'Good' Jobs Report Confirms Slowing Economy
On the surface, Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) was good, and the financial market's reaction to it was positive. The widely followed "Nonfarm Payrolls" number rose by 287,000, the most since October 2015. In response, the Dow Jones Industrial Average jumped by 250.86 points (1.40%).
Unfortunately, if you look below the surface, you see an economy sinking into stagnation.
The Dow (like the S&P 500) reflects the market value of existing assets, while jobs, wages, and economic growth are all driven by investment in new assets. The yield on 10-year Treasuries fell to an all-time low of 1.36% on Friday. By way of comparison, 10-year Treasuries were at 2.27% before the Federal Reserve moved to "raise interest rates" on December 16, 2015. And, they were yielding an average of 4.29% during 2005, which was the last year that America enjoyed real GDP (RGDP) growth above 3.00%.
Janet Yellen and her merry band on the FOMC* seem to think that low interest rates are good for the economy. They are not. Market interest rates, determined in an environment where the dollar is stable in real value, are always best for the economy.
This having been said, low interest rates are, and historically have been, a sign of economic stagnation. They are evidence that people are not investing capital in new assets, and that society is using its savings to bid up the prices of existing assets, including bonds.
Signs of economic stagnation are also visible in the jobs and RGDP numbers. The number of FTE** jobs actually fell by 122,000 during 2Q2016, despite the reported 442,000 increase in nonfarm payrolls. The last such quarter-to-quarter decline in FTE jobs occurred in 2Q2011.
If we look at the quarterly nonfarm payroll numbers in terms of the percentage change from the year-ago quarter, we see that jobs growth peaked in 4Q2014.
If we assume that 2Q2016 RGDP growth will come in at the 2.4% currently forecasted by the Atlanta Fed's GDPNow tool, 4-quarter RGDP growth peaked in 3Q2014 at 2.91%, and fell to 1.71% for 2Q2016.
If we further assume that the CPI will increase at the same rate in June as it did in May, the average real weekly earnings of all employees for June will have been 0.44% lower in June than it was in January. Also, the 4-quarter growth rate of real weekly earnings will be seen to have peaked in 3Q2015.
Although the Industrial Production Index (IP) for June isn't available yet, it is certain that June will be the tenth month in a row where IP is lower than it was 12 months previously. This kind of pattern has never before been seen outside of declared recessions.
On July 29, the Bureau of Economic Analysis (BEA) will publish a "benchmark" revision of its GDP numbers for the past few years. All indications are that much of President Obama's economic recovery will be revised out of existence at that time.
However, even the numbers that we have now show a slowing economy. If Donald Trump wants to win in November, now would be a good time to unveil a powerful economic growth plan.
*The Federal Open Market Committee, which is the body that determines the Federal Reserve's monetary policy.
**FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
