Silver Lining in May's Jobs Report

by John M. Curtis
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Copyright June 4, 2012
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             Expecting a downward revision to first quarter Gross Domestic Product, May’s jobs report should show a net gain in non-farm payrolls of 125,000-150,000 jobs. ADP’s payroll report anticipates tomorrow’s Labor Department stats showing that unemployment held steady at 8,1%. “Today’s ADP report absolutely reinforces the idea that for whatever reason, employment growth has decelerated as of late,” said Dan Greenhaus, chief global strategist at Manhattan-based BTIG Financial. Geenhaus knows of course that sovereign debt problems in the Eurozone, especially the much-dreaded exit of Greece, continue to weigh on Wall Street. Wall Street’s Dow Jones Industrial Average has lost over 600 points or about 5% since hitting 13,000 Feb. 21. Republican presidential nominee former Massachusetts Gov. Mitt Romney wants to hang every global economic problem on President Barack Obama.

             Europe’s sovereign debt problems, especially the destitution of most Eurozone banks, present real problems for the global economy. While Germany continues to hum along, the rest of the Euozone, especially Greece, Portugal, Spain, Italy and Ireland teeter on insolvency, due mainly to an over-valued euro. While the euro, now trading a about $1.23, continues to reach parity with U.S. dollar, there’s growing recognition that the common currency may be on its way out. Unwinding the euro, returning to sovereign currencies, sends shockwaves in U.S., European and Asia stock markets. Most companies watching the global sell off in equities have become gun-shy to continue the expansion that netted the U.S. economy 4 million jobs since June 2010. Friday’s Labor Department Report, while under what most economists want, shows remarkable resilience, considering events in Europe.

           Whatever problems exist in the U.S. labor market, they’ve proven remarkably stable considering Europe’s meltdown. With so much globalization, including the current economic slowdown in China, Europe’s sovereign debt problems present real challenges to Wall Street and, ultimately, U.S. GDP. Romney likes to blame everything on Barack but the country has a short memory of how bad things were in the Republican administration of George W. Bush. Speaking in Tampa Monday, Mitt, a former venture capitalist at Bain Capital in the 1990s, blamed the mess on excessive government spending. His solution to stimulating the economy makes no sense: Slashing the federal establishment. If Mitt gets his way, he’ll balance the government’s books on the backs of federal workers. Federal Reserve Board Chairman has warned both political parties about slashing the federal budget.

                 Given election-year politics, each side seeks to twist economic news to its advantage. While it’s tempting to blame one side or another, it’s helpful to remember that neither side had anything to do with Europe’s financial crisis. “The risk is high that the labor market will remain weak over the summer months as uncertainty over Europe and our own ‘fiscal cliff’ is build,” said Diane Swonk, chief economics at New York-based Mesirow Financial. Whenever Europe gets its act together, it will have an immediate positive impact on Wall Street. Multinational companies are reluctant to restart the hiring binge that netted over 4 million jobs since June 2010. No one likes sluggish growth. “We’re on the edge of barely acceptable job growth,” said Mike Santoli, senior editor at Barron’s and author of the “Streetwise” column knowing that without Europe’s problems, the U.S. economy would be fine.

             Adding 125,000 to 150,000 jobs in May is a major victory considering what’s happening in Europe. Struggling Eurozone countries, led by newly minted Socialist French President Francois Hollande, want pro-growth policies in Europe, not the austerity-driven ones pushed by German Chancellor Angel Merkel. When the euro launched in 1999, it promised unparalleled prosperity and a common destiny for European countries. Currency traders drove the euro through the roof, inflated its value, making it unfeasible in less export-driven Eurozone countries. Unlike the U.S. Federal Reserve Board that rescues U.S. financial institutions in crisis times, the Frankfurt-based European Central Bank has held struggling Eurozone countries hostage, refusing to print more currency, spread the wealth, placing the debt burden on squarely on Germany and other solvent countries.

             If tomorrow’s Labor Department report shows the nation’s unemployment rate holds steady at 8.1% and May’s jobs report adds about 125,000 to 150,000 jobs, Wall Street should jump-for-joy. Given the Eurozone’s financial crisis, adding substantial numbers of jobs shows resiliency in the U.S. economy. Once Europe gets its act together, Wall Street will once again leap forward, giving publicly traded companies the cash needed to add to payrolls. As long as markets sell off, companies will continue to belt-tighten, much the way consumers open their wallets when employment improves. “Whatever really comes out in the wide range of expectations, [for payrolls] is not going to disturb the narrative of ‘slow growth at unsatisfying levels,’” said Santoli, expecting slow growth moving forward. When Europe solves its problems, growth will speed up on both sides of the pond.

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