Will Job Growth Sustain the Rally?
With the official end to summer, there are many topics for sunburned vacationers to consider as they settle in to their desks and boardrooms on Tuesday. Economic data has been mixed, but with a positive tilt. We learned the latest ideas from central bankers. There are assorted crises around the world. Somehow, in spite of it all, stocks showed a strong gain for August.
I expect the main topic from this will be the economic focus and Fed reaction. I expect financial media to be asking: What does the job picture mean – for the economy, financial markets, and the Fed?
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Prior Theme Recap
In my last WTWA I expected that the news would focus on central bankers unwinding. That was indeed the dominant story, in spite of competing world events, but we got precious little new information. There will be some carry over from this theme in the week ahead.
Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.
San Francisco Appearance
I enjoyed meeting some readers and making new friends during last week’s San Francisco Money Show. As I warned before the trip, there was too much going on for me to write my regular weekly update. My stay ended with a wee-hours wake-up from the earthquake. You can really feel the effects when on the 17th floor of a hotel! Locals were joking the next morning, perhaps because the injuries and damage were mild given the size of the quake (biggest since 1987).
I plan to lay out some of the themes from my presentation in future posts, but it has been hectic catching up after the trip. More on that to come.
This Week’s Theme
In the holiday-shortened week ahead we have an avalanche of economic data and crises from around the world. Many different topics could command attention. Out of these choices, I expect special attention on employment data – more so than ever. Why?
The Jackson Hole Fed Symposium highlighted the continuing importance of the employment situation. Here are the key questions about economic growth:
Are the job gains enough to sustain (or improve?) the rate of economic growth? Looking beyond the gross numbers, is there enough improvement in full-time jobs? Is the quality of employment adequate?
Even if that hurdle is surmounted, there is the question of labor market slack. How much room is there to stimulate job creation without sparking inflation?
Fed Chair Yellen believes that better employment prospects will improve labor force participation, keeping wage pressures low. This is a “cyclical” view of the labor force participation decline. Only after the participation rate improves, will there be a need to consider emphasizing the Fed’s inflation goal rather than employment.
The alternative viewpoint, laid out thoroughly in this week’s Barron’s Cover story, Work’s for Squares, emphasizes structural causes. The argument focuses on those of prime working age, where the high post-WWII rates have been followed both by periods of decline and stability.
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While there are many possible causes, one intriguing factor is the growth in disability. The causes are not the old-fashioned work injuries; in fact, the workplace is safer. Someone on disability does not get much income, but does (after a wait) receive Medicare. This is a financial disincentive for returning to work.
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The article provides a good summary of data from various sources.
As usual, I have a few thoughts to help in sorting through these conflicting viewpoints. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the ebackground information.
Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
