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Employment Report: Just Fair
By: Dr. Charles Lieberman, Chief Investment Officer
Date: 7/2/2010
Job growth continued in June, but not enough to support the idea that the economy is still gathering speed, but also not weak enough to indicate a double dip recession. One months data is insufficient to suggest the trend of accelerating growth is truly broken, but the economy ought to be getting stronger and this payroll employment doesn't show that. There is also no support for the market's fear of a double-dip recession. Private sector payroll employment growth has averaged about 100,000 monthly in 2010, enough for 3% to 4% GDP growth, but not enough to be characterized as a strong recovery.
There's little doubt that an economic recovery is underway. What is debatable is the strength and sustainability of the expansion. We have averaged growth of about 100,000 in private sector job growth monthly in 2010 and 119,000 jobs over the latest three months, or slightly above 1% at an annual rate. If overall productivity gains continue above 2%, GDP growth should be above 3%. Digging a bit deeper suggests slightly stronger growth due to the sizeable rebound in the workweek. So while headcount has grown by just over 1% at an annual rate, hours worked has also increased by more than 1%. Put together, manhours are rising by more than 2%, so if we now add productivity into the mix, we estimate that GDP growth could reach 4%. This would still qualify as a slower than normal recovery to this point.
What about the future? Opinion is very divided, of course, but the uncertainty revolves around the pace of expansion, not really whether the recovery is sustainable. The recovery seen so far has unfolded against a financial restructuring of the banking sector, industry, and household finances. Despite those significant headwinds, the economy has made the transition from recession to recovery. Some new headwinds are now apparent. European growth will be a bit weaker -- a small headwind while domestic headwinds should abate. Banks have recapitalized, companies are sitting on about $1 trillion in cash and profit margins have recovered very sharply, while households have reduced debt. Inflation is very low and interest rates are likely to remain quite low for an "extended period" of time. Our population continues to grow faster than new housing construction, cars are being junked faster than new production, and computer replacement is overdue, reflecting improvements in computer productivity, all of which imply pent up demand. Sooner or later, growth should pick up. Apparently, we need to be a bit more patient.
We continue to hold some excess cash, reflecting our judgment that investors remain quite nervous, despite cheap stock valuations. It is our further judgment the market is overly pessimistic, which is why stock values are depressed, but also why we think purchases at current levels will prove rewarding in time. So we intend to invest our cash, although we also intend to proceed cautiously, reflecting the market's nervousness.
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