By
Calafia
Beach Pundit
:
November's jobs report shed no new light on the labor market
situation. November's 147K new private sector jobs was in line with
what we've been seeing on average for the year to date and for the
past three years. It's slightly more than the 130K new jobs per
month that need to be created just to keep up with the long-term
average growth of the labor force, which is about 1% a year, so if
things continue at the same pace the unemployment rate can decline
very slowly from here. It's only declined faster because the labor
force has grown very little for the past four years, which in turn
is a function of many people deciding to "drop out." The current
1.5% per year pace of jobs growth is unlikely to translate into
anything more than 3.5% real economic growth, assuming productivity
growth continues to run at the 1-2% per year pace we've seen in
recent years. That's OK, but it still adds up to the weakest
recovery ever.
(click to enlarge)
Note the relatively steady growth of private sector jobs as
measured by the Establishment Survey (blue line). Both surveys show
that the economy has created about 5 million jobs over the past two
years. Also note that there is absolutely no sign here of anything
like a recession. Jobs growth may be disappointing, but it is still
definitely positive.
(click to enlarge)
After declining from 2008 through early 2011, the labor force
has resumed a 1% annual pace of growth over the past year. But it
is still more than 5 million below where it could have been if
long-term trends were still in place.
(click to enlarge)
The November report provided more confirmation that the public
sector workforce is no longer shrinking. Despite declining jobs in
the past few years, public sector employees have not suffered
nearly as much as their private sector counterparts over the past
decade: private sector jobs are only now back to where they were in
early 2002, whereas public sector jobs have risen on net by 1
million (almost 5%). It's still the case that the best job security
and the best pay and benefits can be found in the public
sector.
(click to enlarge)
Thanks to below-trend growth in the labor force and the
relatively tepid growth of jobs, the economy has fallen farther
behind its long-term growth trend than at any time in modern
history. This is the weakest recovery ever. Fewer people working
means the tax base is a lot smaller than it could be, and that is
main source of a shortfall in tax revenues. Faster economic growth,
powered by faster job creation, is the key to shrinking the fiscal
deficit from the revenue side. Raising tax rates will only risk
retarding the rate of growth. Are you listening, Mr. Obama?
(click to enlarge)
The Fed is doing all it can to promote faster growth, by
purchasing on net about $1.5 trillion worth of MBS and Treasuries
in the past four years. So far, however, there is no sign that they
have managed to increase the pace of jobs growth. Their main
accomplishment has been to satisfy the world's almost insatiable
demand for risk-free short-term securities, which in turn has been
driven by fear of sovereign defaults, a double-dip recession, the
expectation that massive federal deficits will inevitably result in
a huge increase in tax burdens, and concerns that monetary stimulus
could prove to be very inflationary. As the chart above shows, the
market's current expectation for inflation over the next 10 years
is 2.5%, which is pretty much average. But it's nowhere near the
deflationary levels that most Keynesian models have been predicting
given the economy's weak recovery and the unprecedented output gap
that currently exists.
(click to enlarge)
The chart above is a more sensitive measure of inflation
expectations. The blue line shows that the bond market expects
inflation to average a little over 3% during the period 2018-2023.
That's not very frightening, but it does suggest that what's
driving the rise in equity prices over the past year or so is
inflation expectations rather than growth expectations. The Fed has
absolutely succeeded in snuffing out any deflationary threat, but
instead of boosting jobs growth, they have merely boosted the
market's confidence that future cash flows to U.S. businesses will
be rising by at least 2.5-3% per year, even if the economy posts
very weak growth.
The negative real yields on TIPS, which are at or close to
all-time lows, are a clear sign that the market expects future
economic growth to be dismal. At the same time, the inflation
expectations built into TIPS and Treasury prices say that the
market expects inflation to be at least as high in the future as it
has been in the past. Growth expectations are falling, while
inflation expectations and equities are rising.
Translation: equities are behaving more like inflation hedges
these days, than like barometers of real growth
expectations.
See also
A Bullish Case For Investing In Global Energy
on seekingalpha.com