Investor Warning: Job Creation Data Fuelled by Cheap Money

By: InvestmentContrarian

Sasha Cekerevac writes: The latest monthly employment data had a positive headline; a stronger than expected job creation number. However, looking at the core information, there remain significant concerns regarding the U.S. economic recovery and job creation specifically.

For February, job creation for non-farm related payrolls totaled 236,000. This number was far higher than expected, giving a boost to the stock market. (Source: “Employment situation summary,” Bureau of Labor Statistics, March 8, 2013, accessed March 8, 2013.)

One might tend to think the economic recovery is going full steam ahead. I would urge caution, however.

To begin with, job creation data from the Bureau of Labor Statistics is notorious for large revisions. This latest report shows just how volatile this job creation data really is.

The Bureau of Labor Statistics has revised job creation data for January from 157,000, down to only 119,000. That is a huge revision in percentage terms, creating difficulties when calculating whether or not an economic recovery is occurring.

My biggest worry for a sustained economic recovery is the continued decline in the participation rate. This is the number of people who are active in the employment market. People who have given up looking for work drop out of this data, which is why this level continues to decline.

The current seasonally adjusted participation rate of working age people is 63.5%. This is the lowest level since September 1981. (Source: “Payrolls Surge as U.S. Jobless Rate Falls to Five-Year Low,” Bloomberg, March 8, 2013, accessed March 8, 2013.)

This means that a huge amount of people have given up looking for work and are not active participants in the economic recovery. The job creation machine that should be the American economy is not creating enough positions for all of our citizens.

The real worry is how much of this economic recovery and job creation has been boosted by the stimulus policies of the Federal Reserve. If the latest job creation numbers are purely from additional monetary stimulus, once the Federal Reserve begins to withdraw from the market, we could see a failure for the economic recovery to continue.

Look at the two of the strongest sectors: housing and automotive sales. The economic recovery in these two sectors is clearly driven by the Federal Reserve’s monetary policies.

While over the short term, the job creation and economic recovery are positive, I don't believe they are sustainable without the Federal Reserve. This is the problem; we need to get a real, long-term structural economic recovery without a central bank trying to inflate various sectors.

Sure, as long as the Federal Reserve continues pumping money, I think both the automotive and home industries will benefit. But what happens later this year or next year when we hear of a possible reversal in monetary policy?

I don’t believe housing or automotive sales can be generated at the current pace if interest rates rise. The economic recovery will have significant issues, as will job creation, once the Federal Reserve stops influencing the market.

We all want job creation and an economic recovery as soon as possible. However, I believe we must also balance short-term gains versus long-term costs.

The economic recovery that's being built for job creation over the next several decades needs to be structurally sound. Much like a house built with concrete is stronger structurally than a house built with straw.

If this job creation is based purely on the Federal Reserve’s policies, this cannot last forever. At some point, the economic recovery will fade, as will job creation.

Investors in the housing industry as well as the automotive industry should continue to see companies in these industries have strong earnings and revenue for as long as the Federal Reserve keeps monetary policy stimulus very easy.

However, I think investors in both of these industries should be very concerned in the second half of 2013, as these stocks will be extremely vulnerable.

Once the discussion of monetary policy tightening begins, I believe both automotive and housing-related stocks could suffer a significant decline. In fact, the fall of 2013 could be extremely dangerous for all stocks.

Source:http://www.investmentcontrarians.com/rece...

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

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