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Posted: December 23, 2010

Economic news disappoints

Where's the job growth?

Bill Greiner

The Bureau of Labor Statistics has released the employment reports for the month of November. To cut to the chase, the release was disappointing.

During the month of November, the U.S. economy created 39,000 jobs. Additionally, the unemployment rate increased to 9.8 percent from 9.6 percent. The consensus view was calling for 140,000 jobs. Per our writings, we were expecting something in excess of 100,000. It is not good news, and is somewhat puzzling.

During the last number of weeks, we have seen report after report indicating the economy has been showing some degree of growth acceleration. Retail sales, advance home sales, business sentiment surveys and productivity gains were all signaling that GDP growth was starting to lift. While one employment report is not enough to throw that assumption aside, it is a large enough  disappointment to slow down and question how rapidly economic improvement is going to occur.

Our stand is that unemployment should fall during 2011. Consumption growth is accelerating, corporate investment plans appear to be accelerating, and the banking system is flush with cash. Conversely, the problems in Europe are real and government deficit spending needs to be brought under control. We continue to fall back on our main thoughts - as the world's investors focus on "income statement" items (GDP growth, employment trends, consumer incomes, retail and capital spending trends), the markets look attractive.

As the world's investors focus on "balance sheet" items (European banking/sovereign problems, U.S. deficit and debt problems), the markets tend to swoon. We do not believe one month of employment disappointment is enough for us to change our view.

Report Detail

As mentioned, the economy added 39,000 jobs during the month of November. The unemployment rate increased to 9.8 percent (we are assuming the number of new participants coming back into the labor force increased during the month). Temporary employment rose by 40,000. There were few standouts in the report - government shed 11,000 jobs. Construction, manufacturing and retail sectors all fell.

Health care added positions, along with education. If it was not for rises in the education and health sectors, overall employment would have increased by only 9,000 jobs. Average hourly earnings increased slightly to $22.75. Hourly earnings have risen by 1.6 percent during the last 12 months. The previous two-month revisions totaled an additional 38,000
jobs. Due to the arithmetic, we expect the unemployment rate to accelerate in the coming months to 10.0 percent.

Other Thoughts

Moving away from the employment report, Alan Greenspan was on the air recently. His comments were strong. Now that he is no longer officially attached to the Federal Reserve, perhaps his level of candor can increase.

At any rate, he spoke at some length about the issues facing the central bankers and the markets in Europe. If nothing else, Alan Greenspan may be remembered for his two-word phrases. The first that comes to mind is "irrational exuberance."

That was a phrase he first used in 1995, describing upward movements in equity markets that he believed were creating systemic risks within the world's financial system. Today, when asked
about the sovereign debt problems, the former Chairman said nations in Europe needed to behave more like Germany, which has addressed looming fiscal problems with a series of tough austerity measures that have been unpopular, but effective.

He said other countries need to start "acting Germanic." From both cultural and economic standpoints, there are strong differences between the Germanic segment of Europe and others. "Acting Germanic" may not be an option for many countries in Europe. If this is true, expect to see further economic consternation and market volatility driven by continued banking/sovereign debt concerns.

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Bill Greiner is the president and chief investment officer of Scout Investments, Inc.,a subsidiary of UMB Financial Corporation that offers investment management services for both managed accounts and mutual funds. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

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Readers Respond

Yes, 'irrational exuberance' has a certain pithiness. However, the statement of Greenspan that most sticks out in my mind is of another nature. Back in 1966 (before he was corrupted by the keys of power), he write this nugget: "This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." By Nunya Bidnez on 2010 12 23

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