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The growth rate of private sector jobs is decent


According to the household survey, private sector jobs have risen at an annualized pace of 1.4% over the past six months. That number will very likely approach 2.5% next month, assuming only modest gains in employment in June, because the bottom in employment was last December. A 2.5% rate of growth in private sector jobs would be entirely consistent with a modest decline in the unemployment rate; the labor force tends to grow about 1% over time, but it has not grown much at all in the past few years, so we ought to expect labor force growth to be closer to 2% for the next 6-12 months; thus 2.5% jobs growth will only result in a minimal reduction in unemployment. In any event, while this does not look at all like a robust recovery, it is nevertheless a recovery, and I see no sign that it is about to end. The market needs to look beyond the establishment survey—things are nowhere near as bad as the headlines suggest.

1.3 million jobs and counting


Today's headlines are focused on the disappointing number of private sector jobs created (41K vs. expectations of 180K) in May. But that's only one side—the establishment survey side—of the story. The other side is the 178K new private sector jobs that were uncovered by the household survey. Growth in private sector jobs, according to the household survey, has totaled 1.33 million so far this year, but only 495K according to the establishment survey.

As the chart above suggests, the household survey can and does tend to lead the establishment survey, particularly in the first years of a recovery, so it is not unreasonable to conclude from the conflicting data coming from these two surveys that things are looking better than most people who watch the nightly news realize.


The unemployment rate (which is calculated based on the household survey) is still hovering at relatively high levels, however. That's because there have been lots of new entrants to the labor force that are now looking for work. It's going to be awhile—most likely some time after the November elections—before there is any meaningful decline in the unemployment rate.

In other news, average weekly hours rose a bit more than expected, and have now retraced all the decline of last year. At the current rate of improvement, however, we won't see a full recovery in hours worked until the end of this year.

My take on all this is that the recovery is progressing just about as expected. We're not in a full-blown, V-shaped recovery, but we are seeing the ingredients of a moderate recovery, in which the economy grows somewhere around 3-4% per year. We would be in much better shape if it weren't for the massive amount of "stimulus" spending, since that has only sucked over a trillion dollars out of the economy (to finance the increased deficit) that could have been used for more productive purposes.

Monster Indices confirm improving labor market conditions


The Monster survey of online job demand in May uncovered increases in 12 out of 20 industries, some of which are shown here. Only 3 out of 20 industries have experienced meaningful deterioration in the past year (agriculture/forestry/fishing, hotel/food services, and public administration). I note the significant gains in construction, which appear to confirm other tentative signs that the construction industry has finally turned the corner.

Another growth scare passes



I may be jumping the gun, but this chart of 10-yr Treasury yields tells me that the latest growth scare (i.e., that sovereign debt defaults in Europe could have spillover effects in the U.S. economy) is passing. When the market starts worrying about the health of the economy, we typically see equities decline and 10-yr Treasury yields decline—a flight to quality. When sentiment starts improving, equities rally and yields rise. I've tried to illustrate how to interpret the level of yields in the following chart. The recent decline in yields was a good sign, I think, that the market was really concerned that the economy was on the verge of a double-dip recession, and fears of a euro collapse were the catalyst. As justification, I would argue that 3% yields on 10-yr Treasuries only make sense, from an investor's point of view, if one believes that the economy is very unlikely to experience healthy growth and is instead vulnerable to recessionary conditions. 


My personal healthcare rant

Last January I noted that the FDA was barring me from obtaining software that might significantly improve my hearing. The software has been available to European and Canadian recipients of cochlear implants for quite some time, and studies there have shown that most patients experienced significant improvement. A few months ago I participated in a clinical trial of the software (which is necessary before the FDA will consider approving the software here) and found that indeed the software was a significant improvement. Faced with the likelihood that it will take the FDA up to a year to determine that yes, this software is an improvement, I decided to take a trip to Canada to get the software installed there so I wouldn't have to wait for the cumbersome FDA approval process. I even learned that the company that makes the implants is planning to offer the software as a free upgrade to anyone who wants it.

So you would think it wouldn't be a big deal. But today I received this news from the Canadian audiologist I planned to visit: "I was clearing everything with my department head, but I was told that I am not allowed to see patients from out of the country. I was told there were medical legal issues with seeing a patient who is not a resident of Canada." 

This is not only a great example of how government bureaucracies can infringe on personal liberties, but also a reminder of how deeply government can intrude in our lives. And here I'm only talking about an innocuous piece of computer code that will eventually be distributed for free. Imagine if it were a life-saving procedure.... The ghost of Kafka must be looking over my shoulder and laughing right now.

Good news from the service sector overshadowed by walls of worry


How bad can things be if over 60% of service sector businesses report seeing rising activity (the message of the above chart)? That was par for the course back in the go-go late 1990s, but today the market is plagued by concerns that the economy is about to slip into a double-dip recession, so good news apparently doesn't count, because bad news lurks around the corner. Once again the market is climbing a wall of worry.

Recessions, however, are pretty hard to trigger; they require big and largely unexpected changes in monetary and fiscal policy (mostly monetary policy), or (as was the case with the last recession) events which call into question the world's most deeply-held assumptions (e.g., the solvency of the world's banks). To be sure, many today worry about the solvency of the European banking system. This shows up as 2-yr Euro swap spreads that today reached 86 bps, and credit default swap rates of 250 bps on Spanish government debt and 740 bps on Greek government debt.

I have no reason to argue against the possibility that Greek debt will be significantly restructured (resulting in substantial losses), but I don't see the parallels between the potential for sovereign defaults in a handful of European countries and the massive panic triggered by subprime mortgage-related paper. Back then, it was a lack of transparency that sparked a panic. The value of trillions of dollars worth of mortgage-backed paper was suddenly called into question. Ultimately the value depended on the price of millions of homes—whose prices were in virtual free-fall—and things were further complicated by the way that thousands of securitized deals were structured, and by the fact that large institutional investors all over the world held substantial amounts of the paper.

Today the facts aren't too difficult to discern: only a handful of debtors are likely to default; in a worst-case scenario the losses will be a very small fraction of outstanding global debt; and those who are significantly exposed to the losses (mostly the larger European banks) are relatively few. Plus, today's concerns about sovereign debt defaults are taking place against a backdrop of a strengthening global economy and accommodative monetary policies, whereas the unravelling of subprime debt and residential real estate occurred against a backdrop of a weakening global economy and tightening monetary policies. I just don't see the ingredients here for a replay of the global panic recession of late '08.

Auto recovery in full bloom



U.S. auto sales have clearly bottomed, and are up 17% in the past 12 months (first chart). The shares of Ford Motor are up 650% since last year's low (second chart). Relative to their lows of late 2008, Taiwanese auto sales are up 256%, and Chinese auto production is up 150% (to cite just a few of the auto recovery stories). This is a big story with long legs. Sales fell to such low levels in 2008 that the normal ageing of the auto fleet practically demands a recovery. As the auto sector ramps up production, this will have spillover effects throughout the economy. If the past is any guide, auto sales and production are likely to be rising strongly for at least the next several years.

Corporate layoffs are very low


If publicly-announced corporate layoffs are a sign that big business is bracing for bad times, then this chart says we're well on the road to recovery. According to the tally of the folks at Challenger, Gray & Christmas, recently announced corporate layoffs are just about as low as they've been at any time in the past 10 years. It strongly suggests that corporations have trimmed virtually all the fat they had planned to; that they are now lean and mean; that with almost no plans to fire anyone, they are very likely going to be hiring increasing numbers of new employees given the numerous signs of recovery in many sectors of the U.S. and global economies. In short, this is very good news.

So why is the world so concerned about the possibility of a double-dip recession? From the way the market has been acting, you'd think investors are bracing for bad times ahead. This chart says they should be preparing to celebrate the better times to come instead.

Construction spending stops declining


Construction spending in April rose a bit, and exceeded expectations. The two-month-long rise in nonresidential spending is a welcome relief, but it's too early to say it has turned up definitively. In contrast, residential construction does appear to have bottomed. To be sure, the rebound has not been very impressive, with spending up only 5% over the past year. But in the case of residential construction, which has been the hardest-hit sector in the economy, it's great news that activity hasn't deteriorated for the past 14 months. That's one more sign that the housing market has bottomed and should begin expanding over the next year. I think it's now safe to say that residential construction is very unlikely to be a drag on the economy in the future, since it has fallen to a record low 2.4% of GDP. The question going forward is how much it will contribute.

Manufacturing index shows continued strength and rising prices


The ISM manufacturing index for May, released today, was down just a tad from April, but remains unusually strong. As the above charts suggests, based on past relationships between this index and the growth of GDP, second quarter GDP growth is likely to be stronger than the 3% registered in the first quarter. Indeed, second quarter growth could be in the range of 4-6% if the past is any guide.


This next chart shows that almost 80% of those surveyed reported paying higher prices. This is further evidence that the market's persistent concerns about deflation are misplaced. There is no weakness overall in the manufacturing sector and there is simply no evidence of deflationary pressures.


Strength in the ISM subindices was widespread, and this third chart shows very strong gains in export orders. This index hasn't been this high since the late 1980s, a period noted for its explosive growth in U.S. exports. Not only does this bode well for our economy, it also strongly suggests that the global economy is very healthy. This latter point is reinforced by the gains in shipping indices that I have been highlighting for quite some time, and the continued strength—albeit with a modest correction of late—in virtually all commodity prices.


Finally, the employment index shows very impressive strength. In the long history of this index, it has only exceeded 60 on a handful of occasions, most of which were way back in the go-go 50s and 60s. The world is growing, boosting demand for U.S. exports, and manufacturers are ramping up production and employment as a result. This is just simply very good news.