The government’s Bureau of Labor Statistics reported September 4 that the U.S. economy created 173,000 new jobs in August, another solid month for the American jobs engine. Job gains for June and July were revised upward to a half-million for the two months.

So far this year the economy has racked up a robust 1.7 million new jobs, averaging 218,000 new jobs a month and on pace to rival last year’s 2.9 million.   

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Jobs Up, Stocks Down: Why the Disconnect?

Tue Sep 8, 2015

The government’s Bureau of Labor Statistics reported September 4 that the U.S. economy created 173,000 new jobs in August, another solid month for the American jobs engine. Job gains for June and July were revised upward to a half-million for the two months.

So far this year the economy has racked up a robust 1.7 million new jobs, averaging 218,000 new jobs a month and on pace to rival last year’s 2.9 million.

Better still, BLS also reported that the nation’s unemployment rate fell to 5.1%, the lowest in 7-½ years and about as close to “full” employment as it gets.

Bottom line: the U.S. economy is churning out millions of new jobs and the unemployment rate is signaling full employment.

But almost on cue, the stock market opened Friday down over 200 points, continuing the wild gyrations that have seen the Dow Jones Industrial Index shed over 2,000 points or 10% and the S&P 500 give up almost 200 points or 8-½ %.

These days good news for jobs translates into bad news for stocks. Jobs data snapshot the present while stock prices foretell the future. Why the disconnect? Two reasons:

One, the U.S. right now is an island of prosperity in an ocean of stagnation. China’s economy is sputtering as evidenced by its recent decision to push the Yuan exchange rate down to boost exports. And Canada seems to have entered recession in the first half of the year. Meanwhile several European countries, including obviously Greece, are grappling with economic stagnation. Investors may be betting on contagion—that in an integrated global economy the U.S. will weaken sooner or later.

Two, investors are probably guessing that good news on jobs will encourage the Federal Reserve to begin raising interest rates at its next  meeting September 16-17. Since the 2008-2009 stock market crash and economic downturn the Fed has kept interest rates near zero and pumped trillions of dollars of liquidity into the economy.

This presents us with big questions. First how much of the 5-year bull market has been caused by the Fed’s open-spigot printing of money; and second, what happens to stock prices when the Fed returns to a less accommodative monetary policy? To the extent that the Fed has driven the stock price run-up, one could expect stocks to pull back when the Fed tapers.

Put another way, Friday’s jobs report, especially the 5.1% unemployment rate, foreshadows a September rate hike and maybe the end of the Fed-driven bull market.

So we have classic good news-bad news: on the one hand the job market could hardly be better; on the other hand the stock market is tanking. Which will prevail?

All this helps us understand President Harry Truman’s famous request: “Give me a one-handed economist. All my economists say, ‘On the one hand…on the other.’” Indeed.