There was widespread rejoicing over the improving U.S. jobs picture after the economy surprised everyone by adding 257,000 private-sector positions in January, its strongest monthly increase since last April.
The numbers provided a huge dose of encouragement to those who argue the United States has turned the corner, and that years of record-low interest rates and pump-priming stimulus are finally beginning to breathe life back into the economy.
But will the good news continue? I recall last spring, when U.S. payrolls were rising vigorously and the markets and forecasters extrapolated that performance into the future – erroneously as it turned out.
We may be headed down that same path again. Productivity slumped in the fourth quarter and, barring some burst of economic growth, employers are likely to respond by cutting jobs.
Some indicators, such as the Gallup measure of joblessness, are already showing marked weakness. According to Gallup, the U.S. unemployment rate rose to 9 per cent in mid-February from 8.6 per cent in January. Gallup also found that 10 per cent of U.S. employees in mid-February were working part time but wanted full-time work – unchanged over the past month but still near a record high.
The problem is that many of the jobs that the U.S. economy is generating are in low-paying service sector jobs. (Yes, there are modest hints of a manufacturing rebound, but the factory jobs that are coming home are doing so at lower wage rates than when they left for Asia years ago.)
Throw in rising gasoline prices and real incomes are in a squeeze. In fact, on a year-to-year basis, real after-tax incomes are actually sliding. This is not a good sign. In the past, shrinking incomes have been associated with an economy in recession, about to head into recession or just coming out of recession.
Of course, just because the U.S. economy isn't producing jobs hand over fist doesn't mean that certain companies and industries can't perform well.
Consumer staples is one such sector, along with anything tied to the long-term theme of consumer frugality – dollar stores and discounters, home improvement and gardening-focused companies, among others. Tech, too, is a good place to be, especially in anything that can benefit from the rapid rise of smartphones and tablets.
Over all, though, the picture remains darker than recent headlines would suggest. For all the excitement over the recent jobs numbers, it's remarkable how muted our expectations have become.
It's worth pointing out that the highest level that unemployment hit following the 2001 tech wreck recession was 5.7 per cent. According to the Federal Reserve's most recent forecast, the lowest unemployment rate the economy is likely to achieve by 2014 is 6.7 per cent. An unemployment rate that was once considered frightening is now supposed to be reason to rejoice.
The key driving force behind the stock market's rise this year has been the investors' willingness to pay higher prices for a dollar of earnings. Rising price-to-earnings ratios reflect the market's belief that massive expansions of global central balance sheets will end up saving the day for dilapidated sovereign government balance sheets and woefully undercapitalized European banks.
The reality is that whatever improvement has taken place in the U.S. jobs market has been little more than a reflection of deteriorating productivity growth. As such, companies will respond in the spring by curbing their hiring plans. This is exactly what happened a year ago – to the detriment of market bulls.
The risks to the U.S. recovery are far larger than investors are pricing in at the current time. It is not jobs that people spend, but income – real income. Unfortunately on this front the U.S. economy and jobs market still has a ways to go.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.