Friday’s jobs report was smashing on all fronts, with nonfarm payrolls adding 257,000 jobs in December—bringing the three-month tally to over 1 million. The unemployment rate rose, but for the “right” reason as more folks entered the workforce. Headlines were uniformly bullish—but many for odd reasons that aren’t much use for investors. Don’t get us wrong, we’re gung-ho about the US’s potential, too! But being bullish for the wrong reasons is a dangerous road. Let’s debunk the top three.
1. America has entered a “self-sustaining” expansion where jobs growth drives economic growth drives jobs growth drives you get the gist.
Sorry, folks, there is no such thing as a self-sustaining expansion, ever—boom and bust are always with us. The theory robust job gains can drive wages and consumer spending up in a self-reinforcing cycle might sound plausible at first, but real-life data overwhelmingly show labor markets are the economy’s caboose, not the engine. Exhibits 1 and 2 show total nonfarm payrolls versus GDP and consumer spending. In both cases, jobs lag. Jobs also tend to fall when consumer spending doesn’t, shattering the myth of link.
Exhibit 1: Jobs and GDP
Source: Federal Reserve Bank of St. Louis, as of 2/9/2015. Y/y change in nonfarm payrolls and real GDP, January 1960 – December 2014.
Exhibit 2: Jobs and Consumer Spending
Source: Federal Reserve Bank of St. Louis, as of 2/9/2015. Y/y change in nonfarm payrolls and real personal consumption expenditure, January 1960 – December 2014.
2. The pickup in the labor force participation rate shows our work force is finally growing after years of shrinkage.
Nope. The labor force participation rate is the total civilian workforce as a percentage of the total working-age population. The rate has largely declined during this expansion. But the total workforce hasn’t. As Exhibit 3 shows, it bounced along sideways from 2009 through mid-2011, then started a choppy rise. It currently sits at an all-time high. Even though the participation rate is near a trough! Population just grew faster, partly due to immigration and partly due to a wave of Millennials coming of age. (An interesting, widely ignored counterpoint to all those “no one will be around to replace all those retiring Boomers” fears.)
Exhibit 3: Total Workforce Vs. Labor Force Participation Rate
Source: Federal Reserve Bank of St. Louis, as of 2/9/2015. Civilian labor force participation rate and civilian labor force, January 2004 – January 2015.
3. Businesses have a happy problem: They’re running out of people to employ—so get ready for wages to skyrocket.
Let’s not get ahead of ourselves. Both the normal unemployment rate and unemployment rate for college grads, though low, aren’t at historical lows (Exhibits 4 and 5). Ditto for the total unemployed population in both brackets. Labor supply hasn’t cratered. So we wouldn’t expect wages to shoot sky-high. Particularly since employers tend to consider real (inflation-adjusted) wages, not nominal, when figuring out how much extra to pay to attract a limited supply of workers. With inflation quite low, there is less of a need to hike nominal wages drastically to attract workers. Wages probably will rise, but it’s important to keep expectations in check.
Exhibit 4: Unemployment Rates (Total and College Grads)
Source: Federal Reserve Bank of St. Louis, as of 2/9/2015. Unemployment rates for total civilian workforce and college graduates with Bachelor’s degrees or higher, January 1992 – January 2015.
Exhibit 5: Unemployment Levels (Total and College Grads)
Source: Federal Reserve Bank of St. Louis, as of 2/9/2015. Unemployment levels for total civilian workforce and college graduates with Bachelor’s degrees or higher, January 2000 – January 2015.
Bottom line: There is nothing forward-looking in January’s (or any) jobs report. Employment is always a late-lagging indicator. January’s jobs report simply confirms what GDP and other economic reports have already shown—growth accelerated last year. Stocks look forward and have already priced all that in. There are plenty of economic signals for investors to like right now, but happy jobs numbers shouldn’t be one of them.
Stock Market Outlook
Like what you read? Interested in market analysis for your portfolio? Why not download our in-depth analysis of current investing conditions and our forecast for the period ahead. Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!