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July jobs beat expectations, grow moderately

The July establishment survey of private sector jobs not only beat expectations (154K vs 113K), it also included upward revisions to prior months totaling about 50K. The BLS survey results now more closely align with ADP's estimates, as shown in the chart above. (A few days ago I noted that the BLS data appeared to be lagging the ADP data, and they have indeed played catch-up.)

Over the past several months, private sector jobs have been growing at an annual rate of just under 2%. That is more than enough to keep up with 1% natural growth in the working age population, but not enough to make much of a dent in the unemployment rate, especially since the public sector has been shedding jobs at an accelerating rate (about 650K public sector jobs have been lost since the recession peak in April '09). Curiously, 2% growth in private sector jobs is about the best the economy ever managed in the expansion following the 2001 recession, but it's less impressive now, since the unemployment rate was 4.5% in 2007 and 9.1% today.

So the economy is still growing at a moderate, sub-par pace, but these numbers show no sign of an imminent recession, which is what the market seems to fear. Regardless, judging from the market action so far, it would appear that the goods news in the U.S. (which is that there is no bad news) is not enough to counter the bad news in Europe (which is that things might get ugly if Italy defaults).

The ongoing—albeit disappointingly slow—improvement in the U.S. economy, coupled with impressive gains in corporate profits and a sinking stock market, have created an interesting contrast in valuations. As the chart above shows, the yield on long BAA bonds has declined to levels not seen since the mid-1960s, while the earnings yield on the S&P 500 is almost up to 8%, a level that exceeds bond yields by a margin that has rarely, if ever before, been seen. This can only mean that the market fully expects the economy and earnings to slump, if not collapse. Consequently, to be bearish on stocks today you need to be absolutely sure that a nasty recession is just around the corner.

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