analyses project the economy growing at about 2 percent (annualized) through Q1. That’s a bump up from the previous estimate, 1.8 percent.

The housing market’s role in this cannot be underestimated. Household wealth gained $1.17 trillion overall through Q4, moving to its highest levels in five years, as home prices kept going up.

Bloomberg reports:

“Consumers feel much better when it comes to discretionary spending, about spending on their home if they believe the value is going up,” Robert Niblock, chairman and chief executive officer at Lowe’s, the second-largest U.S. home-improvement retailer, said at a conference yesterday. “We’re seeing more of that in some of the smaller tickets. We’re also seeing growth in larger tickets as well.”

Retail sales have benefited from the buoyant consumer sentiment. Building on a 0.2 percent rise in January, retail gained 1.1 percent over February. That’s the most in five months.

All of this is providing something of a buffer against the short-term impact of the higher payroll taxes and increases in gasoline prices. However, the deeper impact of sequestration is yet to really be felt, and that is causing some concern among analysts.

Bloomberg quotes Ryan Sweet of Moody’s:

“The sequester is another issue. Beginning in April, we’ll start to get layoff notices, so we could see some upward bias on new filings because of the sequester, but lawmakers still have time to scale it back.”

There is a serious flip side to all this good news, however. It’s true that the recent economic gains all around have given rise to the perception that the U.S. economy is finally making some real progress. That, it is hoped, will in turn attract investors, who will keep a cycle going, propelling recovery further onward.

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The larger picture is less pleasant. The economy in the U.S., Europe, and China is dismal, to put it bluntly. Over Q4, the economy as a whole expanded by just 0.1 percent, the Globe and Mail reports. China’s outgoing leader finds the national goal of 7.5 percent annual growth a tough target, and the European Central Bank has stated that the Eurozone is likely to remain in a recession through 2013.

Thus, the radical question that is emerging: what if economic growth and the stock market aren’t as correlated as commonly assumed?

Since 2009, as the Globe and Mail reports, the Dow has risen by more than double. The global economy over that period has been a shambles. A report by The Economist is cited, where no correlation was discovered between U.S. GDP growth and the S&P 500 between 1970 and 2012. It appears that investors can simply ignore the broader economy.

Concluding on another interesting note, the Bureau of Labor Statistics’ report of 236,000 jobs added through February includes a footnote to the effect that initial figures may be revised by up to 90 percent. And, as Forbes points out, we ought to bear in mind that out of all the millions of employers in the country, the BLS surveyed just 145,000

Long story short, the February numbers won’t be accurate until about April. And here’s the truly alarming thing. What if stocks are doing so well because, firstly, the Fed keeps printing about $4 billion every day, and secondly, companies have just created enormous cash reserves and are cutting down on their outstanding shares?

More money. Fewer stocks. Stock prices go through the roof. Just something to think about. 

 

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