To the uninitiated, Friday’s jobs report probably looked pretty good. Payrolls jumped by 288,000 (vs. the 215,000 that was expected) while the unemployment rate dropped to 6.3% (from 6.7% previously). The payroll gain was strongest initial result in almost four years.
And indeed, in the wake of a strong retail sales report, it looks like the optimists could be right: Perhaps the terrible 0.1% annualized growth the economy posted in the first quarter (which, as new data comes out, will likely be revised to a -0.6% contraction, according to Macroeconomic Advisers) was merely due to the polar vortex and all the snow.
But the details suggest otherwise for the economy. For one, the economic data continues to disappoint. Indeed, the Citigroup Economic Surprise Index, which measures where the data is coming in against analyst expectations, remains in negative territory after falling to the lowest level since the middle of 2012.
Still, if you need more reasons to worry that we can’t chalk up all of the economy’s softness to the winter weather … well, here are three:
#1: Where Are the Jobs?
Click to Enlarge The drop in the unemployment rate was overwhelmingly driven by a whopping 806,000 decline in the labor force. That put the labor force participation rate at just 62.8%, a 35-year low. The employment-to-population ratio stood at 58.9% last month — 0.5% below where it was when the recession ended in the summer of 2009.
Given evidence of tightening labor market conditions, with business surveys indicating difficulty in finding qualified applicants, it seems the job market is tightening due to a drop in the supply of labor, not a surge of new hiring. That’s not good.
The drop in the unemployment rate moves the labor market closer to the Federal Reserve’s estimate of full employment. And that, in turn, brings forward the start of the first short-term interest rate hike and the start of the policy-tightening cycle.
#2: Global Growth
Click to Enlarge Yesterday, we learned that the Global Manufacturing PMI measure of factory activity fell to a six-month low of 51.9 on a drop in new orders and production.
Japanese output in particular was a weak point following the recent sales tax increase. Results out of China also were weak, with the Chinese HSBC manufacturing data indicating the fourth consecutive monthly contraction in factory activity.
#3: Wage Growth (Or Lack Thereof)
Click to Enlarge And finally, and most importantly for beleaguered middle-class families, wage growth continues to lose momentum and remains well below the rates reached in the late 1990s and the mid-2000s.
There has also been, over the last few years, a marked slowdown, as shown in the chart above.
Here’s the kicker: While many celebrated the rise in consumer expenditures in March, it’s clear that the spending spree has been funded by a typical late-cycle dip into savings and credit. The personal savings rate has dropped to just 3.8%, down from the near-6% levels maintained between 2008 and 2011.
Bond Market Sniffs Out Trouble
Click to Enlarge While large-cap stocks keep flirting with new highs, other parts of the market sense trouble for the economy. The small caps in the Russell 2000 have been repeatedly dropping to test their 200-day moving average, a level that hasn’t been breached since 2012.
Moreover, U.S. Treasury bonds have been screaming higher — a sign that bond market investors are worried about the future. That’s pushed 10-year yields back down to 2.6%, a level that was last seen during stock market selloffs back in January and March.
I’ve recommended investors take advantage of this via the leveraged Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF), which is up nearly 12% since I added it to my Edge Letter Sample Portfolio back in late February.