While the labor market has stabilized, job growth in the United States remains pitiful.
While August’s payroll report was unambiguously bad, and confirms the general deceleration in the economy, the labor market still looks stronger than it was three years ago, and much stronger than it was two years ago.
Today, job growth is about 1% above year-ago levels. In contrast, by September 2008, non-farm payrolls were already contracting by 1% year over year, and by June of 2009, the number of non-farm jobs in the US was nearly 5% below where it was a year earlier. This was the worst contraction in non-farm jobs in the post-WW II period.
So while job creation certainly decelerated this past August, job growth year over year is still right about where it has been since February. That’s the good news.
The bad news is that wages are falling, and they look particularly weak when compared with rising prices. For example, hourly wages are growing at less than 2% year over year. When you compare this to inflation of around 3.5%, there is a 1.8% gap between what hourly workers are making and the pace at which prices are rising. This is the biggest such gap since 1991, when there was another jobless recovery. This means that low- and middle-income consumers are now losing purchasing power at the fastest pace in 20 years.
So far, consumers have been able to deal with the wage decline by drawing on savings. This can continue for a bit longer but obviously not forever.
The bottom line: Unless wage growth picks up in the near-term, which is unlikely, consumption will have to fall. I continue to hold an underweight view of US retailers as they will suffer the most if consumption drops.
Call #2: Australian equities are starting to look compelling again.
Australian valuations look much better than when I went neutral on the country earlier this summer.
Australia also has a strong fiscal balance sheet and little debt. In other words, it is not suffering from the same type of sovereign debt problems plaguing Europe, the United States and Japan. On the downside, the Australian economy is very exposed to global growth. For now, given rising concerns about the fragility of the recovery, I’m not changing my view of Australia.
Still, while the global macro environment continues to be uncertain, there are already some opportunities in developed Asian equities. I currently hold an overweight view of both Singapore and Hong Kong. Although Hong Kong is still struggling with stubbornly high inflation, valuations there are compelling. Like Australia, both Hong Kong and Singapore are also not part of the current global sovereign debt crisis.
If I do see signs of stabilization in the global recovery, I will likely upgrade my view of Australia. Then, the iShares MSCI Pacific ex-Japan index fund (EPP), could be a good instrument for investors to consider. This fund gives exposure not only to Australia but also to Hong Kong and Singapore.
Disclosure: Author is long EPP
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country and narrowly focused investments may be subject to higher volatility.