For a long time we talked about the economy being in a Goldilocks state: growth was strong enough to drive corporate profits higher but not strong enough to force the Fed to get aggressive. 2018 is shaping up to be the year Goldilocks finally turns into the fairy tale it was always doomed to become that.
Higher interest rates have put pressure on stocks and credit, to be sure. But also the tight economy is putting pressure on costs, from labor to raw inputs, which is making earnings growth tough. So how tight is the economy, and what are the consequences as it get tighter? It is through this lens that readers should interpret today's jobs report. Here's my take.
Headline job gains
The Bloomberg economist survey was calling for 192,000 net hiring in April, so the actual at 164,000 is a small miss.
That is up from an original estimate of just 103,000 in March which in turn was down from 326,000 in February, which should all just serve as a reminder not to get worked up over any given month's number.
Somewhat faster or somewhat slower job growth doesn't really matter much to the Fed at this point. It is all about how tight the labor market is. Ostensibly if we're growing jobs at a 200,000/mo pace, that eats up available slack faster than at a 160,000 pace. However the real uncertainty is around how much slack is left, if any. The pace of job gains doesn't really illuminate that question at all. To get at that question...
Wages really the key
The expectation for Average Hourly Earnings (AHE) was +2.7%. Yet the number came in at 2.6%. The mystery of why headline wages aren't showing more acceleration continues. Not surprisingly the bond market seems to be taking this as good news, and perhaps this does take some pressure off the Fed. However I'd be careful over interpreting this data.
Anyone who has been listening to earnings calls this month has heard company after company warn about rising input prices, labor shortages, and higher transportation costs. Normally I'm not one to favor anecdotal evidence over hard data, however in this case I'm going to make an exception. Companies are telling us the economy is tight, not just a few companies or in select sectors, but more or less everywhere.
I'm not sure why this isn't translating into the AHE number moving higher. I suspect there is something about the mix of who is entering the labor force vs. who was there before that is depressing this measurement. Regardless of the explanation, we should remember that the Fed is hearing these same kind of reports from their business contacts. I don't think they are going to ignore that evidence just because the aggregate wage figures are a couple tenths lower than they'd expect.
I think trade/China issues are going to be more impactful on stocks today than this jobs report, which makes interpreting the market's reaction a bit tricky. However bonds were up just before the number and are not much cheaper changed since, so it seems bonds are reacting more risk off to trade data than really moving on the jobs report.
The Real Money site is meant to give readers insights into what investment pros are doing in the markets. Often we are giving you specific trade ideas. I for one continue to like curve flatteners and think longer-term interest rates are more likely to fall than rise over the next several months.
However, let me leave you with a big picture thought. You should resign yourself to a simple reality: the Fed will tighten money too much. They will not pull off a perfect landing. I don't know when exactly money will get too tight, nor do I know for sure how much damage the tight money condition might cause. However if there is something about your portfolio that isn't robust to a near-term recession, an inverted yield curve, or a period where getting debt funding in the capital markets is difficult, then I'd rethink your portfolio.