E-piphany

Remind me not to write about g-o-l-d again.

Wow, I don’t know what it is about the yellow metal that inspires such…fanaticism, devotion, tunnelvision. Whatever you want to call it. Ordinarily, my columns inspire anywhere between 2 and 20 comments from people on the one or two places it is “syndicated.” Yesterday’s column rated 40, and it wasn’t even a particularly good one. And a lot of those comments were of the black-helicopter variety. This isn’t to say I don’t appreciate all sorts of comments; I do. But – maybe I should have written about zinc. The point would have been about the same; the data is just better for the metal whose name shall not be spoken.

Having learned from my mistake, let me turn back to the economy.

The investing world got to do that again today with the release of the July Employment report. Payrolls fell -131k, 65k below estimates, with a net -97k revision to the prior two months. A 163k miss is pretty bad, but private payrolls didn’t miss as bad. Private hiring amounted to 71k, but with net downward revisions of -34k to the prior two months the net addition was only 37k. Still, that’s not an awful miss.

Moreover, Average Hourly Earnings bounced back this month, +0.2% with last month revised up to flat, and Weekly Hours were +0.1 (reversing last month’s contraction). That’s decent news.

The Unemployment Rate was unchanged at 9.5%, with a third month in a row of shrinking civilian labor force. The participation rate fell to 64.6%, matching the low for the cycle and the lowest, in fact, since around 1985 (see Chart). It is quite bad news if the Unemployment Rate is only as low as it is because millions of Americans are no longer even in the workforce – retiring, or giving up.

Labor force participation is ebbing. Demographics?

This chart also is a sober reminder that increased labor force participation tends to go hand in hand with rising standards of living…and rising equity markets. Look at the shape of that chart from 1980 until the present, and compare it to the next chart, which is the S&P index deflated by CPI, on a logarithmic scale. Suggestive? (Maybe too suggestive…the correlation of some of the wiggles suggests that the big zig-zags are likely caused by the same factor – a recession – operating on both charts. but I am interested in the overall trends).

S&P, deflated by CPI, logarithmic scale.

Back to the Employment report: temporary help contracted, for the first time in a while. That has been a rallying cry of people who were looking for improvement in Employment, so it hurts that argument at the margin (I’ve never really bought into that argument, however).

The average and median duration of unemployment dropped sharply. These are volatile series, but this is good news.

Stocks plunged on the news, but volumes were light and indices rallied back into the close to recoup almost all of those losses. Bonds rallied, with the 2y note falling below 0.50% for the first time ever and the 10y note getting to 2.82%, and gave none of it back. Hmm…there seems to be some disagreement here about the significance of the numbers.

In my view, the significance is this: these are not horrible data. Clearly, things are better than they were a year ago, and perhaps even six months ago. But they are only marginally better, while a big fiscal rock is rolling down the tunnel like the boulder in Raiders of the Lost Ark rolled after Harrison Ford. The economy needs to be in much better shape to withstand what is coming.

Of course, if you see the rock coming, you might do what Indiana Jones did and get the heck out of there. That’s what Christina Romer, chair of the Council of Economic Advisers may have been thinking yesterday when she resigned from the economics team. This is more important than the resignation of Peter Orszag (OMB) in July, although most people believe Geithner and Summers run the show. People are already talking about how Romer “wasn’t vocal enough” about ways to solve the economic malaise. I wonder how quickly someone else will step up, knowing they’ll be the one to be implicitly blamed if things don’t work out.

As I said, stocks managed to recover most losses and end with only a small decline. Many investors think the bad employment number is good for QEII and they think therefore that bad economic data is perversely good for stocks. There are enough people who believe it that in the short run it might be true! We may find out next week when the Fed meets; there is a growing expectation that there will at least be a change in the mood of the statement although nothing terribly concrete is likely to happen right away (it is the Fed, after all. They don’t shoot when they see the whites of their eyes; they shoot when they feel the boot marks on their backs). I expect investors might be disappointed in that.

Whether they are or are not, in the long run the market is a weighing mechanism. It will be very hard for a fundamentally-oriented investor like myself to go along if the market “melts up” on inflationary actions by the Fed! I doubt I have to worry about that quite yet, however.