Friday, August 5, 2011

July jobs beat expectations, grow moderately

The July establishment survey of private sector jobs not only beat expectations (154K vs 113K), it also included upward revisions to prior months totaling about 50K. The BLS survey results now more closely align with ADP's estimates, as shown in the chart above. (A few days ago I noted that the BLS data appeared to be lagging the ADP data, and they have indeed played catch-up.)

Over the past several months, private sector jobs have been growing at an annual rate of just under 2%. That is more than enough to keep up with 1% natural growth in the working age population, but not enough to make much of a dent in the unemployment rate, especially since the public sector has been shedding jobs at an accelerating rate (about 650K public sector jobs have been lost since the recession peak in April '09). Curiously, 2% growth in private sector jobs is about the best the economy ever managed in the expansion following the 2001 recession, but it's less impressive now, since the unemployment rate was 4.5% in 2007 and 9.1% today.

So the economy is still growing at a moderate, sub-par pace, but these numbers show no sign of an imminent recession, which is what the market seems to fear. Regardless, judging from the market action so far, it would appear that the goods news in the U.S. (which is that there is no bad news) is not enough to counter the bad news in Europe (which is that things might get ugly if Italy defaults).

The ongoing—albeit disappointingly slow—improvement in the U.S. economy, coupled with impressive gains in corporate profits and a sinking stock market, have created an interesting contrast in valuations. As the chart above shows, the yield on long BAA bonds has declined to levels not seen since the mid-1960s, while the earnings yield on the S&P 500 is almost up to 8%, a level that exceeds bond yields by a margin that has rarely, if ever before, been seen. This can only mean that the market fully expects the economy and earnings to slump, if not collapse. Consequently, to be bearish on stocks today you need to be absolutely sure that a nasty recession is just around the corner.


McKibbinUSA said...

The US employment to population ratio has been trending downwards since 2000 -- more at:

The good news is that declining employment means declining payrolls for large corporations, which I suppose adds to net profits, albeit in a precarious manner...

Benjamin Cole said...

I have to agree with Scott Grannis, stocks are not expensive. We are not seeing the DJIA at 30 times earnings ala 1999.

(If we ever see broad indices at 30 times earnings again, I guess it will be time to sell).

Now is the time for a sustained push by Bernanke to get the economy going. The right-wing needs to drop its obsession with minute rates of inflation and go back to George Gilder--what is important is business creation, low business taxes and regs and economic growth. Moderate inflation is not AIDS--in fact, Gilder says it is normal to robust growth.

This fetish for minute rates of inflation is the key mistake made by the right-wing and Bernanke since 2008. Now, we are paying with extremely slow growth and perhaps a pending contraction.

Japan has shown the way--to becoming an eclipsed nation with a declining population and prospects.

Sheesh, give me 5 percent annual inflation for five years, and 5 percent annual real growth. We will be on top of the world again.

Jeff said...

I just read an article that stated that the European debt crisis is looking like our financial crisis in 2008. Your thoughts. I know it's not yet showing up in credit spreads, Libor, etc., but these things can change very quickly. The debt problem and the ability to solve it is so intertwined in the European banks, etc. when reality hits, could it be like 2008? I truly hope not..

William said...

Mr. Grannis - I read yesterday that M2 was now growing rapidly. Could you comment on the meaning of that growth?

Secondly, two weeks ago you published a chart which showed a mysterious growth in another value - sorry I forget its name. Care to comment on ?? it??

Thank you,,,William

Scott Grannis said...

I think you are referring to M2, and it now looks like the huge growth in that monetary aggregate was related to European money seeking a safe haven in the US banking system.

Pragmatic Investor said...

There is no bad news in the US? what about the huge ISM miss, the horrible GDP numbers, or the first personal spending drop since 2009? You continue to kid yourself.

Based on your valuation chart, stocks had been much more expensive than bonds since the early 1980's which is the start of a 20 year bull market and seemed to trade at fair value by 2007 which was the beginning of the financial crisis. In other words, this chart is pretty useless.

The Lantern said...

"to be bearish on stocks today you need to be absolutely sure that a nasty recession is just around the corner."

Isn't that axiomatic? If stocks decline 25%, there will certainly be a recession to follow.

mmanagedaccounts said...

Benjamin, it's not those minute moves of inflation that bothers us right-wingers, it's those big ones. HAVE YOU SEEN THE PRICE OF GEORGE GILDER'S Wealth & Poverty?
$89.33 for a new paperback!!!!!
That's the inflation that worries us.
I too agree that stocks are inexpensive and this irrational panic is an opportunity for us to grow our wealth. Start buying next week.

John said...

Like trapeze artists, investors are nervous about working without a net. The debt deal took away the net.

William said...

Pragmatic Investor: I don't think that you read Scott's Earnings Yield vs BAA Bond Yield chart correctly. It is rare for the Earnings Yield (red line) to exceed the Bond Yield (blue line). When this occurs, it indicates that bonds are overvalued and stocks undervalued. Those rare occasions - typically occurring after bad bear markets - have been excellent buying opportunities: 1966, 1974, the late 1970s, and late 2008 / early 2009.

Notice that this didn't happen after the 2001 to 2003 bear market because equities were still relatively overpriced - as Warren Buffet pointed out at the time. It remains to be seen whether now is such an opportunity.

Bill said...


I believe that stocks dropped about 20% in one day in Oct. 1987, followed by a short duration bear market, but still no recession until 1991. You don't always have a recession with a bear market. I'm not saying it won't happen this time, but it's not axiomatic.

Benjamin Cole said...

Managed Accounts:

Yes, that is a ridiculous price--on the other hand, you can buy used through Amazon for under $3. While seated at your desk. It will arrive in the mail, you don't even spend gasoline, or the time of a trip to the bookstore.

If you wish, I will buy a copy and send it to you for $50.

Pragmatic Investor said...


Take a look at the S&P 500 chart over time. The whole period from late 1960's to early 1980's was range bound bear market with wild swings and no real returns. How could they be excellent buying opportunities? And if a chart tells you that stocks were much more expensive in the 1980's than 2005-2007 relative to bonds, what good does it do?