Farr: Jobs Number Raises Questions
Total non-farm payrolls were up 151K in October, much better than the consensus estimate of +60K. Private payrolls grew 159K compared to the consensus estimate of +80K. In addition, there were positive revisions to the September and October numbers. Total non-farm payrolls only declined 42K in those two months compared to the prior estimates of -152K. Adding together the positive revisions and the better-than-expected number in October, payrolls were about 200K better than expectations for the past three months. This is obviously a very good sign for the economy.
The unemployment rate, which is calculated using a different survey, remained steady at 9.6%. Interestingly, the civilian labor force declined by 254K. This suggests that the unemployment rate may go even higher as frustrated workers re-enter the labor force and are once again included as "unemployed." The underemployment rate (or U6) declined slightly to 17.0% from 17.1%.
In my opinion, it will take several months of positive job additions in the 150K+ range before the Fed feels comfortable that the employment situation is getting better. There is still a very high level of unemployed people as well as people who remain out of the labor force because they are frustrated. Therefore, we would expect QE2 to go ahead as planned. However, people are already beginning to speculate that this may be the beginning of the end for the series of large bond purchases by the Fed. So QE3 may be out of the question for now.
We are likely to find out very soon the extent to which government money has driven the stock market higher.
If economic data is indeed improving on a sustainable basis, the Fed is unlikely to be as aggressive in buying assets and thereby driving down interest rates and the dollar.
If QE2 is already baked into stock prices, will today's jobs numbers, which may make QE3 much less likely, cause a sell-off in stocks? Or will investors be more comforted by the fact that the economy may actually be improving?
David Tepper's position that either a) the economy improves, and the market goes up, or b) the economy doesn't improve, so the Fed adds cash, and the market goes up - is accurate but only as far as it goes. That is to say that if the market goes up because the economy improves, then we have a fundamentally driven, albeit somewhat rocky perhaps, recovery and a new expansion phase (this would be ideal).
If the market increase is driven by unsustainable Fed, magic-money, then the rally becomes unsustainable (at least based on magic drivers), and investors are left holding our collective breaths to see if a real recovery will take over for magic money.
The critical flaw (I struggled not to say fatal flaw) is that Mr. Tepper and the Fed ignore the longer term consequences of magic money. This is a long way of saying that I agree with Doug Kass: QE2 "will result in the sort of inflationary pressures and drop in our currency that will, in the fullness of time, serve as a headwind to domestic economic growth." This morning's Employment Datasuggest that the economy may be showing signs of genuine recovery. I certainly hope so, but if it is, will that mean that QE2 is unncessary? The drop in bond prices would indicate that perhaps the Fed may pare back its $600 billion target.
Thiere is an additional issue that continues to trouble me: markets are not being allowed to clear. Greenspan's prolonged period of sub-2% rates in order to engineer an economic "soft-landing" and the credit and housing bubbles that ensued seem to have taught us nothing. I fear that the ultimate consequence from which the Fed is intent upon saving us is being ultimately compounded.
The government, through both fiscal and monetary policies, saved us from economic collapse, and I laud them for it. I think it is a treacherous, perilous choice to try to save us from all economic consequence.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.