Will fewer lay-offs be followed by new hires?

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Today’s job report sent stock market bulls and bond market bears rejoicing as it appears the recession has ended and the U.S. economy is on its way back to the prosperity seen in the early and mid part of this decade. As usual we dig under the surface to find the nuggets that will help lead the way to unraveling the economic puzzle. The headlines tell us that “only 247,000” jobs were lost in July and the unemployment rate “fell” to 9.4% from last months 9.5%. The auto sector contributed 28,200 jobs as it prepared for the cash for clunkers program giving it the biggest job improvement in July in the past 11 years. Unfortunately people don’t quickly consume cars and this demand will result in a decline in auto demand later this year. Many “experts” are stating that the demand for autos is a sign of pent up demand but it’s nothing more than Economics 101 where demand increases when the price drops dramatically. Temporary help jobs fell by 10,000 and if employers saw a boom in business activity they would be adding to this category before even thinking about increasing permanent workers. The seasonal adjustment number obtained from the BLS “birth/death model” added 32,000 jobs and represents the largest July increase in 10 years as it subtracted from the total in half of the previous years. State and local government payrolls were flat in July and without education continued the decline that began last year. Finally only 30.1% of private sector businesses increased employment last month up from 28.6%.

The unemployment rate is computed from a separate survey and fell 0.1% more because 422,000 left the workforce than people finding new jobs. When the number of workers losing their jobs is less than the number leaving the workforce the unemployment rate falls giving the impression that the economy is rebounding and more jobs are on the way. Those seeking employment are becoming discouraged with an average duration of unemployment rising to 25.1 weeks in July from 24.0 in June. The biggest problem with the unemployment rate is that the participation rate fell again last month to 65.5% while the employment to population ratio declined to a 25 year low of 59.4%. Unless the U.S. population begins to decline (doubtful) the unemployment rate will continue higher. Since the consumer has led every U.S. economic rebound and over 2 million jobs have been lost in the past two years it appears the federal government is hoping that demand from China due to a weaker dollar will replace U.S. consumer demand.

Gold

Many believe gold is the best hedge against an increase in inflation but it can also be used as a play against dollar depreciation. Gold continues to move higher and readers have been long and buyers on any sharp pullback awaiting a move to $1000 and beyond. Although inflation is doubtful over the next few years more government involvement in business and less risk taking by the private sector should lead to higher gold prices on the realization the economy will NOT grow without lower taxes and more fiscal discipline.

The Fed and interest rates

Next week’s FOMC meeting is not expected to bring a change in current short-term interest rates as the Fed understands lending rates MUST remain low until businesses and consumers begin to borrow $$$ that is currently being printed but being kept at the Fed for safekeeping. Low interest rates will also insure the dollar does NOT appreciate driving foreign demand to cheaper destinations. Normally long-term rates fall in the 2nd half of each year and I expect them to decline later this year but for now money is leaving bonds and chasing the recent stock rally. Until the equity market slows down long rates will continue in a broad trading range and supported by the recent Fed Treasury and mortgage purchase program. The “key” 4.00% level should hold the 10-year Treasury note but investors should closely monitor the inflation component (nominal rate less tips yield) for any indication of inflation worries by long-term investors. The rate is currently near 2.00% and the high for this year was 2.09% on June 10th. During recent testimony before Congress Fed head Bernanke stated the Fed closely monitors inflation expectations and would take action IF this rate rose above current levels. In the past that action was usually in the form of higher short-term rates but because of the current weak employment situation and contracting credit the Fed could use other tools to reduce future inflationary expectations.

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Consumer credit

Today’s report by the Fed showed a continuation of the credit contraction as total credit fell by $11.3 billion with $5.3 billion coming from credit cards. This follows the $5.4 billion decline in May and is now $76.5 billion less than the peak in 2008. If consumers don’t have jobs and can’t borrow $$ how can they increase their spending? They can’t unless the federal government creates a “cash for deserving consumers” program giving them $$ to spend on needed goods and services.

Summary

The economy is bouncing back from levels that would have led to a 1930’s style depression but my theme for 2009 and 2010 is the U.S. economy is NOT binary and if we slow the rate of decline it will NOT lead to a sustainable advance. Credit continues to contract, banks don’t want to lend, jobs are NOT being created and businesses do NOT want to take risks and expand. It’s the beginning of a four year period of slightly up and slightly down where the federal government insures things don’t get worse but can’t create incentives for things to get better. The winners will be those earning less than $250,000 per year (especially those earning minimum wage) and the losers will be those who own assets on leverage that need appreciation (and inflation) to produce profits.