The puzzle of the US jobs data

Today is Martin Luther King Day in the US, and trading will be curtailed. So this morning, I will cover a critical macro topic that seems to get many investors worked up – the US jobs picture.

Stock markets have zeroed in on this subject above most others. Now, even the Fed has changed its emphasis from suppressing inflation to promoting employment. It has pledged to do everything to bring unemployment down.

Many have interpreted this as a green light to ramp up asset markets – including gold – until the unemployment rate drops to 6.5% (currently 7.8% and falling).

And that is what we are seeing currently.

But as we all know, the link between asset prices and employment is tenuous at best.

What’s happening with the jobs data?

This is the headline unemployment rate in graph form:

US unemployment rate chart

But with GDP growth subdued, there appears to be an inconsistency between output and employment.

Why, if many jobs are being created, is GDP not keeping up?

The answer is probably this: many workers are leaving the workforce, which reduces the pool of labour and lowers the unemployment rate.

This fascinating chart shows the labour participation rate:

US labour participation rate chart

The rate peaked in 2000 at 67% and is now falling rapidly and lies under 64% at present.

Even in the last four years, ten million people have left the labour force. That is a lot of people on food stamps, benefits, and living off savings – or emigrating!

One other factor is the demographic one – the population is ageing, as it is in most Western economies. The baby boomers are retiring. And the dependency ratio is falling – it is taking more workers to support a growing number of dependents.

But one thing caught my eye when I first saw the above chart: the peak in 2000 occurred at the same time as the Dow Jones Industrials peaked in real terms (adjusted for CPI).

That set me thinking. Could it be that the economy started to contract in 2000 (in real terms) and made jobs more difficult to keep and get?

One measure of this is to look at the part-time jobs data. It is all very well counting people in jobs, but are they well-paid, full-time ones?

Here is the part-time jobs data:

US employment level (PT) chart

For the past six years – since the Credit Crunch – the number of part-timers (for economic reasons) has ballooned – and has only just stabilised since hitting the peak during a period when the stock bulls have proclaimed the economy is growing healthily.

I mentioned those that have come out of the labour force or are on part-time work and are using food stamps (the government programme is called SNAP (incidentally, a term used in the UK for food!). Well, here is the data:

US Supplimental Nutrition Assistance Program participation chart

There are 45 million people currently using SNAP – a staggering 21% of the population.

This is on a par with European dependency programmes. The USA is now just as socialist as Europe.

This will have severe implications for the economy, as it already has had in Europe.

And this is definitely not a healthy US economy. The SNAP figures help explain why the very rich professional money managers (who are buying stocks) are bullish, while the average Joe is much more gloomy.

But remember, the stock market is not the economy! I have seen periods when the economy was lousy and stocks in a bull market, and vice versa.

Euro update

I will follow up on the euro from my post of 14 January, as it is deciding whether to rally above the 1.34 high, or descend back to my tramline. This is the updated daily chart:

EUR/USD spread betting chart

(Click on the chart for a larger version)

I now have three tramlines, and the original two lower ones are sporting good prior pivot points (PPPs - red arrows). My new upper tramline has two excellent touch points.

OK, the rally off the July low can be counted as an A-B-C, which means I should be looking for a wave C top soon.

Also, there is a potential large negative momentum divergence (red bars) which adds to the bearish case.

Last week, the market hit the centre tramline at 1.34. Is this the end of the rally?

Let’s zoom in on the short-term picture:

EUR/USD spread betting chart

(Click on the chart for a larger version)

The weak spot for the bullish case is the area under the most recent minor low in the pink zone. A move there could herald a move back down to the lower tramline.

But at present, the trend is up.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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6 Responses

  1. 21/01/2013, Darren Harris wrote

    When’s your next Dow email? It’s been a while since your last one.

  2. 21/01/2013, Bronco Bill wrote

    I use some slightly different methods to you John and my charts suggest a pull-back for the euro on the daily chart (which is also shown on the weekly chart and then a continuation of the uptrend).
    Do you think this could be connected with what the dollar index chart shows ? It shows on a daily chart today at 80.04 what could be a right shoulder forming of a large H/S formation which began in Jan 2012 and where the neck line today is just below at about 79.
    The weekly chart bears out that the index could see at least 73 again in the coming months.

  3. 22/01/2013, phil wrote

    Is it me or has the analysis changed from a 5 wave up to ABC? Any chance of an article on the pound, John? It looks very sickly.

  4. 22/01/2013, norman wrote

    What are these yanks smoking? Thats twice now, in the last week when the DOW has been sitting at double top levels, of previous high in the autumn (and rediculously high levels anyway- the highest since dec 2007 ie 5 years) and some trully awful news has come out compared to expected, and yet its done nothing but jump further and further up. What is wrong with them? I can not believe ANYONE would be buying here. There is surely something “funny” going on.

  5. 23/01/2013, norman wrote

    Ive seen the DOW make 50 point slips if not more on such a big gap on reported industrail sentiment data compared to expected. Currently we’re getting about 140 point up moves! Wonder the VIX index is at, its got to be nearly zero, nothing is getting these guys to sell -nothing. But having passed the previous high, the only remianing target now is the all time high around 14400 -remember, back in the bubble time. Whats more, that was when “things” were “known” to be good. We currently know they are far from it. I do wish somone could explain this non-sense to me. I appreciate higher prices, as a response to devalueing the dollar -but only for assets prices and therefore stocks such as miners. For all other groups, the earnings are going to be devalued just a much, so there should be no corresponding inflation in stock prices should there not?

  6. 24/01/2013, Bronco Bill wrote

    I agree norman, and it will all end in tears again. I think it was Jesse Livermore who said that the markets can stay irrational a lot longer than you can stay solvent

Commenting on this article closed

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