Another month – another disappointment in the employment picture.
But it doesn’t matter! The economic recovery continues. Employment is a lagging indicator.
A month ago the consensus forecast was that 155,000 new jobs were created in November. When the November jobs report was released in early December it was terrible, showing that only 39,000 jobs were created. (The economy needs approximately 150,000 new jobs monthly just to keep up with the growing population).
It was also reported that the already high unemployment rate ticked up from 9.6% to 9.8% in November.
A month later, with the economy continuing to improve, the consensus estimate has been that 175,000 new jobs were created in December.
Wrong again. The report this morning was that only 103,000 new jobs were created in December. The consensus estimate was also that the unemployment rate would hold steady at 9.8%. That was also wrong. The unemployment rate fell quite dramatically to 9.4% (but that was probably due to so many unemployed people giving up on finding a job).
For many years I’ve called the labour Department’s monthly employment report the Big One among economic reports. Not because it’s more important than other reports, because it is not – but because it is impossible to forecast and therefore has the record for most often coming in with a surprise in one direction or the other.
It’s also the big one because the financial media holds the report up as an important leading indicator of the economy – which it also is not.
Employment is a lagging indicator. Employers do not hire additional full-time employees until after the economy has recovered so much that their present employees cannot keep up with improved business. That, by the way, makes a number within this morning’s report particularly telling, and that is that the average workweek for all employees held steady at 34.3 hours in December. Employers normally increase the hours for existing employees before hiring more workers.
Employment therefore lags behind the economy and is not of near as much importance as the media places on it.
The leading indicators of the economy are measurements of consumer activity, obvious since consumer spending accounts for 65% of the U.S. economy. That makes retail sales, home sales, auto sales, consumer sentiment, factory orders and the like much more indicative of the economic recovery than the employment reports.
And those consumer-related indications continue to improve. Among reports of recent weeks that came in better than forecasts were consumer sentiment, retail sales, home sales, construction spending, auto sales, factory orders, the ISM Mfg Index, the ISM Non-Mfg (service sector) Index, and so on.
Additionally, the disappointing jobs report will provide the Federal Reserve, which also overemphasizes the employment picture as an important indicator, with reason to continue with its quantitative easing program, additional fuel for the economy.
So, the economic recovery is continuing, which bodes well for the stock market in 2011, the usually positive third-year of the presidential cycle.
But that does not mean investors can relax just yet.
Short-term, the stock market is overbought, and investor sentiment is at high levels of bullishness and complacency usually seen at rally tops.
The disappointing jobs report could have the effect of providing the catalyst for the stock market to correct enough to alleviate that overbought condition and cool investor sentiment off to a healthier level.