Stock markets seem to be carrying a false sense of optimism that economic growth is stronger than it actually is. The economic data, however, tells a story that is quite contrary. The US saw 146,000 jobs created in the month of November and Bureau of Labor Statistics claimed that Super storm Sandy had little to no impact. The Canadian economy added a sizeable 59,000 positions in the previous month, and the majority of the gains were full time employment from the private sector, but those numbers are somewhat misleading. The fact of the matter is the numbers that count were actually quite weak. Stock markets have nothing to be optimistic about, and the labor market is just the first place to look for evidence.
To begin with the US, modest estimates are for 90 to 125 thousand jobs to be added on a monthly basis just to keep up with the growth of the labor market. So when, in fact, the US adds 146 thousand, it raises the question around how the unemployment rate really was able to tick down 0.2 percentage points. What gives? For starters, the labor force participation rate is tracking its lowest levels since September of 1981. The number of discourage and underemployed workers will stay at all-time highs until we start to see a change from the US private sector.
The only changes we currently see from the US private sector is preparing for the end of the golden age of tax rates. Quite simply, Americans have been in a fantasy tax land since the Clinton administration of the 1990’s. And the further income tax breaks put in place by George Bush and continued through Barack Obama’s first term have kept them there. The imminent threat that taxes on capital gains and dividends will soon be going up has a number of corporations paying out special dividends allowing investors to take advantage of this year’s current rate.
Despite also being in a golden age of access to credit markets, the US private sector opts to sit idle and await fiscal policy from a non-constructive system of government. As the fiscal cliff attempts to become the most overhyped story in the media, an appeasing solution really presents itself as quite simple: cut entitlements, increase marginal tax rates on higher earners, and allow congress to increase the debt ceiling to continue to pay its bills. Inevitably, we know all three will happen, but not without opposition from the extremes.
To move north, Canada’s job numbers, although looking strong in aggregate, were not indicative of a growing economy. The majority of the gains in the month fell into service sector jobs, and not with the manufacturing and construction sectors, which tend to move in tandem with a strengthening economy. Thus, economic data leads much to be desired and gives a sense that the equity markets seem to be over anticipating what’s to come.
Instead of addressing what to expect as we go into the New Year, I think a more prevalent question is how will the markets finish off 2012, and on what terms will 2013 begin. Markets need more than false sense optimism as a reason to rally. In the US, the economic recovery has dragged on since June of 2009. It’s apparent from the economic data that this recovery is nothing more than mediocre. And as long as it stays this way, the financial markets will be a very uneventful place.