In the Eyes of the Beholder
Tim Phillips, CEO – Phillips and Company
For the last four years I’ve believed that in order for the economy to improve, we must at least see an improvement in jobs and income. Depending on the lens you choose to look through, it appears we might be seeing just that.
Bloomberg reported the following about improving incomes:
Wages and salaries in the third and fourth quarters grew a combined $197.3 billion, the most since the six months ended March 2007, according to revised Commerce Department figures released Feb. 29.
Certainly that is encouraging since wages underpin consumption. Another welcomed improvement was the increase in the savings rate to 4.6% in the prior 3 months from an initial estimate of 3.9%. This increase in savings could suggest two things (depending on the lens you choose to look through):
1) It could be a sign that consumers are becoming more cautious in the short term; or
2) Consumers are replenishing their savings and now they are more able to spend
On the jobs front we have seen a steady improvement. As of January, the unemployment rate has dropped to 8.3% from a peak of 10% back in October of 2009. Focusing on this lens, unemployment appears to be improving.
On the other hand, looking at unemployment through different “lenses” may not give you the same picture. As of January, the Bureau of Labor Statisitics U-6 Total unemployment which counts the number of people that are unemployed, underemployed and are discouraged and stopped looking (but still want to work) was reported to be at 15.1%. Looking at more of a participation lens, the participation rate was 63.7% well below the 66-67% rate that was normal over the last 20 years. However, when considering the participation rate you have to place some emphasis on a demographic lens which points to a number of people that do not want to find work or choose to retire.
To get a better picture, we need to break down the workforce participation rate by age to determine if the drop in the rate is from an aging population or discouraged job seekers.
Here is how Barclay's sees it:
"Of those who dropped out of the labor force since Q4 2007, only 34.5% are classified as wanting a job, and only 14.7% want a job and are of prime working age (ie, 25-54)…The fact that the majority of those who fall in the “no longer want a job” category are in the 55+ age bracket suggests a significant move into retirement. This is consistent with the rise in the proportion of the population receiving social security benefits for retired workers.”
Through this lens, it appears there are significant structural changes at work in our labor force that will not change as the economy improves. These changes could create a different optic when we look for cyclical trends.
In light of what appears to be an improving picture for both jobs and income the question arises, can the market continue to trend higher? The answer is, it depends.
If you look at valuations from a yield perspective then the answer could be yes.
The next question is do we trust our vision? We have been "head faked" in April of 2010 and again around the same time in 2011. There are plenty of things that can blur our vision: European financial crisis, expiring government programs, and US fiscal problems. Recent headlines about record high gas prices could also begin to cloud our vision. The rule of thumb among economists is that a 25-cent increase in gas knocks $25-$30 billion off consumer spending in a year and lowers economic growth by 0.2%.
Year to date, stock market volatility has been extremely low, it might begin to pick back up as we head into summer. Remember, volatility is trouble to some and a necessity for others to generate outstanding returns, but I guess that too is all in the eye of the beholder.
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Tim Phillips, CEO – Phillips & Company