U.S. Jobs Report Strong-But It Doesn't Contradict Recession Scenario

Today's U.S. job report was quite strong with employment up fairly strongly according to both the payroll and household surveys. Meanwhile hours worked and hourly earnings also posted significant gains.

This was interpreted by the bond market as a sign that the danger is over with regards to the U.S. economy and that the risks of a recession is diminishing. However, this overlooks that the job market is completely worthless as a leading indicator. It is in fact not even a good coincident indicator. Instead it is a lagging indicator of economic strength.

If you look at data from the Bureau of Labor Statistics, you can see that employment continued to rise during by on average more than 100,000 per month during the second half of 2000, even though GDP growth turned negative in the third quarter. By contrast, job growth remained weak -indeed negative according to the payroll survye- some two years after the 2000-2001 recession ended.

Instead this report indicates that corporate profits -which is a leading indicator of economic activity- probably fell during the first quarter for domestic nonfinancial companies as the 1.5% increase in hours worked indicate that productivity growth was probably near zero. And with wages posting strong gains, this implies a significant increase in unit labor costs. Which in turn is likely to indicate falling profits.