The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Short Term Myopia

The most watched economic data point has always been the monthly “jobs report” published by the Department of Labor on the first Friday of each month.  Today, that report was just GREAT!

Last month, 271 thousand jobs were created, far more than the 182 thousand that was expected.  The previous two months were revised higher by another 12 thousand jobs.  The traditional unemployment rate dropped to only 5%.  The more important U-6 level of unemployment, which includes those forced to take part-time jobs when they want full-time jobs, fell to 9.8%, the lowest in seven years.

The reason this data point is so closely watched is that it is thought to be the best “real-time” indicator of the economy.  In an economy where almost 70% of all spending is spending by consumers, the health of the consumer is critical, and that depends on the health of the job market.  Therefore, a good report should push the stock market higher, right?

In a normal economy, that would be true.  When the report was released this morning, Dow futures quickly dropped 40 points – why?  Because good news is bad news, when the stock market is obsessing over the Fed raising interest rates.  The Fed’s job is to depress both unemployment and inflation.  If unemployment goes too low, many economists believe that inflation will result.  The Fed must balance both priorities.

It is time for the Fed to “normalize” interest rates and begin raising them.  Unfortunately, that pushes the dollar up, which hurts our exports and our biggest industrial companies.  That short-term reality scares the market.  I expect the market will drop dramatically if the Fed does raise rates next month, before rebounding.  Logic only prevails in the long-term, not the short-term.

A great jobs report should be enjoyed, not feared.  So . . . ENJOY!