The weaker the economy is, the more jobs the US economy seems to create?

Today, I will defend my position on the US economy despite the two sets of strong payrolls data. 

The jobs report for July that smashed expectation came just a week after the 2nd quarter GDP that was less than half of what the markets had been anticipating along with much lower revisions to the previous two quarters. How can that be?

The weaker the economy is, the more jobs the US economy seems to create and it just so happens that the only strong numbers that are coming out are the the nonfarm payrolls numbers that Obama likes to promote and that Hillary Clinton likes to peddle while the Federal Reserve keeps using to advocate that the economy is on track and highlights as the only important number that really matters. 

It is ridiculous that the markets are looking for a September rate hike again based on these numbers.  June and July were strong headlines as upside surprises and, surprisingly, there were no downside revisions this time around. However, the participation rate only rose from 62.7 to 62.8 and is still a very low number. Average hourly earnings rose as expected. However, above all, these jobs numbers are just reflecting the transformation of full time to part time jobs and are not a reflection of a strong US economy. We also have to account for the seasonal adjustments where assumptions are factored into the data as these could have positively impacted and inflated both of these recent reports. We will soon see over time as there is more scrutiny over these assumptions, but the key factor to understand is that there were massive increases in part time lower paid jobs in, for example, the profession business services and temporary help (53k new jobs), leisure/hospitality (45k new jobs), Federal jobs (38k new jobs, even worse as the tax payers have to support those jobs and that is a burden on the economy) jobs in education/health care (36k new jobs) and retail trade (15k new jobs).  When you compare those numbers vs the higher paying in say, manufacturing (9k new jobs), you begin to understand the bigger picture of the US jobs market.

Anecdotal evidence points to a much weaker US economy

Source: iStock

The trade deficit was at a ten-month high which is going to weigh on the already poor 1.2% Q2 GDP. At the same time we had consumer credit that grew at its slowest pace in four years because the pace of increase in one of the US largest sectors, automobile, is in decline which underlines my point; All these new jobs that have been created are so lowly paid that no one can afford to take out credit to buy themselves new stuff, such as a car, against a backdrop of a flat housing market. 

Credit is tight and part time workers simply can't afford to borrow money to spend, so the velocity of money is bound to be drying up and you can see that in the weak retail sales in the US economy. In fact, more consumers are relying on credit cards with a spike in credit card debt, but this has nothing to do with confidence with their new jobs. No-no! This is because consumers are relying on credit cards just to buy the basic necessities of life and to use for paying their bills while their savings are dwindling. American's are borrowing more money to simply get by. Then, look at factory orders in decline. If the US jobs market was so strong, then why do we have all of the anecdotal evidence elsewhere conflicting with that story? It is very suspicious to me as I alluded to earlier on in this article.

Watching all Central Banks heading to zero

Source: iStock

Everywhere is weak yet the labour department assumes the economy is growing and assumes all of these jobs are being created. So, in reality, this nonfarm payrolls data belongs in the fiction section of the economic calendar in my opinion and I will definitely not bank on the data as an indicator of the state of the US economy. The stock market was able to rally though, but that is only because no matter what, the Fed is unlikely to hike interest rates and the stock market bulls know it and the cheap money will keep flowing as the prop to Wall Street. Gold is also a good indicator of expectations of a Fed hike, but even if they do hike rates, so what? They can't keep hiking rates, that is for sure because the US economy nor the Fed can afford to hike rates and when you look behind the Fed's mantra, you will understand why. 

Source: iStock

The US can't afford to see the US dollar trashed and if they are prepared to go to war over the value of the dollar, you can be sure that Yellenwill be toeing the line ahead of these presidential elections and that is to keep up the mantra that hikes are on the way while the US economy is improving. Meanwhile, the Fed are likely to be monitoring Central Banks closely because they are all easing again, including the BoE, RBA, BoJ, possibly the RBNZ. In effect, the US dollar is stronger and effectively makes life a lot harder for the FOMC in respect of timings of a rate hike due to the global yield rate differentials and a stronger dollar is not necessarily the best outcome for the US economy either.