October 4, 2015

A disappointing September jobs report capped off a third week of losses a rescue from a third week of losses in the stock market.  The initial reaction on Friday morning was a 1.5% drop in the SP500. Over the past several weeks, the stock (SPY) and long term Treasury market (TLT) have become little more than speculative gambles on when the Fed will raise interest rates.  Until Friday’s jobs report, the choices were mainly restricted to October or December 2015. Janet Yellen voiced a commitment to raising interest rates this year in comments (see last week’s blog) at the U. of Massachusetts.  However, the lackluster jobs report ushered in another choice – March of 2016.  By the closing bell on Friday, the SP500 had gained 1.5%, a reversal of 3% on the day and a gain of 1% in the index for the week.

Emerging markets bounced up almost 5% this week, showing that there are enough buyers who are willing to invest at these low price levels.  The Vanguard ETF VWO formed a “W” pattern on a weekly chart and strong volume.

Despite the tepid job growth of 142,000, the unemployment rate remained steady because more than 300,000 left the work force.  Probably the biggest surprise was that July and August’s job gains were revised downward as well.  I had been expecting an upward revision in August’s numbers.

The Labor Force Participation Rate (CLF) declined .2% to 62.4%.  The CLF rate measures the (number of people working or looking for a job) / (number of people who can legally work).  There is another measurement that I have used before on this blog: the ratio of (people not working or looking for a job) / (the number of people working).  Let’s call it the Inactive Active ratio, or IARATIO.

Visually, the blue CLF rate doesn’t show us much; it is a relatively monotonic data series.  In contrast, the decades long fluctuations in the red IARATIO present some useful information.  We can see a simple answer for the federal budget surplus at the end of the 1990s, when the ratio of inactive to active workers was very low. Although politicians like to claim and blame for every data point, the simple truth is that there were almost as many adults working as not working in the late ’90s. Working people tend to put in more than they take out of the kitty.  For two decades there was a striking correlation between the Federal Surplus/Deficit and the IARATIO.

At about .75, the ratio of this past recovery was similar to that of the first half of the 1980s.  In the past two years, the IARATIO has dropped to .72, a good sign,  similar to the readings of 1986, a time of economic growth.

The ever greater number of Boomers retiring over the next decade will put upward pressure on this IARATIO.  The fix?  More jobs. Jobs solve a lot of problems, both for families and government budgets.