June’s unemployment release was a disappointment to the markets. The European mess and the fears of a double-dip recession led to high hopes for improvement in employment. The low private sector employment with the Census jobs making up a big segment of non-farm payrolls was not expected. On the bright side, the unemployment rate dropped. The Dow reacted by sliding below 10,000, and bonds rallied.
Never Look at the Headlines
Never look at the headlines! Year-over-year trends in unemployment and private sector employment have been the best barometers of the direction of economic cycles since World War II! These trends predicted the coming of the current recession, the end of the current recession, and the beginning of the recovery. The continuing trend suggests that the recovery is firmly in place.
Yet, why the fuss? It truly seems that bad news still sells.
The European contagion is just such a bad news story. The size of our recent recession in any terms dwarfs the economies that have been in the news. As one community banker put it, “The GDP of Greece is about the same as Massachusetts.” If the news is that bad to create a flight to quality, why is the Spanish 10-year trading at a 4.58% compared to the U.S. 10-year at a 3.15%.
Even the Greek 10-year is only at 8.11% for all their issues. This pales when one thinks of the yields we saw on U.S. corporate bonds at the height of the financial crisis. Amazing that the Italian 10-year is at 4.28%, the French 10-year at 3.06%, and the German 10-year at a 2.5%! Shouldn’t there be significantly higher risk premiums if the Euro is so destabilized?
The Real Story Remains Hidden
Yet the most amazing story remains hidden. Our economy is still making productivity gains, and unit labor costs remain negative. This would continue to suggest that the private sector has been and is making more money from its workforce. While one could see this through the tough times of a recession, it is continuing as the recovery grows, creating a stronger foundation for private businesses to grow.
This will probably mean that we will live with a higher overall unemployment rate, and that may not necessarily be bad for our economy. A leaner and more productive workforce will make us more competitive in the global economy.
This only confirms that the U.S. stock markets have sold off too much and that the 10-year U.S. Treasury will head back up to 4%.