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11/8/13 – Will More Jobs Mean Less Stimulus?

Written by Brad McMillan, CFA®, CFP® | Nov 8, 2013 11:54:59 AM

Looking at yesterday’s post, it is clear that there’s a disconnect between consumers and business again—but in the opposite direction from what’s been happening recently. Over the past couple of years, consumers have spent while business sat on its cash, refusing to invest or, more particularly, hire. While consumers had led the recovery thus far, it was apparent that, to take the next step, business had to start to hire and invest.

I mentioned yesterday that consumer confidence had declined since the shutdown, while business surveys had come in much more strongly, indicating that this transition might be starting. Today’s data points suggest that, while consumers are closing their wallets somewhat, businesses are beginning to open theirs.

Let’s start with the employment reports. Private employment growth came in at 212,000, up significantly from the previous month’s 126,000, which was also revised up to 150,000. Not only was this month’s number much higher than expected, with the consensus expectation at 125,000, but previous months were also stronger than initially thought. Total nonfarm employment grew at 204,000, which included a job loss of 12,000 at the federal level. In this data set, furloughed federal employees were counted as employed because they got paid, which limited the reported loss.

The unemployment rate, which ticked up to 7.3 percent, was actually consistent with the job growth described above. (It’s based on a separate survey, which did not include furloughed federal workers as employed.) This figure is therefore a statistical artifact and should be reversed next month.

Consumer income also ticked up as a result of the greater number of jobs, and yearly wage growth increased to 2.2 percent from 2.0 percent. Interestingly, personal income was up by 0.5 percent while personal spending only increased 0.2 percent, pushing the savings rate up. Again, this suggests two things: first, that consumers have pulled back somewhat, and second, that the current spending rate is not only sustainable but can even increase over time.

Today’s data puts a much more solid foundation under the economy than had been expected. While there does appear to have been a slowdown due to consumer worry about the shutdown, business doesn’t seem to have been affected at all. The strong employment numbers also start to call into question worries about how the Affordable Care Act may retard employment growth.

The market fell yesterday, a drop attributed in several reports to the stronger-than-expected GDP growth, which raised the chance of a reduction in Fed stimulus. If that’s the case, we may see more turbulence today, as the much-stronger-than-expected employment figures hit directly at the Fed’s expressed concerns about the economy. If this kind of stronger employment growth takes hold, we will meet the Fed’s targets much sooner than previously thought. That said, I doubt the Fed will allow one month of data to drive a taper at the end of the year.

If, however, the drop was more attributable to how much of that GDP growth was in inventories—in other words, that growth was weaker than it appeared—today’s data should be good for the markets.

Personally, I think the continuing improvement in the real economy will not only be good but necessary for continued strong market performance. In order for earnings to keep growing and the market to keep rising, revenue growth—which comes largely from consumer spending, which is driven by employment and wage growth—has to pick up. More jobs means more revenue, in a virtuous cycle. If there is short-term turbulence around the Fed stimulus, that is a price we’ll have to pay at some point, and better when the economy is growing.

For several months, I’ve been talking about how the real economy is improving more quickly than is generally perceived, and how employment growth will accelerate at some point. Today’s data is the first indication we may have reached that point, and it’s particularly promising coming as it does on the heels of the government shutdown.

Overall, today’s data is very encouraging, with significant positive implications for the future.