Markets paced the floor this morning… like a man condemned awaiting word on his final appeal.
For the December unemployment report was due out at 8:30.
A poor jobs report would send stocks spiraling down the greasy pole — again.
The market staggered into 2019 off its worst December since the Great Depression. It is also off to its worst start in 19 years.
Could it absorb another blow?
Economists as a whole forecast 176,000 jobs.
What number did the report actually reveal?
312,000 jobs — a “blowout” number — and the largest monthly increase since last February.
We were also informed that American wages increased a gorgeous 3.2% over the previous December.
Only once since April 2009 has this 3.2% year-over-year increase been equaled.
And the sweet scarlet treat atop the sundae:
The unemployment level increased from 3.7%… to 3.9%.
Come again, you say?
How in the name of all things holy is higher unemployment good news?
For this reason:
It means more Americans are entering the labor force.
If they cannot secure immediate positions, they are counted among the unemployed… and the unemployment rate increases.
In December, 419,000 previously idle Americans volunteered for duty.
And the labor force participation rate increased to 63.1% — up from November’s 62.9%.
Wall Street went and had itself a day at the races…
The Dow Jones stormed back 747 points today.
The S&P surged 84.
The Nasdaq leaped 275 points — a thumping 4% rally.
(The unemployment report alone does not account for today’s raucous numbers. Answer below).
From the cheering section rose exultant gloats and howls today…
“The far-bigger-than-expected 312,000 jump in nonfarm payrolls in December would seem to make a mockery of market fears of an impending recession,” beamed Paul Ashworth, chief U.S. economist at Capital Economics.
“What recession?” mocked Stu Hoffman of PNC Financial.
Jared Bernstein — former chief economist for Joe Biden — says it “looks like the jobs market didn’t get the recession memo.”
But let us dispatch a recession memo of our own…
As we have illustrated before, an unemployment rate below 4% is no cause to celebrate.
The proof is clear as gin… and every bit as stiff:
Recession is never far behind when unemployment sinks below 4%.
U.S. unemployment dipped beneath 4% last May.
Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com derangement.
The economy was in recession by March 2001 — less than one year later.
A similar schedule would put this April on recession watch.
Before 2000, unemployment had previously fallen below 4% in December 1969.
The economy was sunk in recession shortly thereafter.
Do we stretch the facts to fit into a theory?
We do not.
Nicole Smith is chief economist at Georgetown University’s Center on Education and the Workforce.
If we look historically at other times when the unemployment rate has fallen below 4%… what we find is that the low unemployment rate is often associated with a boom phase just before a recession. It’s almost a precursor for a recession or a precursor for another slumping economy.
Perhaps you are unconvinced.
We therefore hammer you upon the head with the following evidence — a chart giving the history since 1950.
On each occasion the unemployment rate fell below 4%, it reveals, recession was on tap:
Of course… recessions are not always occasioned by unemployment rates below 4%.
But once again, the chart proves it beyond all cavil:
When the official unemployment rate sinks beneath 4%… recession is close by.
In pleasant reminder, unemployment presently hovers at 3.9%.
But why should recession rapidly follow peak employment?
Mainstream economics equates extremely low (official) unemployment with an “overheating” economy.
Central banks must therefore raise interest rates to lower the temperature, to bring the business under control.
Our own central bank has been following the operator’s manual.
But instead of slowing things down… the clods end up slamming the engine into reverse.
As the following chart informs us, rising interest rates preceded each U.S. recession since 1950:
Confirms analyst Jesse Colombo:
Economic recessions, financial crises and bear markets have occurred after virtually all Fed rate hike cycles, and there is no reason to believe that the current one will be an exception.
Which brings us now to Mr. Jerome Hayden Powell, chairman of the Federal Reserve System…
He appears to be a man with a bit between his teeth.
He has seemed determined, that is, to increase interest rates at any excuse.
Last month, for example — as the stock market was plunging into correction, no less — he went ahead anyway.
Many analysts believed the continued stock market horrors would back him off.
But will today’s go-go jobs report encourage him to press ahead?
MarketWatch on Powell’s dilemma:
On the one hand, the markets are reflecting fears of a deceleration in activity, but more fundamental sources of information on the economy show the danger of an overheating economy remain present.
“This will be very difficult for Powell to reconcile,” warns Carl Tannenbaum, chief economist at Northern Trust.
But what does the man himself have to say?
Powell addressed the American Economic Association this morning.
His comments suggest a new flexibility…
He said he is “prepared to adjust policy quickly and flexibly.”
What about the balance sheet?
We contend that quantitative tightening (QT) has throttled markets far more than a series of pinprick rate hikes.
Last month Powell said QT was running “on autopilot,” a remark that sent stocks careening.
The chairman said this morning the Fed is “listening carefully” to markets.
He further pledged to announce a halt “if needed,” adding, “We wouldn’t hesitate to change it.”
By sheerest coincidence… the Dow Jones jumped 400 points following the remarks.
We can only come to one conclusion:
The Federal Reserve will never truly “normalize” its balance sheet — despite all gabble to the contrary.
Wall Street will simply not allow it.
But it will not be enough to keep the show going.
We stand by our 2019 forecast:
Dow 18,000 by year’s end.
And recession — just look at the unemployment rate.
Managing editor, The Daily Reckoning
Source: Daily Reckoning