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Houston, We Have Ignition
By: Dr. Charles Lieberman
Date: 4/5/2010
The final and most important missing link in the economic recovery is now falling into place. Job growth has resumed. As a matter of caution, one should not jump to a strong conclusion that is based on a single economic report. However, the underlying trends and supporting data all reinforce the same inference that the economy is back on a growth track. The economic recovery trajectory is likely to improve further in the coming months, as job growth feeds into household income and confidence to support more spending. It seems like it has been a long wait for clear evidence of job growth, although it is actually well within the normal range. This month we have ignition. Next month, we should have liftoff.
Many aspects of the report are very promising. The manufacturing sector is hiring once again and the gains are spread out broadly across many industries. Temporary hiring remains quite strong. In time, firms will want to turn those positions into full-time jobs. The work week also increased, so plenty of firms are still trying to make do without adding to headcount. This is also unsustainable and should also soon translate into more hiring. The unemployment rate remained unchanged in March, despite the rebound in job applicants. As more people re-enter the labor market after giving up looking for a job, the unemployment rate could easily rise. Instead, new jobs have absorbed this influx. As the job seeking influx slows down, unemployment will actually fall once again. Employment by restaurants increased again, which reflects increased discretionary spending on meals away from home, an excellent indicator of household willingness to spend. All in all, this was quite a good report for the economy with significant investment implications.
This report is very positive for stocks, but equally negative for bonds, although investors continue to pour cash into bonds with abandon. Last week was a perfect example. Inflows into stock funds totaled a mere $294 million, only because foreign fund attracted $1.22 billion. (Domestic funds suffered outflows.) In contrast, bond mutual funds attracted $8.74 billion. In the first quarter, stock and bond issues totaled $1.93 trillion, but new stock issues accounted for just $170 billion. The same mismatch was evident throughout 2009, as equity inflows were close to zero, while bond issuance was heavy all year. Investors remain cautious about stocks, so they pour cash into safe bonds. This is classic behavior and it will prove very costly. As growth gathers momentum, interest rates will normalize at higher levels. In contrast, stocks have been buoyed by a surge in corporate profits that should continue to expand along with the liftoff in the economy.
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