Growth, Then Jobs

Friday’s May jobs report was overall better than expected. The unemployment rate ticked up from 7.5% to 7.6% (an effect of the stat’s odd construction) and government employment fell slightly (continuing a long-term decline). But the big story was nonfarm payroll employment increasing by 175,000—encouraging news suggesting improving sentiment as more folks join the work force. The biggest gains in employment came in the professional and business services, food services and retail: All consumption-based industries, suggesting increased consumer demand is likely driving companies to step up hiring. Indeed, the May job gains owe their creation entirely to the private sector and confirm what we’ve believed all along—the US economy continues growing at a fine pace, and real strength gets lost in the headline numbers.

Job growth is great news, but it’s not now (nor ever) a harbinger of things to come. After all, employment is a lagging, not leading, economic indicator. For a concrete example, look no further than North Dakota. In 2012, North Dakota’s economy grew 13.4% over 2011, eclipsing second place Texas (no slouch coming in at 4.8%). This is five times faster than the national average. Unsurprisingly, unemployment in North Dakota is below 3%, thanks in large part to the fracking boom.

This perfectly illustrates how the job market works. Jobs didn’t create the growth—it was the reverse. The discovery of the abundance of shale oil and the innovation of newer extraction methods sent signals to entrepreneurial folks that capital risked in North Dakota might well be rewarded. Think of all the jobs that came about due to this bonanza—from the actual oil extractors to homebuilders and restaurants down to photographers practicing “oil field photography.”

Now don’t get us wrong—improving employment numbers can be a positive for markets, particularly because they can help sentiment. One factor behind our bullish outlook for 2013 is we believe sentiment is likely improving, helping boost stocks even higher. But it’s important to remember higher employment alone doesn’t tell you where stocks will go—it only confirms where they’ve been.