By: Dividend Sensei
Today was the release of perhaps the most important economic report of the month, the jobs report for December. The reason this matters so much is because the US economy is primarily driven by consumer spending, and so a strong job market is essential to maintaining both consumer confidence as well as buying power. In addition, stronger consumer demand is essential to spurring increased business investment, especially into productivity boosting capital expenditures.
Today Automatic Data Processing (ADP), America’s largest payroll processor released its estimate of private sector job creation, which it estimates at 153,000. That’s slightly below the 168,000 that analysts were expecting, but is also understandable. After all, with unemployment at 4.6% we’re approaching full employment and so naturally you’d expect new job creation to slow.
However by far the two most important aspects of the report to watch are the labor participation rate, and wages. Usually at this point in the economic cycle, (full employment), wages should start to rise, as companies are forced to compete for fewer and fewer potential workers. In recent months year-over-year wage growth has come in at 2.5%-2.7%, which though above inflation, is a pretty anemic rate.
If we see wage growth start accelerating, especially above 3% then hopefully not just will consumer confidence and spending rise into 2017, but also millions of discouraged workers who dropped out of the job market will be incentivized to return, further boosting spending and demand. That would give companies reason to invest back into their businesses, which would boost productivity (which has stagnated in recent years), and allow the Fed to raise interest rates more gradually.
Historically rising interest rates have been a very important component of economic reversals, so the longer we can gradually raise rates the longer the economic recovery and earnings growth can continue. That in turn could help keep the current bull market alive. Now, while I personally look forward to the prospects of a bear market, so that I can put new capital to work at more attractive prices, and yields, a rising market does help the nation as a whole.
That’s because most Americans, (as well as pension funds) count of a rising market to help grow their retirement funds, and with so many baby boomers approaching retirement, the last thing that millions of Americans need is a market crash at this time. That’s especially true since, after the pain of 2008-2009 many people have been understandably skeptical about this rally, and chosen to sit it out.