Something Good Brewing at Home

02/03/2012 12:35 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Solid job gains are proof of domestic strength that continues to be viewed with skepticism by most investors, writes senior editor Igor Greenwald.

The best news for the stock-market bulls in today’s surprisingly strong jobs report wasn’t the fact that January payrolls expanded by 243,000, some 100,000 jobs above expectations. Nor was it the drop in the unemployment rate to a three-year low of 8.3%.

No, the best news for the optimists was that the naysayers refused to skulk home, tails tucked. Instead, we’ve heard about the lowest labor participation rate in nearly three decades, and how ugly that jobless rate would be if all the discouraged workers started looking again. And we’ve heard about the unseasonably warm weather, and the havoc it might have wreaked on seasonal adjustments to the data.

In other words, there’s a lot of stubborn skepticism out there for markets to convert into additional rally fuel.

The bond market certainly is taking the latest numbers with a very large grain of salt. Sure, the ten-year Treasury yield is up 12 basis points to 1.95%, but that’s still 44 basis points below where it stood in late October, and 125 basis points lower than on July 1, when the US economy looked nowhere near as strong.

Perhaps the bond buyers still believe that the vast burden of debt accumulated over decades will ultimately drain this cupful of momentum.

Maybe they’re mindful of the huge fiscal drag set to hit the US economy next year, in the absence of the not-so-minor miracle of comprehensive Congressional compromise on the most vexing tax and spending issues, in an election year.

Could be they’re spooked by the action overseas, where for all the happy recent bond buying in Europe, the consumer sector is in full retreat, and banks are lining up to borrow gazillions more from the Frankfurt money factory?

Chinese real-estate prices continue to deflate, and monetary relief to date has been modest. Oh, and the US defense secretary has let it slip that Israel could bomb Iran any day now.

So yes, there’s a slew of good reasons for no one to worry too much about last year’s best-performing asset class, or to get too excited about the ongoing series of speculative short squeezes in equities.

And meanwhile, payrolls have risen in each of the last 16 months, and over the last five months have recovered the momentum seen last spring. The household survey used to calculate the unemployment rate—which is typically more reliable in spotting economic turning points—showed a January gain of 508,000 jobs, seasonally adjusted.

Just as impressively, the gains were very broad. Professional and business services added 70,000, powered by strong demand for temps, another traditional signal of improving confidence. Leisure and hospitality added 44,000 jobs, and though these may not pay any better than the temp gigs, at least some labor demand is trickling down. Better still, the economy added 50,000 manufacturing jobs, overwhelmingly in durable goods.

Eight months ago, I offered eight reasons to keep faith in the economy, and every one of them still look good despite last year’s trials. Last April, I suggested the depressed national mood would rebound soon, although that too was a little early.

But economic sentiment has been recovering since last fall, and every good employment report reinforces a confidence, hopefully creating a positive feedback loop.

This could still all go wrong eight ways to Sunday, of course. But for the moment, it’s time to admit that something good's brewing on the home front, and it’s a trend that bears watching at least as closely as the goings-on in Europe and China.

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