Yoshikami: Jobs Growth or Stagnation?
This month's employment report was particularly exciting given the bipolar analysis dependent on the political leanings of commentators.
Republicans focused on an increase in part-time versus full-time workers and voiced skepticism regarding the accuracy of the numbers.
Democrats expressed their view that job growth is once again returning after years of job losses. Biden and Ryan trumpeted their views in the VP debate . And Jack Welch continues to clarify his earlier skepticism of the rosy reported numbers.
There is a lesson for investors in the noise.
Half-full or half-empty is determined by political leanings. And as you read headlines, it is important to recognize that interpretation of data is very often impacted by bias and other agendas. The old adage is true: never completely believe what you read and always keep an open mind.
With that being said, here is my analysis of the jobs numbers and what it means for the economy.
The headline number of 7.8% is a surprising decrease which does suggest that overall employment is beginning to recover. But let us understand what the word 'recovery' means. The reason why the unemployment rate dropped is not so much because of an expanding economy, but instead it's because unemployed workers are now shifting towards part-time employment. Part-time employees are counted as employed when calculating the headline number.
Additionally, there continues to be many potential employees that have simply given up looking for a job and instead are returning to school or exiting the workforce because of the lack of employment opportunities. It's hard to believe I know, but if you give up looking for a job you are not counted as unemployed. Likewise, if you were once an attorney or doctor and now drive a taxi you are still considered employed.
The headline number does not reflect underemployment (taking a job that you are overqualified for). Headlines can be misleading and that is why it is important to look below the surface before one concludes what the data really means. Here are our conclusions based on today's jobs report:
- The employment picture appears to be stabilizing but not improving significantly
- The real unemployment and underemployment rate (counting discouraged workers and part-time employees) has likely remained unchanged
- The economic picture remains very cloudy, and significant employment gains based on real economic growth are likely to be at least 6 months away
You can see why the Federal Reserve has embarked on an aggressive quantitative easing policy to try to boost unemployment. Because the global economy is in pause mode as Europe spirals and China resets, job growth is difficult to come by around the world. One should not expect the U.S. economy to be exempt from employment stagnation.
(Read More: Fed's 'QE Infinity': Four Things That Could Go Wrong )
We are of the belief that the U.S. unemployment rate will likely be higher than the average than we've seen in the past; we expect a natural rate of approximately 6 1/2% to be the new typical unemployment rate. With the outsourcing of jobs to other countries because of lower labor costs and with greater efficiency provided by technology, we see no reason why the employment picture should become robust anytime in the near future.
From an investment strategy standpoint, we have adjusted our strategies based on our belief that slower growth is inevitable in economies around the world. We prefer more conservative assets such as dividend-paying equities, gold, and other more defensive positions. Our fixed income durations remain short to intermediate in length which we believe will provide the best possible yield while still protecting against significant downside fluctuation.
So as you read the headlines and listen to the controversy surrounding unemployment reports, remember that whoever you might be listening to will have their own particular biased perspective. Listen for the information and how they arrive at their judgments but don't necessarily automatically adopt their conclusions. Your opinion matters as well; blindly trusting what you hear or see is not always the best way to form an independent opinion.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.