I always say, complacency is the kiss of death.
Friday’s job report was certainly well received by the equity markets. Even the bond market acted with manners, as the numbers seemed to show this economy again being characterized by a small girl, a bear family’s forest home and three bowls of porridge on a table.
But for how long?
The margin of error grows smaller, especially in the current environment of increasing interest rates and threats of global tariffs.
A couple of line items worth mentioning about Friday’s report:
Labor force participation grew by over 600,000 – causing the unemployment rate to rise fractionally. This is a positive development. New workers can help alleviate labor shortages in various sectors. This is also a sign of worker confidence that jobs are available. Jobs equal wages… which leads to output and growth. Despite all we hear about technology and innovation, this economy still needs an increasing labor force to drive growth. Let’s hope for a pickup in productivity.
For Fed watchers, the most important number out of the report was the year-over-year growth in average hourly earnings. Year-over-year earnings increased 2.7 percent, lower than the previous report which came in at 2.9 percent. Many had worried that this part of the report would show hourly earnings at over 3 percent, which probably made the bond market uneasy.
With the jobs report out of the way, markets will again turn their attention and worries towards global trade and corporate earnings. Both merit concern. Quarterly comparisons for corporate earnings will become more difficult as the effects of this year’s tax cuts wane. Global tariffs threaten to increase the costs of exported items and slow global growth. This, combined with a strengthening dollar, will increase input costs for many exporting countries. This could further stagnate growth, as most commodities are priced in dollars. Multinationals will also feel the effect of a stronger dollar as translation effects play out on the income statement.
Friday’s job report keeps the US expansion story in place for now, but new and more serious concerns lie in wait. Now is not the time to grow complacent. And now is not the time to lose your discipline.
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