Last Friday, the Labor Department revealed that the economy gained 165,000 new jobs in April. While this figure might not seem impressive at first glance, the mainstream media celebrated the news as it was ‘better than expected.’
On Wall Street, the response was euphoric. The Dow Jones Industrial Average surged by 142 points, and the S&P 500 soared past 1,614, reaching a new all-time high. From a distance, everything seemed to be aligning perfectly for a thriving economy.
However, a lingering skepticism obscured this optimistic assessment. Why does a jobs report that barely matches the pace of population growth elicit such exuberance from investors? Shouldn’t the bar be set higher before we burst into celebration?
As the excitement settled, a critical reality became apparent: the figures simply don’t match the narrative. In April 2008, 62.7% of working-age Americans were employed, but by April 2013, that number had dropped to 58.6%. With fewer people in jobs, shouldn’t the unemployment rate be on the rise?
It turns out, the answer is surprisingly no. The current unemployment rate stands at 7.5%, but the disappointing truth lies in the fact that 9.5 million Americans have exited the workforce during President Obama’s tenure. Strangely enough, if individuals aren’t working and aren’t looking for work, they aren’t counted as unemployed.
Investor Complacency
No matter how government statisticians calculate these numbers, the enduring reality is that many people remain unemployed because job opportunities are scarce. In fact, if we were to calculate unemployment using methods from before 1980, the current rate would be at an astonishing 23%. That is a stark contrast indeed.
A 23% unemployment rate surely signals profound economic distress. Yet, the stock market continues its relentless climb as if a genuine boom is in full swing. Although quantitative easing has failed to generate the promised employment surge, it has successfully masked the economy’s shortfalls with inflated stock prices.
At this juncture, the Federal Reserve’s influx of cheap money is overshadowing weak economic indicators pointing to slow growth. The recovery has been painfully sluggish and has yet to gain the momentum it requires. At this stage, we might even be approaching another recession.
Without this steady stream of new money flowing into financial markets, stock prices would likely tumble. Nonetheless, investors have grown accustomed to the Fed’s interventions, becoming complacent about market signals and business cycles.
Who knows? Perhaps the stock market boom could continue indefinitely, though that would defy historical patterns. Yet, we are experiencing an unparalleled level of market intervention that we have never encountered before.
Another All-Time High
The Fed cannot print money indefinitely. Sooner or later, one would assume, they will have to halt or at least reduce their rampant spending. But what might prompt the Fed to stop expanding its balance sheet?
According to Fed Chairman Ben Bernanke, he aims to cease creating $85 billion each month for purchasing Treasuries and mortgage securities once the unemployment rate dips below 6.5%. There are also other potential triggers that could lead Bernanke to abruptly alter course.
For instance, a currency crisis induced by the Fed’s mass money debasement policies could compel a shift in strategy. A swift devaluation of the dollar, threatening the stability of middle-class savings, would bring an end to quantitative easing. In such a scenario, the temporary boost given to stocks would vanish, leading to a swift decline in share prices.
In any case, we suspect it won’t take a currency crisis for stocks to deflate. The current market has been pushed to a precarious brink. Just a single negative economic report or an unforeseen crisis from Europe could trigger widespread panic.
Of course, the market may continue to ignore bad news until it no longer can. Until then, new all-time highs may continue to be celebrated, as we witnessed recently. We’ll watch this spectacle unfold, curious about the consequences of what lies ahead.
Sincerely,
MN Gordon
for Economic Prism