Wailing and Gnashing of Teeth

On December 10th, 2013, posted in: Economic News, Newsletter by

Payrolls keep growing. Economic data stays positive. The stock market makes new highs. It’s been consistent for nearly five years. And so has the pessimism. In fact, the pouting pundits of pessimism get more determined each month, trying to prove that things are really bad out there and their predictions are about to come true. One of these days they will be right.

The jobs report on Friday was one of the best of the last few years, with nonfarm payrolls up 203,000, while wages rose, total hours worked increased 0.5%, and the unemployment rate finally sank to 7%, maybe legitimately. Nonetheless, after digging through every line of the report, some of the pessimists found their talking point. They discovered that a whopping 41% of the job gains in November were from government.

This was not exactly a lie, but the data point they tried to make relevant is misleading and meaningless. The number came from the Household Survey’s civilian employment data – a separate survey with a much smaller sample size than the payroll survey. This data said the US gained 818,000 jobs in November and that 338,000 of them were government jobs – the 41%.

But, do you recall, there was a partial government shutdown in October? That shutdown did not affect the payroll survey but did affect the household survey, which has a different timing. So, the data needs to be evaluated over two months, instead of one.

In October, overall civilian employment fell 735,000 with a 507,000 drop in government jobs. But when you look at the two months together, the data shows total employment was up 83,000 while government jobs were actually down 169,000. In other words, the trend in government jobs continues to be downsizing and includes a drop of 534,000 employees over the past year according to the household survey.

Several months ago, these same pundits invented another Black Swan-style crisis when they claimed part-time jobs were dominating any job gains the US was experiencing.

But nothing has been said about this theory recently. Why? Because part-time jobs have plummeted in the past four months and are now lower than they were last year even as total jobs are up. Are these politically motivated scare tactics? Lots of time can be spent chasing down, and proving wrong, these erroneous claims. They worry investors who could spend their time finding opportunities.

The US is not a perfect labor market. Technically, the US should be gaining 350,000 jobs per month. But the relevance of the monthly reports is trend. They speak of the direction of the economy, and that is clearly the Plow Horse continues to move on down the road.

Another recent criticism of the US Economic news is economic growth in Q3 was all due to inventories. Yes, there was an upward revision of real GDP growth to a 3.6% annual rate was due to inventories. But real GDP was still 2% when you removed the inventory influence. This has been the same Plow Horse effect for the past few years.

The Keynesians pabulum regarding all of the fears associated with the partial government shutdown and Sequester never materialized. The economy was supposed to fall into recession proving once again John Maynard had it wrong. On Friday, real (inflation-adjusted) consumer spending was reportedly 3.8% as an annual rate in October. This is the fastest pace for any month so far this year. But the news carried how Black Friday was a major disappointment.

Preliminary November numbers show automakers sold cars and light trucks at the fastest pace since 2007. It looks like November is going to be another solid month for consumer spending; destroying the myth the fiscal cliff deal (Sequester) and the shutdown was going to kill the consumer.

There is every reason to believe there will be solid job reports in the months ahead, showing continued improvement in the labor market. Rest assured, however, after each report someone, somewhere, will find a way to twist the numbers until they scream. They won’t be an outright lie, but the waling and gnashing of teeth will send many investors to the mattress and cause unsubstantiated fears that a recession that doesn’t exist is about to happen.


Some observations:

  1. The Fed’s FOMC Committee is still being asked WHEN will they start cutting back (tapering) on the quantitative easing, bond-buying program. This will most likely happen in March when Janet Yellen replaces Bernanke as Chairperson. Not likely to happen at the meeting on December 17-18.
  1. Will Congress and the Obama administration hammer out a compromise to keep the federal government functioning after January 15. The wounded President is losing his grip on his coalition, so hard to say how this will turn out. There is much more likely to be short term solutions than a long-term fix. Most likely, this will be a “kick the can” negotiation until after the 2014 Congressional elections.


  1. The recent jobs number was +203,000, well above the consensus estimate of 185,000, and the unemployment rate dropped to 7.0%. But some of those gains are seasonal, part-time positions that probably go away after New Year’s Day. The unemployment rate is expected to drop to 6.8% by the end of 2014.
  2. The U. S. trade deficit narrowed to $40.6 billion from $43.0 billion from the previous month. But we are running a deficit of $20B a month in the oil sector. How is that possible if the U. S. oil production is at historic highs?

Bottom Line: These numbers are Plow Horse numbers. To sustain the 2012-13 rally, the economy needs to overcome the retardation caused by regulation, Obamacare and the specter of the debt. But so far, the economy has survived those issues. We shall see.


Wailing and Gnashing

Past performance is no guarantee of future results. Indices are not available for direct investment.

The stock market flat lined in November. This pause was not unexpected given the tremendous growth the market has seen this year. Some analysts are starting to say the market is overbought. Everyone has an opinion. The trick is to NOT listen to them.

It is interesting though to watch market behavior. You get good news like the increased GDP report (+3.6%) and the jobs report (+203,000) and you would think the market would jump up, but it doesn’t. It took a Friday rally to keep from a large loss. But even more confusing, is when you get lousy reports and the market does jump up. Go Figure.

This +30% total return has many praying the market does not do anything horrible in the last weeks of the year. Compare the +30% to the compounded annual return over past ten years of only 7%. Since 2000, the S&P 500 has been up less than 3%.

Meanwhile, interest rates were up sharply in both the Treasury and mortgage markets. This drives the bond values down. Bond risk can only be managed by duration (the amount the bonds will decline when rates rise) and short term maturities. Bond investors and bond fund managers are probably not too optimistic about this year or the foreseeable future.


The FDIC (Federal Deposit Insurance Corp.) reported the number of banks dropped to just 6,891 in 3Q 2013. This is down from a top of 18,000+ since 1984. Most of the closures have occurred up to 2011 among banks with less than $100 million in assets.

The lesson in all this is simple – Markets outperform stocks. Stay invested and don’t be concerned about the intervening metrics. Unless you are buying or selling – these are not your numbers.

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