To the Laundry

"The US economy may be 'the cleanest dirty shirt' amongst a world of dirty shirts, but we should not forget that it is dirty nonetheless." - Fred Hickey

The jobs report came out today and it was (to me anyway) surprisingly strong.  Headlines stated things like, "Strong Employment and Wage Gains in January Show Sluggishness in December Was not a New Trend."  Non farm payrolls added 257,000 new jobs in January; on top of this wage growth surged 0.5% leading to an increase in aggregate wages of 0.7%.  Economists lauded the report saying that undoubtedly consumer spending will follow and that the economy is now on firm footing.  It is interesting then that at the time I am writing this that the stock market is not up hundreds of points, in fact right now it is actually down.

One reason for this might be that the overall unemployment rate edged up to 5.7% from 5.6% but this was due to revisions to seasonally adjusted numbers so I doubt that this has an impact.  Another reason could be that the market had baked in a higher number and that the rally of the past week was overdone.  To me though the main reason is that the number has not taken into account the recent oil and gas layoffs and that either the market expects a big revision to these numbers or that future numbers will be weak.  Oil and gas extraction worker layoffs amounted to only 1,900 in January and I expect that this number will balloon in the future as oil producers have cut capital spending budgets by $24 billion according to the Wall Street journal.  Considering that the oil and gas industry employs 216,000 workers, the highest number in nearly 30 years, I would expect a large number of these to reach the unemployment tables in the coming months.

Furthermore with the strengthening of the dollar, exports are slowing and job reductions have been announced by P&G, American Express, JC Penney, US Steel, Caterpillar, IBM, HP, Cisco, EMC, Citrix and eBay among others.  In fact according to Challenger, Gray & Christmas US employers job cut announcements soared 63% from December.  One reason for this is that the consumer spending numbers were not as robust as expected over the holiday season.  It turns out that the consumer is not opening their wallets to spend their gasoline windfall but are rather keeping it for the simple reason that earnings on their savings is so low that a little bit of extra income is being used to offset the loss of returns.  In addition the cost to the consumer of insurance, health care, taxes and education is still biting into their meager pay increases and this is more than offsetting the oil bonanza.

Assuming that the oil price remains low (and it looks like it will) for an extended period of time, consumers may start to spend this extra income but that day has not yet arrived.  Furthermore until the job participation rate improves from multi-decade lows consumer spending will continue to stagnate particularly as it is the younger worker that has the highest levels of unemployment and they are the engines of consumption.

So while the market reaction seems to be of interest it might be that stock traders are growing wary of the tired drum being beaten by the Federal Reserve and may actually realize that the shirt while clean in comparison to the others is still dirty.