May 4, 2007
WHAT'S THE LABOR MARKET TELLING US?
The labor market isn't everything, but it's a lot.
In fact, if you're trying to get a handle on the big picture, you could do a lot worse than watch the economy's capacity for minting new jobs.
With that in mind, the optimists have another stumbling block to conquer with today's the release of April jobs data. Nonfarm payrolls increased by a slim 88,000 last month. For those who are still counting, that's the smallest gain since November 2004.
One month a trend does not make, of course. But the fact that the pace of creating jobs has been slowing for some time catches our attention. Consider our chart below, which shows that the net change in new nonfarm payrolls on a monthly basis has been biased to the downside for more than a few months.
No, it's not panic time. As recent history reveals, there's plenty of volatility in the month-to-month jobs report to allow for reasonable minds to differ. In fact, monthly gains in new jobs have fallen to the 100,000 range several times in recent years only to bounce higher shortly after, as the chart below shows. But the bounces have been getting weaker and the dips to the 100,000-net-gain range have become more frequent. In short, there's one more reason to be wary about 2007 and the economic cycle.
As we've written recently, there are offsetting factors that support a bullish interpretation of the foreseeable future. The latest data point suggesting the economy will still bubble comes in yesterday's update on the services sector, as profiled by the ISM Non-manufacturing index. The rebound in the services slice of the economy--which is huge--remains alive and well, according to this benchmark, and as our chart below illustrates. Ditto for the manufacturing side of the economy, a smaller but still widely monitored chunk of GDP.
So how does one square the apparent strength in manufacturing and services with the weakness in employment growth? Is the jobless recovery/growth phenomenon coming back to haunt us? Or does the slowing jobs-creation machine suggest that the economy overall is slowing and that the ISM indices will soon turn south as well?
Therein lies the debate that is at the heart of the back and forth between the bulls and the bears. For what it's worth, the stock market is firmly in the optimist camp. The S&P 500, to cite the usual benchmark suspect, yesterday broke above 1500 for the first time since 2000. The bulls are increasingly running the show in the theater of equities, and it's now conceivable that a new all-time high in the S&P is within reach.
But if we're headed for new record highs, how does that compare with the trend in jobs creation, assuming it even matters. Embracing this quixotic and perhaps erroneous task, we looked at the monthly changes in net nonfarm payrolls against the S&P 500's monthly total returns, and indexed the cumulative performance for each, beginning with a base of 100 set in January 2000, just ahead of the previous bear market (see chart below). The result (see chart below) may not be terribly insightful, but it does suggest that the stock market is increasingly predicting a future that's diverging from events on the ground in terms of jobs creation. It remains to be seen if the divergence can last, or if it even matters.
Posted by jp at May 4, 2007 10:06 AM