The August employment report last week with 0% job growth has many speculating about a new recession. While the report itself was on the weaker side, a closer look at other data does not indicate that activity in August weakened significantly. Rather, it appears the economy is stagnating with activity below normal levels but not getting appreciably worse.
The August employment report was actually not that much different from July’s reading. July showed an increase of 85,000 jobs but in August, the Verizon strike caused the report to be 45,000 less, so the adjusted month-to-month decline was 40,000, which is relatively minor. In addition, another employment survey by ADP for private employers showed an increase of 91,000 jobs in August versus 109,000 in July. Weekly jobless claims, a good leading indicator, showed little change throughout August, which implies that little has changed in the labor market.
Consumer confidence dropped during August, back to levels near the depth of the recession in 2009. While this would appear troublesome, looking at consumer spending, there has been little change. Auto sales tend to be an excellent barometer for consumer spending and during the 2008/2009 recession, they dropped below 10 million units on an annualized basis, after being over 15 million units. Auto sales in August were at a 12 million-unit pace, virtually the same as July but would have been higher had hurricane Irene not disrupted activity during the last weekend of August.
Given the negative news that has transpired, such as the downgrade of our debt, the fact that employment and retail spending did not change appreciably in August is actually positive. Certainly, there is a risk things could get worse from here and the deteriorating banking system in Europe continues to rattle financial markets. However, it is likely that the economy continues its sluggish path for a few more months, and then resumes a more normal growth trajectory.
Corporate earnings are currently at record levels, so the stock market is relatively inexpensive. Even with the economy near a 0% growth rate, earnings should at least be stable. It is only if we fall into a recession that I would see downside risk to earnings and stock prices. Nonetheless, the risk reward outlook for a longer-term investor is favorable for stocks but expect higher than average volatility for a while longer.
For a fixed-income investor, Treasury yields are at record-low levels. While some may be enticed to longer-term Treasuries, as a 2% yield for 10 years is better than .2% for two years, there is significant price risk to longer-term bonds should interest rates rise. Therefore, for more conservative investors, I recommend keeping bond portfolios relatively short even though you will sacrifice some income in the short run.
