Stocks rallied Thursday due to increased hopes that the Federal Reserve may lower rates later this month. Friday brought us a solid jobs report, which pushed them up further.
Many economics hold the belief that unemployment below a certain level, 5.5% generally, it causes too much inflation that may need to be managed. They believe that there is a sweet spot for unemployment, not too high but not too low either, and managing it this way will better promote the desirable goal of cyclical stability.
Even the Fed has economists that follow this view, but the Fed overall has been able to understand well enough that inflation and economic growth are more dynamic, and there may indeed be situations where unemployment is very low and it can still make sense to stimulate the economy.
It is true that unemployment lowering would produce a stimulatory effect in itself, due to this bringing more money into the game, by way of seeing productivity increase. Productivity is the engine behind economic growth and also what breaks down during slowdowns, with everything else just being downstream.
Among the trio of employment, inflation, and economic growth, although they all influence one another, employment numbers measure productivity better than the rest and also measures one of its practical impacts, more or less people working.
The fact that this number has improved again with September’s jobs report, dipping to a 50-year low of 3.5%, really doesn’t change the current outlook that much, but is at least a confirmation that the economy remains pretty healthy, even though it may conflict with other data such as Thursday’s manufacturing survey.
The fact that manufacturing has been trending down for a while, as has the economy as a whole, is not something that we want to ignore or not take proper account of, but the most important sign that this data is really weighing things down too much is the unemployment rate rising.
Friday’s jobs report served to allay fears that the employment scene may start to break down. Even though the number of new jobs added fell a little short of expectations, coming in at 136,000 versus the consensus prediction of 150,000, an additional 45,000 jobs were added to the table from revisions up with July and August’s numbers, which more than made up for this month’s deficit.
When we take a look back at the trend with new jobs added though, we will see a steady and clear trend downward since the beginning of 2015. This in itself can be interpreted as a negative indicator and one that has us heading toward further slowdowns.
This number in itself is only meaningful when we add in the number of jobs lost, to discover the net number, and it is the number of jobs lost that is the more important of the two. This not only brings down net employment, but also better indicates when the economy is contracting, due to more job losses and the shrinking of the money supply that this produces.
The two together, jobs added and lost, is conveniently represented by the unemployment rate, even though inflows and outflows with the employment market also weigh in. Overall though, unemployment numbers tend to paint a fairly reliable picture of the health of the job market.
No Matter How We Look at These Numbers, the Overall Outlook Remains Stable
There are a number of other things that we can do with employment data. Economists David Bell and David Blanchflower have an index that measures the number of people that have to work part-time for economic reasons. They believe that this index provides a clearer picture of the health of the economy than employment data such as the unemployment rate.
The Bell/Blanchflower index has been on a steady decline since 2010, and is at its lowest level since 2001. This speaks to how well people are prospering, as the more that people struggle, the more likely they will have to take on additional part-time work.
With all of the people that move in and out of the job market, the best approach to measuring employment levels may be to just look at what the level is overall among those in what are considered the prime years, from 25-54.
We saw a drop from 80% in 2006-07 to 75% at the end of 2009 as a result of the recession. This number steadily increased to make it back to 80% in October 2018, but had fallen off by half a percentage point through July. August and September have seen it come back from this though and the numbers through September have us finally breaking through the 80% level at 80.1%.
This may be more meaningful than making a 40-year low with the unemployment rate, but together, these numbers confirm each other and show us that the job market is pretty healthy indeed.
Overall, this most recent jobs report doesn’t really take us off our current assumed course, as it really doesn’t suggest much bullishness, while at the same time isn’t bearish either. We already were seeing a strong bill of health overall prior to this week’s report, and on this front, this has simply been confirmed. There remains a bit of economic slowdown to be managed and it’s always nice to see employment numbers not show much wear or any real indication that the tide has turned against us.
While Thursday’s manufacturer data had the market’s prediction of a rate cut by the Fed at the end of the month move from 50% to 90%, this has now moved down to 80% after Friday’s jobs report, which still has us well over the predictions from earlier in the week.
This has led to 2 strong up days to end what was otherwise a terrible week for stocks, where we have moved up 3% from Thursday’s low. We’re still down for the month but have now made it half way back to the highs of mid-September in less than two trading days.
In a real sense, the market’s reaction to what would appear to be a pretty neutral jobs’ report overall shows that it is biased toward the upside right now. Given that the bearishness lately has been spearheaded by recession worries, seeing a jobs report that did not confirm these fears was certainly seen as welcome.
When the market rallies on back to back days after what should be bad news and what should be pretty neutral, this makes clear that the mood of the market has improved and the stock market pullback since mid-September may not be indicative of what to expect in October overall or in the final quarter of the year.
If the Fed Does Its Job Properly, They Can Do a Lot to Protect Us
The Fed does still have plenty left in the tank even after another rate cut, as it retraces its steps from the near-zero rate from 2008-15 and then perhaps being overly aggressive with ramping it up too much through 2018. The Fed plays a huge role in the economy and more so than people tend to realize, as it’s all about the money supply and they are the ones with their hands on this lever.
While we have virtually put to rest the idea that the invisible hand of the market will always keep us moving in the right direction, this is only a fairly recent phenomenon and the history of the Fed’s actions up until recently have been riddled with mistakes at times, going back to their first big challenge starting in 1929, which they failed at miserably.
There are still people who believe that the Great Depression was a failure of business rather than government, even though economist Milton Friedman showed pretty clearly in a book published in 1963 that the Great Depression was a result of the Fed not acting in the manner they should, especially with their allowing so many banks to fail.
Bank failure was the real cause of this depression and it all has to do with the massive hit that money supply took, similar to what happened in 2008 but on a grander scale. Back then, the Fed just stood idly by and watched so many banks fail, in spite of being a lender of last resort being one of their primary objectives.
The Fed also had their hands in their pocket too much when it came to using monetary policy to help things out, and we relied almost solely on the expansion of fiscal policy called the “New Deal.” This may have played out better politically and seemingly addressed the great unemployment problem, but by the time this was rolled out, money supply had shrunk so much that this depression persisted for over a decade.
Friedman’s views were met with sharp criticism though, and even though it’s hard to imagine arguing with the fact that massive bank failures were the proximate cause of the depression, or on a higher level, that it wasn’t the massive reduction in money supply that caused it. Instead, the focus was essentially on what led to the bank failures and the subsequent collapse of the money supply, which ends up leaving aside what action we could have taken to prevent this, which is the Fed’s job.
By the time the Great Recession hit, the Fed of the day had a better understanding of how this all works, and after decades of being at odds with Friedman’s views, former Fed Chairman Ben Bernanke finally admitted that Friedman was right, and this time we got the bail-out and fiscal policy that we needed to save us from another Great Depression, which could have happened all over again if the right action was not taken.
There is still a tendency with the Fed to be overly cautious with inflation, but perhaps less so than ever today, as the traditional approach to the mild slowdown of today would have been to stand pat and wait for things to worsen. They are now showing that they are willing to be more proactive in preventing economic contraction, and this is exactly what we need to stay ahead of the game and not wait until so much damage has been caused that the problem becomes much more difficult to manage, as they did in the years leading up to the Great Recession.
Provided that the risk of inflation running too high remains managed, as it clearly is now, another rate cut or even two perhaps during this cycle may not be unreasonable at all. It is nice to see them opening up more though and we at least can be assured that if action needs to be taken on this side, they are willing to do their part to help.
This is perhaps the single most important reason why the outlook for the stock market and the economy remains positive, although among those who just look at the numbers and do not account for the effects of well-measured changes in monetary policy in seeking to counter it, this can lead to misunderstanding.
The stock market loves expansionary policy though, and while they may at times be too eager to get it, they do know that expanding the money supply during times where it needs to be expanded is both wise and beneficial for the economy. Thus far, the ship is being kept well on course with further course changes available if and when they are needed, which should serve to reassure investors during these seemingly uncertain times.