thoughts on the May jobs report: (I)

Yesterday,  I wrote about the bare bones of the May Employment Situation report issued by the Bureau of Labor Statistics.  Job growth for the month dropped from the recent rate of around 200,000 job additions to 54,000.

More data:

Commenting on the May Employment Situation, the BLS says there’s no obvious statistical anomaly that might lead one to think the low job additions number will be revised away in coming months’ reports.  Also, if the slowdown were due to economic disruptions in Japan caused by the Fukushima nuclear disaster in March, we should be seeing a decrease in hours worked, as parts-short factories slow production.  We don’t.

Outplacement agency Challenger reported a couple of weeks ago that job security for those currently employed is rising.  In addition, company plans for layoffs are the lowest they’ve been in over a decade.  The anticipated layoff rate is 80% of what it was a year ago, and only about a quarter of what companies were figuring to do  during early 2009 (the low point for the economy).

I’ve also read a report recently (no citation–I’m writing this from a B&B in Colorado and will post a link when I get back home) indicating that companies were increasingly willing to pay to relocate potential hires because they can’t get the skills they need in the local labor market.

Recent earnings reports seem to indicate that US consumers are increasingly trading up, and are spending more (sometimes, a lot more) on discretionary items.  TIF, for example, just posted very strong results.  The company said it was seeing strength across the country and that each month of the April quarter was stronger than the previous one.  More expensive items are the best sellers.

my thoughts

Looking in rough terms, an unemployment rate of 9% means 91% of the workforce is employed.  An unemployment rate of 5% would be full employment.  So, putting aside questions about the long-term vitality of the US economy, which involves “cosmic” considerations about whether/how our legal and political framework encourages economic growth, the near-term unemployment issue involves about 4% of the workforce.

Given the distribution of incomes and wealth in the US, this 4% represents far less than 1% of potential US consumption.

As far as we can determine (the issue is one of corporate disclosure), half the earnings of the S&P 500 come from outside the US.  We can roughly divide that into 25% from the EU + Japan and 25% from emerging markets.  In other words, whether unemployment in the US is 9% or 7% makes virtually no difference to S&P 500 profits over the next year or two (or three or four).

There are investment issues, however.

They have to do with the multiple placed on earnings whose future course is somewhat less certain, and about sector/industry weightings and individual stock selection.

I think there may also be, for lack of a better word, a “transition” issue, as conventional wisdom about the preeminent position of the US economy in the world, and the relationship between the course of the US economy and the S&P 500, are questioned.

More tomorrow.

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  1. Pingback: thoughts on the May jobs report: (I) « PRACTICAL STOCK INVESTING | Investing

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