Employment Picture Darkens: What Next?

Investors are apparently not real happy
that payrolls grew by only 431,000 in May. Nor are they pleased
that the unemployment rate dropped to 9.7%.

Are investors being unfair? Are they
seeing a glass that’s half empty?

No, not really. Nearly all of the new
hiring in May was for census workers. In fact, 411,000 of the
431,000 jobs were essentially government handouts. The private
sector only created 41,000 jobs in May, which was less than
Economists were expecting payrolls to grow
by a total of 536,000. This is a pretty big miss. 

known that improving the unemployment picture would not be
easy. Job growth will not be a straight line. There will be fits
and starts. The jobless recovery after the 2001 recession was the
same way. 

Still, it’s a good idea to remain
focused on the implications of the painfully slow recovery for

Hiring at the current pace means
interest rates will stay low. After all, the Fed’s favorite
measure to fight real inflation is wage inflation. And we’re
not likely to see wage inflation pick up while hiring is

During the last rally off of the
February lows, this might have been seen as good news. After all,
that rally was all about pricing in economic recovery in a low
interest rate environment.

But the focus has shifted from interest
rates (which represent the environment in which a recovery can take
hold) to actual signs that the economy is growing. 

Now, for
the bears, stagnant jobs growth means two things. One, corporate
earnings will be impacted. And two, the federal deficit will grow
due to added stimulus spending and lower tax receipts.

And really, it’s corporate profits
that are the biggest concern. 

I’ve commented repeatedly how well
companies have cut costs to meet lower demand. And we’ve also
seen consumer spending growth find some equilibrium. But nature
will only tolerate moments of stasis. 

Over time, spending and profits are
usually growing or shrinking. We’ve seen growth. So now that
momentum seems to be slowing, it becomes easy to imagine a period
where things start moving backward. 

Of course that doesn’t mean
it’s inevitable. Again, economic recovery and jobs growth
will not be straight lines. But it’s clear that investor
confidence has been rattled a bit. And that will lead to more

earnings season is winding down. Earnings growth was very
good. It was also priced in after the rally from

Up next will be the pre-announcement of
2Q earnings. Of course, there’s no block of time officially
designated on the investment calendar where companies have to come
out and say they will either make or miss earnings. But companies
have learned that Wall Street analysts appreciate a head’s
up, especially if earnings will miss expectations.

I expect investors will be on pins and
needles over the next couple of weeks, worried that negative
earnings pre-announcements will be made. 

And I will admit that if there any
significant earnings misses pre-announced that it’s likely
that the stock market will start the next leg

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