Using a 4-week moving average, initial claims for unemployment last week fell to their lowest level in 15 years.
Relative to the number of people working, claims are now at their lowest point in recorded history. The average worker has never been so little at risk of losing his or her job.
Meanwhile, after-tax corporate profits have never been so strong.
Nevertheless, despite record-setting profits, business investment has been quite weak. In real terms, capital goods orders, a good proxy for business investment, are at the same level today as they were 20 years ago, even though the economy has grown by over 60% in that time!
The problem today is not layoffs and unemployment, it's a lack of investment. Animal spirits are lacking, and risk aversion is still high.
Sovereign yields in developed countries are very near their all-time lows. That is the best proof that animal spirits are lacking and risk aversion is still high. The world is willing to pay extraordinarily high prices for the safety and security of sovereign debt. Why? Because the world is very afraid of the alternatives, even though they yield substantially more.
As the chart above shows, the earnings yield on the S&P 500 has rarely been so high relative to the yield on 10-yr Treasuries.
Weak investment and tepid jobs growth have created a $2 trillion annual shortfall in GDP (by my calculations, the so-called output gap is about 10% of GDP).
Even a massive increase in government spending and transfer payments couldn't boost the economy. Indeed, it's quite likely that it was the big increase in government spending and transfer payments that weakened the economy.
The solution to this dilemma is straightforward. We don't need more attempts at government stimulus. What we desperately need is more incentives for private investment. We need lower marginal tax rates and we need reduced regulatory burdens.