Could One Bad Jobs Report Derail this Bull Market?
On Friday, April 6, 2012, when U.S. markets were closed for the Good Friday holiday, the Department of Labor released a report indicating that U.S. companies added 120,000 new jobs in the prior month. While this would seem like positive news on the surface, it represented the first time in the last five months that less than 200,000 new jobs were created and fell significantly below the expectations of most economists who were expecting another increase of 200,000 + new jobs. U.S. markets thus opened decidedly lower on the following Monday after having time to digest the disappointing report and perhaps fearing that this report could be a sign of the underlying weakness in both the job market and the overall economic recovery.
One should remember that the report is just one report and, in and of itself, does not make a turning or lasting trend. However, the fact the U.S. economy is having a difficult time creating new jobs consistently should not come as a surprise to anyone.
To understand our sentiment in this regard, one should remember that the United States economy is now more service oriented than manufacturing driven and service oriented economies, which thrive on technological innovation, do not tend to have the capacity to produce large numbers of new jobs. Further, it remains to be seen if the majority of new job creations will go to existing displaced U.S. workers. Hence, it is difficult for us to imagine an economic scenario that would allow for a large number of new jobs to be created for existing unemployed U.S. workers.
While we, at Hennion & Walsh, still do not believe that unemployment will move significantly lower in 2012, we also do not believe that the unemployment rate will not move higher in 2012 and, perhaps, experience some minor improvements along the way leading into the Presidential election in the fall.
As a point of reference, the three key labor market statistics that we generally refer to in order to assess the current state of employment in the United States are as follows (although we also look at private sector job creations as well as previously indicated):
- U3 Unemployment Rate – the most commonly referred to “official” rate of unemployment, the U3 unemployment rate measures the proportion of the civilian labor force that is unemployed but actively seeking employment.
- U6 Unemployment Rate – the U6 unemployment rate counts not only people without work seeking full-time employment (the more quoted U-3 rate), but also counts marginally attached workers and those working part-time for economic reasons.
- Initial Jobless Claims – a weekly measure by the U.S. Department of Labor that shows the number of initial jobless claims filed by individuals seeking to receive jobless benefits.
As of March 2012, the U3 (i.e. the “official”) unemployment rate stands at 8.2%, which is the lowest that this rate has been since February of 2009. The official unemployment rate has been falling gradually since August of 2011 although it is still above the highest level it has been since November of 1983. Following a similar path, the more encompassing U-6 unemployment rate has been falling since September of 2011 and currently stands at 14.5% as of March 2012. To put these numbers in perspective, the U6 and U3 unemployment rates stood at just 8.2% and 4.4% respectively as recently as May of 2007 – the latter near the 4% rate that many academics claim is the approximate level of full employment in the U.S. While the overall unemployment trends are both positive and promising, clearly, there still remains much work to be done to get America back to work again.
Aside from the jobs market, we are anxiously awaiting Q1 quarterly earnings reports to gain a better glimpse into the balance sheet health of U.S. companies but also into the spending health of U.S. consumers. The latter remains critical as consumer spending still accounts for over 70% of Gross Domestic Product (GDP) in the United States.