The July jobs report generally disappointed. From my point of view, the argument for buying into this cycle has rested on two big pillars: first, that there is no credit cycle in the private sector to create risk and distort pricing, and second, that lack of job growth could be made up for by wage gains accruing from a longer workweek for each US worker.
On this second point, we received bad news this past week. The average workweek, which has powerful implications, fell. This number is often hidden from view behind the unemployment rate, but it should not be overlooked. A mere quarter of an hour addition to the hours worked can be the equivalent of adding well over 120,000 jobs. And the opposite is true if a quarter-hour is subtracted. The July jobs report showed that not only were fewer jobs created than expected, but also that corporations were having their employees work fewer, not more, hours than the month before.
This disappointing number has two immediate implications: New jobs are not likely to be created until companies feel they are working their existing workers more hours. And with fewer hours worked, there is less money in the aggregate US July paycheck, and that crimps final demand.
In earlier blog posts, I have noted that the stock market needs to see final demand grow in general for stock prices to move up, and not just more corporate cost containment. The current slowing of growth among S&P 500 companies is due to a foreign slowdown, but we also need to see that final demand in the US is growing or accelerating in order to justify higher stock prices.
That good news did not happen in the month of July 2013.
The jobs data in general confirm that the US is still in a moderate growth arc and that the average GDP growth is 2%, with a higher growth rate coming from the private sector. This arc of real growth is about 2%, and that seems to be typical of this business cycle. For the stock market to move on to the next plateau, we will need to see better numbers than this, especially on the workweek and from foreign growth, to justify the market’s current P/E ratios. I think that we will see both, and fortunately, the drivers of this cycle are not debt, but forces like deferred spending, affordable goods, noninflationary pricing of goods and very productive US workers.
Keep watching the workweek data and the fate of international final demand to tell the story of the second half of 2013.
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.