Why the current expansion/bull market has so long is open to debate. What’s undeniable, though, is the vast amount of malinvestment that has accumulated. The biggest example might be corporations borrowing hundreds of billions of dollars to buy back their stock at record high prices. See Record Buybacks at Worst Possible Time. If those equities subsequently fall by half in a future bear market, today’s buybacks will end up as an object lesson in corporate hubris.
Goldilocks Jobs Report
- A very strong jobs growth with benign wage pressures unleashed a strong day for the stock market.
- Other than wage growth deceleration, the details of the report were quite healthy.
- Tax reform can take some of the credit for stronger goods employment relative to services employment.
In the wake of the release of January’s jobs report—which saw a jump in average hourly earnings—I had our fearless cartoonist Charlos Gary create the visual below, with the headline “Goldilocks may be leaving the building.” Notice that the little bond bear has been awakened (as Schwab’s Kathy Jones has been detailing); but the equity bears are still tucked in their beds—albeit with the non-recession bear keeping a cautious eye on the situation.
Courtesy of last week’s February jobs report though, it looks like Goldilocks may have taken a step back into the building. For those not familiar with the analogy, an economy that’s operating “not too hot, but not too cold” is often referred to as a Goldilocks environment. We have been in such an environment as it relates to economic growth and wages/inflation for much of the current economic expansion.
Over the past two days, Chinese exports exploded, US payrolls bested 300k, and China’s CPI recorded the hottest inflation in 5 years. Globally synchronized growth?
It might be tempting to view this recent positive report cluster in that way, but, again, we’ve seen these before.
The other big problem with the current BLS figures for February 2018 is that +311k sounds impressive but it shouldn’t. It does only because the labor market is just that weak. What I mean by that is any reasonable standard for meaningful growth is so far above what we have become accustomed to. It’s not that the labor data is misleading on its face, it’s that the interpretations of them haven’t been re-calibrated properly for the last decade.
Using the averages for the late nineties, the Establishment Survey if it represented solid growth would gain almost 4 million payrolls in 2018. That would be an average of 320k per month. The latest estimate for 311k is actually below average. That means everyone is celebrating as some kind of blowout what would otherwise fall as a weak month under more reasonable analysis. That’s how bad the labor market has been for so many years.
And it’s an outlier, but it’s not the first. The BLS data shows that in June and July 2016, for example, payrolls gained +285k and then +325k, respectively. Taken in isolation, those two “blowout” months seemed to suggest economic acceleration in keeping with the “reflation” sentiment that was then just forming. We know, for that labor market anyway, those two perfect reports were quickly forgotten, mere statistical noise that represented instead more of the same – the good months, even two in a row, are the exception.
Average weekly earnings, which are even more noisy month-to-month, rose just 3.2% year-over-year in February after being nearly flat, +0.8%, in January.
Despite the unemployment rate sticking at 4.1% for the fifth straight month, there isn’t the slightest hint that earnings let alone wages are accelerating; nor is there any indication they are about to.
Is it the beginning of the labor market finally stabilizing after three years of slowing? Or is it Harvey and Irma?
Given the inherent lags economy to employment, it is possible that what’s indicated in February is the trailed effects of the artificial hurricane boost.
This is where the noise works against us (like the middle of 2016). There is, right now, simply no way to tell.
There's much more in Snider's article that bears a closer look.
It's interesting that he kicked off with a question about global synchronization.
Where is Goldilocks?
Is Goldilocks in the room or out of the room?
Curiously, that's not even the right question. Even if Goldilocks is is in the room with the inflation and recession bears slumbering, are stock valuations so stretched that it does not matter where she is?
That's my belief. I suspect we are right about here:
Stocks are tremendously overvalued.
That may be a bit high, but it's a well-researched target. Even flat returns for the next seven years would crucify pension plans.
Goldilocks? No one will be talking about a Goldilocks environment no matter what inflation or jobs do once stock valuations start returning to normal.
Mike "Mish" Shedlock