Continuing the trend of slower economic growth with higher inflation, today the Labor department reported a much weaker than “expected” 112,000 gain in June non-farm payrolls. The consensus forecast had been for a gain of 250,000 jobs. In addition, April and May’s previously reported gains were revised lower by 22,000 and 23,000 jobs, respectively. The rate of job growth has now declined for three consecutive months following the sharp gains registered in March. This trend continues to support my view that the significant payroll gains achieved in March and April were aberrations, nothing more than corrections in an otherwise long-term bear market in U.S. job creation, resulting from the temporary spending associated with home equity extractions and tax refunds that are unlikely to be repeated.
Within the jobs report, factory employment resumed its decline, shedding 11,000 jobs for the month. The Commerce Department’s separate release which reported the second monthly decline in factory orders following yesterday’s release of disappointing auto sales by GM and Ford does not bode well for factory employment in the future. The lion’s share of the payroll gains continue to occur in the service sector, including significant gains in temporary workers. However, rising interest rates and escalating prices for food and energy will likely curtail discretionary consumer spending, weighing heavily on this sector’s ability to produce jobs in the future.
The main factor undermining U.S. job creation (other than excess regulation and taxation) is that so much of consumer spending is on imports. As a result, profits which might otherwise have been available to create jobs domestically flow to foreigners. Given April’s record high trade deficit and the expectation for rising deficits in the months ahead, the employment situation is likely to continue to deteriorate.
For now, the bond market still reacts positively to weaker than expected jobs data, while ignoring dollar weakness. Treasury prices rallied to close at an eleven week high, while the dollar index fell to close at a five month low. Against the Swiss franc, the dollar closed at its lowest level in eight years! Now that all of the supposed benefits of higher interest rates have already been priced into the dollar, those traders who have been buying the rumors of Fed tightening for months are likely sellers of the fact. Therefore, the only significant remaining dollar buyers are foreign central banks, whose resolve is likely to be tested soon. The stock market continues to trade sideways, ignoring the data on weaker growth and stronger inflation, as well as developments in bond and currency markets. This complacency is not likely to continue for much longer, raising the near-term probability of a significant stock market decline.
The problem is that the conventional wisdom still maintains that the slower the economy produces jobs, the more “measured” the Fed will be in raising interest rates, and that weaker job growth means less inflation. Neither of these assumptions is correct. Weaker employment data may initially cause the Fed to be more “measured,” but only at the expense of even higher inflation. Ultimately, the bond market will ignore the weak jobs data in favor of the highly inflationary monetary policy the Fed pursues as a result. In the end, the U.S.economy will experience both rising unemployment and inflation. Ironically, the more the Fed tries to fight the former by ignoring the latter, the worse both problems ultimately become.