Today's Employment Report December 3, 2010, David Kotok, Chairman and Chief Investment Officer
Today’s employment report is a disappointment. We will skip most of the numbers since they are available in all the press releases.
Markets got ahead of reality; this is weak economic recovery. Expectations vs. reality is the issue at hand.
The United States faces the worst employment conditions seen during the entire Post World War II period. We have one out of 20 college graduates without work and seeking work. This is double the norm. It means the highest-paid component of the labor force is languishing. The US economy needs rising labor income to accelerate. It does not have it in either the highest paid or the lowest paid cohort; nor does rising labor income appear anywhere in between.
The human tragedy is large. One out of eight single moms is unemployed. These folks teach, nurse, do administrative services, or may clean your office. They usually commute to work. They often use public transportation because their household budgets are tight. They have kids at home and try to maintain a household. They use day care. They face an enormous struggle. They exemplify the human tragedy at work in the US labor force.
If you look at the U-6 unemployment rate, you realize that 1 out of 6 in the labor force has either no income or pay that is less than it was three years ago. One out of six. That is an unprecedented and monumental number.
To understand the dynamic at work in the US one has to drill into the headline number. It is not pleasant reading. When labor-force participation rises again, it will drive the unemployment rate above 10%. Today’s report was 9.8%. Right now, the number of discouraged workers who are not in the labor force is setting all-time records.
Markets will interpret this negatively at first. They will focus on the chronic unemployment that is growing more pervasive in the US.
Financial analysts realize that this will extend the already “extended period” of Fed QE for many more months. The zero boundary in US interest rates is certainly now imbedded for all of 2011.
Expectations were jerked back to reality today. We remain fully invested in the US stock market. We remain invested in the US bond market in spread product, not Treasury securities. We emphasize very high-grade state and local government bonds, both tax-free and taxable. There is huge and growing liquidity with no place to go. And there is no inflation threat on the horizon for an ”extended period.”
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