In the Nation's Interest
The Employment Report and the Stock Market
This morning's November employment situation report seems to be all good news. The labor market's status in October was good, and November shows little change. Nonfarm payroll employment is up a moderate-to-robust 155,000 jobs, which given the unchanged very low 3.7 percent unemployment rate is more impressive than it might seem at first blush. With the unemployment rate already so low, and with the young population growing slowly while the number of people on the brink of retirement is large, there would seem to be few idle potential workers to fill those jobs, making the job growth noteworthy. Meanwhile, average hourly earnings are up by 3.1 percent over the year. It appears that wage growth is improving somewhat - finally - after the long, slow climb out of the crater of the 2008 financial crisis.
And yet, the stock market this week, including today, has gyrated wildly - and mostly in the down direction. And the Wall Street Journal report this morning that the Federal Reserve Board of Governors is considering a more-cautious upward path of interest rates for next year than had been in the cards. How can such a sold-but-steady jobs report coincide with stock-market anxiety wracking the nerves of the Fed?
There are two things going on.
First, in our rapidly opening economy in a rapidly integrating world, U.S. trade policy appears troublingly erratic. The President and Congress are playing a game of chicken over our NAFTA trade agreement with two of our largest trading partners, Canada and Mexico. The President threatens to terminate NAFTA before Congress is willing to ratify the President's successor U.S.-Mexico-Canada Trade Agreement.
Meanwhile, the President and China's leaders are in an angry spat over our trade relationship with the world's most-populous country. Confident statements have turned to recriminations, based both on failing trade negotiations and on the U.S. arrest of the head of a Chinese technology company in Canada on claimed national security grounds. Just when the United States most needs the cooperation and support of our allies and fellow advocates of an open and fair world trading system, we may pay a dear price for our withdrawal from the Trans-Pacific Partnership agreement - which was intended to confront China with just such a principled alliance.
And then there is the stock market. Economics and finance tell us that shares of corporate stock are at bottom shares of expected future corporate earnings, and so the ratio of share prices to earnings - the "P-E ratio" - is perhaps the best market indicator. Of course, expected future earnings are a subjective forecast, and so the real-world ratio of share prices to actual current earnings tells us a great deal about where market participants expect earnings to go. The long-term (since the late 19th century) average of the P-E ratio is in the range of 14.75 to 15.75; as of just a few days ago, the P-E ratio was 22.0. Some might interpret the current market as high in price, even "priced for perfection," and therefore highly vulnerable to any bad news. The putative trade war was just such an alarm bell.
A big drop in the stock market would be its own bad news. People and institutions who own stock (directly or indirectly) rely on its value to support their future incomes. If the market falls substantially with little promise of bouncing back soon, those people try to cut back on current spendi9ng to restore their lost wealth and future income. Such spending reductions slow the economy - and increase unemployment.
So this month, the employment report is not the headline economic story. Employment a few weeks ago is history if the economic outlook for next month is in flux. Will U.S. industry lose sales going forward in a trade war? Will the economy lose steam after an unorthodox big tax cut in an already-healthy economy peters out? Those are the questions that will matter for the job market going forward.