The jobs growth is coming

The March US labor report elicited a giant moan of grief from Wall Street. The number of new jobs created was positive as payrolls grew by 88,000, but the growth was well below what experts had expected and the smallest gain in nine months. The news put quite a damper on any enthusiasm that growth would pick up in the second half of 2013.

These jobs numbers are always slightly confusing. They are released at the same time as the unemployment rate, which for years was used as a measure of economic health. But the unemployment rate fell to 7.6% from 7.7%. If we were using traditional measuring sticks, that drop would have been seen as good news. Not this time, though. This number represents the unemployed people actively looking for jobs as a percentage of the labor force. Unfortunately in this cycle, the number of people looking for work has fallen. So the improvement in the unemployment rate is merely illusory.

What is happening, and does it matter?

This business cycle is in its fourth year, and if you stack it up against other business cycles, it compares quite well. Most of the developments we have seen in this business cycle are not radically different from what we have witnessed in other cycles.

But labor is one big difference; the improvement in the labor market has been slower and more painful than the patterns seen in the 80s and 90s. There are several reasons for this. Skilled and educated US workers seem to be finding jobs, while lower-skilled jobs seem to now be filled by lower-salaried workers overseas, mainly in Asia.

Also, older workers, seeing retirement plans depleted, seem to be working longer years and younger workers seem to be too discouraged to join the labor pool.

While it sounds like a mess, we have to remember some key points. The economy and the US consumer have continued to strengthen during this period. Consumer spending, which makes up 70% of the US economy, has been growing at a 4.5% to 5% rate. So if jobs are scarce, where is the money coming from that keeps the economy growing?

The answer is three fold:

  1. The existing worker pool, while not growing fast, is working more hours. That means more pay, with the net result being more money flowing through the economy.
  2. Because consumer have lowered their debt load at the same times that interest rates were falling, the average family pays about $1000 less to service their debt than they did before the last recession. In other words, they now can spend that money.
  3. Government spending in the wake of the last recession, has helped balance out the losses the economy suffered in the housing market. This government spending is still filtering through the economy.
While the US economy needs more high-paying jobs in the long run, the pressure on labor has improved company profits. While companies may be keeping much of that cash on their balance sheets right now, some of the cash returns to the economy in the form of dividends and eventually as capital expenditures. Capex will lead to job growth, albeit with a delay.

The job growth is coming and wages are likely to rise, too slowly for those who are out of work and discouraged, but fast enough for investors to remain optimistic and not fearful of the onslaught of another recession.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.


1 comment:

Michael Andries said...

Again Mr Swanson posts his level headed view helping sort the wheat from the chaf in volatile markets. Thanks Mike.

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