December 10, 2017 Full Employment

Risk/Reward Vol. 374
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

Another stellar week in stocks.  And why not?  Although all of the contours of tax reform have not been finalized, the most likely amendments provide a boon for Corporate America.  According to Merrill Lynch the overall tax package is expected to provide a 14% boost in earnings to the stocks comprising the S&P 500.  Since stocks are priced in part on a price to earnings ratio, a 14% boost in anticipated earnings should result in a 14% rise in stock prices assuming multiples (currently 19.8 times projected earnings) remain the same.  This anticipated boost is IMHO the cause of the most recent spike in the indices.

Also helping is the continuing good news on the employment front.  Unemployment is at 4.1% which is well below what economists once believed was "full employment."  But how relevant is that unemployment rate?  How can we be below "full employment"?  Peek behind the numbers.  The unemployment rate only measures the percentage of those currently participating in the job market who are without employment.  Not measured are the 40% who choose not to participate.  When they are added to the mix, one sees that the total employment rate is still down 2% from 2007.  More striking is the fact that in the critical age bracket of 25 to 54,  the rate of total employment is down 1.3% from 2007.

How come?  In the upper age brackets, Baby Boomer retirements are contributing.  But the numbers below retirement age are a direct result of overly accommodating disability benefits.   In 1990 fewer than 2.5% of working age Americans received disability.  In 2015, the number stood at 5.2%.  That's right, one in 20 workers is on the dole.   More shocking is the fact that 35% of disability beneficiaries (the largest group) claimed that a mental disorder precluded them from working.  That's crazy.

The above statistic is why most market watchers focus on wages, not unemployment.  Conventional wisdom is that wage increases are the key to economic growth.  Higher wages mean more disposable income which means more consumption which means more production/economic growth.  This number has been anemic with wages growing only 2.5% on an annual basis.  Why remains a mystery to the economists at the Fed who still slavishly adhere to the Philips Curve about which I have written in the past. See Vol. 367 Riskrewardblog

There may not be an edition next week.  Barb and I are headed to Colorado.  We are skiing a few days in Keystone and then going to Denver to spend some time with Abby and her family.  Speaking of Abby, if you have not followed her exploits you are missing out on a great story of entrepreneurship.  Check her out at  abbylouwalker.com  and check out her product at vivianlou.com.  Her book "Strap on a Pair---A Middle Aged, Middle Management, Middle Class Mom's Quest for Something More" is a triumph and makes an excellent stocking stuffer.