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Today's Commentary: 08.08.05
Analysis Paralysis

Writing about the Jobs Report is a push. It is far too easy to find fault with either the way it is reported, who it excluded, the laughable guesstimates which are supposed to jerk the market with their unworldly accuracy, or the way those numbers are seasonal adjustments for this reason or that. The later mentioned adjustments were dutifully added to the report on Friday as well swelling the previous two months of paltry reporting by twenty thousand or so.

But I would be remiss if I let the news pass without a nod. One reason is based on my firm and consistent belief that the market is not really aware of the world beyond its borders. We are all aware of Washingtonıs ignorance from the top spot on down but to think that the moneyed members of Wall Street might be able to add up the economically good reports and see how it relates to those of us in the trenches is at best unnerving.

The other is Secretary of Labor Elaine Chaoıs appearances following each release extolling the virtues of the Presidentıs policies as the reason for the strength in the economy, low unemployment rates, and barely apparent wage growth. Rumor has it that the President is about to embark a seven-city tour congratulating himself for what he has done for the economy policy-wise. The Jobs Report, hot off the presses will present Mr. Bush with easily cull-able numbers to stump on his tour.

The report, as have so many before it provided us a certain analysis paralysis ­ a term I lifted from the airwaves spoken by Bill Harwood, CBS News Space Consultant (Johnson Space Center Bureau, Houston, Texas) when he appeared on NPRıs Science Friday. The term perfectly describes the way we have been viewing the economy, how we twist and turn it, reviewing and opining on its state, and coming away mostly undecided about its direction or even its intent.

Could that have been the reason for the markets to cease and desist their hasty sideways climb? Using the lead-up to and finally the release of the employment numbers on Friday gave traders the chance to come to their senses and they did.

The stock marketıs four-year highs were left a little worse for wear last week in spite of a healthy batch of good news on the economy and no shortage of good earnings. Ignoring my call to retreat in May to look for some place nice was duly ignored by speculators whose belief in this level of stock prices gave the bulls a nice showing for the previous five weeks or so. But not so last week.

The cake topper was the number of new jobs created in July and how it easily surpassed most sage guesses. It didn't take long to dig up the obvious quality of those new jobs as low wage paying ones, the kind that are held largely by teens, or held doubly by working adults trying to keep food on the table.

Jobs in construction, while not necessarily being filled by teens are still a hot sector as long as money supply and interest rates align themselves in the current environment. But that current environment is due for a change and most folks have already written a last-at-bat scenario for the interest rate hikes. Donıt be so sure.

It has long been a matter-of-fact that the median necessity for creating new jobs in a growing economy is a 150,000 per month. With an to-date average of only 191,000 being created, the Jobs Report could offer nothing but a quiet nod of thanks to those hamburger slinging, bag carrying jobs in the service sector of this economy. Donıt ignore the career-making employment opportunities in retail that tend to keep minimum wage workers at minimum wage or the construction workers whose job now perches precariously on a slowing housing market. Without them, this would be a dismal recovery indeed. With them added, taking credit would seem like the last thing anyone would want to do.

Since this rally in labor began, half of the jobs created were in sectors that do not offer any type of product other than service. Including retail, hotel and restaurant workers, and the fact the nursing shortage is finally catching up with Boomer demand, these new jobs seem to be of the non-durable sort that is hard to export, both from an outsourcing standpoint but also as something to trade with our global partners. Bottom line: these jobs donıt make much of anything the world needs.

Much of the so-called strength is still relying on housing, a stronger than it should be sector, and the acute savvy of business that demands a leaner operation as opposed to innovation.

The vibrancy of housing is continuing as if it cares little about the effort it needs to stay afloat. Many markets in the Northwest, Eastern seaboard and Florida are now hot only because of limited supply and heightened demand. This natural occurrence is not so much an anomaly as just the result of in-demand markets overheating. Some markets will suffer from a slight increase in interest rates and those are expected for at least another Fed meeting.

Markets cooling will create a drag on local economies as money to spend dries up. Those adjustable rate mortgage holders will be forced to sell their way out of their loans or lock at a higher rate than they would have paid had they seen the future so many of us were pointing so emphatically.

Although the Fed has made clear that what they are doing in terms of short-term rate hikes was more for inflation control and to keep the economy in check through this growth spurt. Which makes little sense since inflation seems tame - excluding food and energy which is slowly stifling the market. Growth, if you step back, looks rather anemic and chart wise, a little too level to be celebratory.

What growth remains in housing is at the behest of the ever-growing league of hungry re-financiers and innovative first-time buyers. You don't find that just a little scary?

Business has become even more averse to spending, shelling out only what they need to. There are no bets currently being made on how to grow the company through expansion from within so industries are consolidating. We are left with the same old consolidation syndrome passed off as growth, when in-fact, merger and acquisition moves of late have done little to increase real productivity or wages. If anything, business is using asset grabs to show that they can do more with less, as they jettison duplicate jobs and sometimes pension obligations as well to achieve the kudos that come with skillful management.

One last note on how business competence is perceived: earnings over the quarter were based on grossly underestimated analysis. In many instances, stock prices indicated such disparities until those estimates were beat. Cheerily, for the last five weeks, we marched to our inner trader and bought equities pushing the markets higher. In other words, any activity is better than none even if the celebration seems kind of hollow. Consider if you will, the DJIA is still down over 2% for 2005.

In the end, over analysis of anything can lead one to make suspect leaps of faith and the markets have been prone to doing just that. Much like looking at the sun leaves a retinal afterimage, this economy seems to be doing well - based on what we can see of it through the cataract like haze. Weıve seen it do well before, but once the often numbing brightness of all of these reports clears, I think what we will be left with is an economic paralysis; one that leaves us unable to readily distinguish from the good, the bad, and the downright troublesome vision in front of us.

BlueMoney Report

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