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The monthly US employment report released on the first Friday of every month is among the most widely watched and highly anticipated economic reports. As I noted in the July 17, 2009 PFW, the release is also widely misinterpreted. 

The June report released early last month showed job losses of more than 460,000 in June, roughly 100,000 more than the consensus had expected. The total number of jobs lost actually increased in June from May levels; most analysts had been looking for a further decline.

The June jobs report was the most obvious catalyst for a significant pullback in the broader market averages in early July.

This month’s report has sparked entirely the opposite reaction. The Labor Dept indicated that only 247,000 jobs were lost in July, the smallest pace of job losses since August 2008. Furthermore, prior reports saw significant positive revisions; taken together revised May and June payroll data suggests 43,000 fewer jobs were lost than originally predicted.

Given the big downside surprise in the June report, the market had been jittery ahead of the release and saw a major relief rally as soon the better-than-expected figures hit the tape.

But check out the chart below for a closer look at the current situation.



Source: Bloomberg

This chart shows the total monthly change in non-farm payrolls going back to the end of 1999. The June blip to the downside is clearly visible on the chart but this, as I’ve noted before, is entirely meaningless.
Jobs data rarely shows even trends from month to month; as you can see in the chart above, as the economy recovered from the 2001 recession there was considerable monthly volatility in payrolls data. Although the most recent economic contraction has certainly been worse than the 2001 recession from a labor market perspective, the basic pattern in non-farm payrolls is intact.

Specifically, the overall trend on this chart clearly shows that the pace of US job losses accelerated from last summer through early 2009 and has since moderated significantly.

Some will tell you that the US continues to shed jobs and, therefore, the economy can’t be recovering. But this is totally false.

The monthly decline in non-farm payrolls tends to bottom out between one and three months before the end of a recession. However, jobs growth typically doesn’t turn positive again until months after the economy exits recession.

The unemployment rate is an even less useful indicator of future economic conditions. As I explained in the July 17 issue, the unemployment rate typically peaks several months after the economy has been in recovery mode.

Bottom line: The current data remains consistent with my forecast that the US recession will end either late this quarter or early in the fourth quarter of 2009. Don’t be fooled by the naysayers who will tell you a still-weak jobs recovery will delay the turn until 2010; this view is not consistent with historical norms in employment data.

It’s equally important to point out that there’s a huge difference between a recovery from recession and an outright economic boom. As I’ve often noted, I see the coming economic recovery as a shorter cyclical move in the context of a still-troubled economic environment.

Many investors have become conditioned to the big economic expansions witnessed in the US since the 1980s. For example, from March 1991 through March 2001, the US economy expanded for 120 consecutive months. This is not only the longest expansion in US history, but is more than three times longer than the average expansion in the entire period from 1854 through 2001.

In fact, there have been only three US recessions since 1982; the average period of economic expansion has been 95 months. But the past 27 years are more the exception than the rule. In the ’70s and early ’80s, the average period of growth was less than three years.

Although the US economy will soon start growing again and the market has significant additional upside to come, the pace and duration of that growth will ultimately disappoint investors looking for a repeat of recent experience.

How to Play It

The US is likely entering a more cyclical period of growth akin to the ’70s, but the developing world is on course for an unprecedented wave of growth.

As my colleague Yiannis Mostrous points out in the most recent issue of Emerging Markets Speculator, investors can benefit from this wave of growth by investing directly in these dynamic markets.
Another sector we have been focusing on in Personal Finance is energy. Oil prices have rallied in recent years largely due to fast-growing Asian demand coupled with major supply bottlenecks; it’s becoming technically more difficult and more expensive to meet the world’s growing oil demand. 

Don’t be tempted into believing the rally in oil is a function of excessive speculation; I de-bunk this myth in the most recent issue of The Energy Letter, Don’t Buy Oil Speculation.

In the August 12 PF, now available online, we take a closer look at one of the most important but all too often ignored energy markets of all, coal. Although coal is a relatively dirty fuel, it’s also cheap and abundant and the most important fuel in key fast-growing countries like China and India.

Chinese coal imports recently surged to record levels for two straight months. And India is projected to be the fastest-growing coal importer in the world over the next five years. Australia--far and away the world’s most important exporter of coal used in power plants and coal used to make steel--is the key to this market.

Another sector we favor: technology. Tech companies have among the highest exposure to overseas earnings of any sector in the S&P 500. Meanwhile, the proof is in the proverbial pudding: Of the 55 technology stocks in the S&P 500 that have reported second quarter earnings, close to 80 percent have surprised to the upside.

Elliott H. Gue is editor of Wall Street Winners the premier monthly growth newsletter designed to manage investor’s portfolio risk. Mr. Gue examines the market sector by sector to find the industries with big tailwinds and avoid investing pitfalls. Mr. Gue uses both top-down and bottom-up approaches to search the global stock and currency markets for strong intermediate-term trends, picking investment vehicles accordingly.

Mr. Gue is also editor of Trading Floor Pro and a research analyst for Personal Finance, where he specializes in global equity and debt markets and also has broad interests in technology and sector investing.

He has worked and lived in Europe for five years, where he completed a Master’s degree in Finance from the University of London, the highest-rated program in that field in the U.K. He also received his Bachelor’s of Science in Economics and Management degree from the University of London, graduating among the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that business school.