Analyzing the Jobs Report
So the good ole BLS published the February jobs report this morning. Of course, it contains it usual lies and/or errors, er um I mean adjustments. I'm not going to weigh in on whether the people at the BLS are corrupt or inept, I'll leave that to you. Either way, they're not doing a good job. I have said it before and I'll say it again, my day job involves some statistical analysis and calculation. If I was as wrong as the BLS is every single month I would have been fired long ago. As the saying goes...it's good enough for government work I guess.
OK onto the numbers. Unemployment hits 25-year high. According to the BLS, 651,000 jobs were lost in February. Hey that's not too bad, relatively speaking. It is in line with what analysts were looking for...right? WRONG. Look at the downward revisions to the previously published numbers for December and January. The combined job losses for those two months were raised by a whopping 161,000. The "new" December number is the largest number of job losses reported for a single month in 59-years.
When one adds the additional 161,000 job losses to the 651,000 from Feb., were talking about a total of 812,000 new job losses that the government reported today.
Wait there's more. Don't forget about the old "Birth / Death" adjustments that the BLS uses to account for all of those new businesses that are being formed right now (Not). I believe that B/D added something like an additional 130,000 phantom jobs to the February number. Add that to the above total and we're at 942,000 jobs lost...rapidly approaching the 1,000,000 mark.
Other statistics of note:
- The official unemployment rate rose to 8.1% in February.
- The widest measure of unemployment, U-6 (link), in which the BLS adds up the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons rose to 16.0% in February 2009 from 9.5% in February 2008 and 15.4% in January 2009.
Of course, the markets rose immediately after these numbers were announced. I know that jobs are a lagging economic indicator and that the markets anticipate a recovery in the economy even earlier than that, but I don't see any silver lining here. All we can hope for is that companies got all of the firings out of their system at the end of '08 and beginning of '09 and that the rate of layoffs will begin to slow.
Either way, when the economy eventually does stabilize, and make no mistake about it...it will do so at a level that is well above the carnage that was seen during the Great Depression, I don't envision a rapid rebound. Where will the growth come from? Government spending can help keep us from falling off of a cliff, but it is not the foundation that real growth is based upon.
Consumer spending accounts for 70% of the U.S. economy. It was the key driver in U.S. economic growth over the past decade and consumers are now cutting way back. Consumer spending cutbacks hurting economy
Unless you expect massive inflation in the near future buying stocks looking for capital gains rather than ones that pay dividends or better yet high yielding bonds is a fool's game. Growth is what drives company's stock prices higher. Unless the absolute worst is already priced into a stock, you will not see any gains at all in the no-growth environment that I expect the United States to experience for the next several years.
The big question mark here is inflation. I personally believe that the Fed will keep the Funds rate close to 0% for much longer than many believe. I envision it sitting here at the bottom through at least the end of 2010. Look at how long Japan has had low rates. I realize that the U.S. is not Japan and that our government has taken action more quickly than theirs did and that we do not have demographic issues to the extent that they did, but my point is that rates can sit down here for a long time.
The only scenario that I see that would cause interest rates to rise is foreigners losing their taste for the massive amount of Treasuries that the U.S is going to have to issue to finance its massive budget deficit. The deficit is bad now and it is going to get worse because the recently released budget's assumptions about future GDP growth are way too optimistic. If foreign governments can't or won't buy up our debt like they have been, then rates will have to go higher. The question is whether this will happen? No one knows for certain at this point. I certainly think that it is possible, I just don't know how likely.
Things are bad out there right now. I am seeking refuge in corporate bonds for a number of reasons.
1) I can easily see the major indices falling further as earnings estimates continue to be revised downward and multiples continue to contract.
2) They are higher up the capital structure and provide greater protection than common stock does in the event of a bankruptcy.
3) I strongly believe that after the economy stabilizes that we will be stuck in a period of low to no growth for a number of years.
Because of the possibility that interest rates may rise in the future, for the reasons that I outlined above, I am sticking a large percentage of my money in shorter term bonds rather than locking it up at the current rates for decades.
That's what's on my mind this morning. Thanks for reading. Let's discuss. What did you think about the jobs report? Where do you believe the economy is headed? Where are you investing your money right now?