Financial Watch

Headline data rarely tells the whole picture about what is happening. This is true of employment data for April that came roughly in line with consensus estimates. Over the last year the U.S. economy has chugged along at an unimpressive 2% growth rate. Job growth has remained fairly robust despite the slow down. Several factors help to explain why employment data has remained stronger than the economy would usually indicate. We’ve seen a slow down in the rapid growth of productivity that characterized the early parts of the expansion. Immigrant laborers that are bearing a significant brunt from the housing slowdown are unlikely to show up in employment data. Finally, we are seeing robust activity in so-called non-productive economic activity. Lawyers, Accountants, Consultants, and Investment Bankers are in heavy demand yet they do not produce activities that contribute to the output of our nation.

At 4.5% unemployment, the U.S. is at an employment level that historically has been full employment. Something many fail to recognize is how the Internet has revolutionized the job market. The extent that unemployment has been able to fall without triggering wage inflation has even surprised us at Financial Watch. A few years back we believed 4.5% would finally push the job market clearly into one favoring workers and led to strong wage gains. Only a few industries outside of those listed above are having any trouble finding qualified workers providing the company is offering reasonable compensation.

From our thoughts earlier here it would seem that everything is going steady in the job market. What Financial Watch finds troubling is that workers are leaving the job market. Otherwise the unemployment level would be higher than it currently is. According to the survey measuring our nation’s unemployment rate, employment is down by about 100,000 year to date. Although consider the less reliable indicator of employment trends, Financial Watch believes over several months it actually is a more accurate indicator of job growth. Coincidentally, this number is more in line with consumer confidence numbers that show a slight deterioration in economic expectations.

Investors should not be concerned about our stance on job growth. Economic output is expanding rapidly overseas. Although Financial Watch believes the U.S. markets are overbought in the near term. We expect optimism in the stock market to be tempered until a clear direction can be sorted out. Complacency among analysts calling for slow economic growth and no interest rate cuts appears overdone. In our view, it will take at least a couple rate cuts to bring the U.S. economy back to trend growth (3.5%). The powerful stock market rally Financial Watch is expecting this year (+20% appreciation this year) should pause until we see signals interest rates will be cut. Investors will have to wait beyond this week’s FOMC meeting for a clear direction on future interest rates.