Two Things That Point To Job Growth
Although virtually every sector of the economy has been showing marked signs of
improvement, job growth remains moribund. The 4 week moving average for
weekly jobless claims is now back above the key 400,000 threshold and non-farm
payrolls unexpectedly declined by 93,000 jobs in August.
Job growth is
needed in order for the current economic recovery to become self-sustaining. The
reason is that over 2/3 of US GDP growth comes directly from the US consumer. Up
until recently, multi-decade low mortgage rates provided households with
significant cash infusions in the form of refinancing. However, now that long
term yield on government notes have risen, so too have mortgage rates. Tax cuts
will provide US consumers with some support but this stimulus will only continue
until the first half of next year and the record amount of money in savings
deposits cannot last forever. Job growth is essential for the US consumer to
continue to spend and the economy to expand on its own. As a result, any
economic data that is linked in any way to the state of the job market will have
a significant impact on the financial markets in the weeks and months ahead.
In my view,
certain economic data suggest that the likelihood of a job-market recovery is
quite high:
1)
Over the past couple of months, there has been a
trend developing in the manufacturing sector of the economy (where most of the
job-losses have occurred). Specifically, orders for business machinery and
equipment (durable goods) have been increasing substantially, while at the same
time, business inventories have been declining to very low levels. These two
factors combined typically point towards an acceleration in job growth. The
reason is that businesses will need to hire new workers in order to manufacture
the goods being ordered and goods needed to replace depleted inventories to
normal levels.
2) According to the National Federation of Independent Business (NFIB)
Survey, hiring plans by small businesses (7,200 were surveyed) increased to
their highest levels in two years, and the index is now up sequentially for a
fifth straight month. This development is significant since small businesses
employ most of America’s workers. As can be seen in the chart below, the NFIB
employment index typically leads payroll data by a month.
