The Jobs Report Brings Irrational Exuberance Back Into Vogue

We've grown complacent about federal austerity measures, which are still going to harm the economy.

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Very happy economist or accountant.

We must be desperate for something to celebrate.

A mediocre employment report, showing that employers added 165,000 new jobs in April, has sent the stock market to new record highs while pushing up the price of oil and generating other rallies typically associated with a big economic upswing. Investors were impressed because job creation was higher than expected, with the unemployment rate falling by one-tenth of a point to 7.5 percent. And revisions to earlier months show that job gains have averaged 196,000 per month so far this year, which would ordinarily be pretty good.

[READ: Employers Added 165,000 Jobs in April]

This is not an ordinary year, however, and there's a very good chance that anybody expecting the good news to continue will end up quite disappointed.

Sooner or later, the spending cuts known as the sequester will take an unpleasant bite out of the economy. The tax hikes that went into effect at the start of the year will sting as well. President Barack Obama and other politicians overstated the effect of those austerity measures, and some economists predicted they'll hit the economy sooner than they have. So we've gotten comfortable dismissing the risk. But the hit is coming, even if it turns out to be delayed.

Russell Price, senior economist at Ameriprise, points out that the tax hikes and spending cuts combined will take about $210 billion out of the economy this year. Last year, GDP only grew by $294 billion. So unless the underlying economy is surprisingly strong in 2013, GDP growth for the year will be a weak 2 percent or less.

A lot of economists thought the effects of the sequester would begin to show up in the April jobs report, since the spending cuts have now been in effect for two months. But there were only hints of the cutbacks. While the private sector added 176,000 jobs, for instance, the federal government cut 8,000 jobs. And the average number of hours worked declined, which could be a result of companies and government agencies furloughing workers to adjust to lower spending limits, instead of laying them off completely.

[PHOTOS: Jobless Keep Searching For Work]

The better-than-expected April report could mean the sequester will hurt less than many initially thought. Or, it might mean that companies and agencies simply haven't reacted to it yet, perhaps because they thought Congress might reverse itself after a few weeks. That now seems unlikely, so during the next few months we'll find out for real how potent the sequester is.

At a minimum, it seems likely to generate much slower job growth for the rest of the year. "Though the better than expected April report allayed some of the fears of a softening second quarter, the impact of sequestration has not yet hit the economy in full force," Moody's Analytics advised. The forecasting firm expects job growth to fall back to a range of 100,000 to 150,000 per month for the rest of 2013, which might be low enough to push the unemployment rate back up.

Other indicators are more worrisome than the latest job numbers. Factory orders dropped sharply in March, for instance, and car sales and durable goods numbers recently came in lower than expected. The Federal Reserve says it remains concerned about the slow, erratic recovery.

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A few people think the Fed's easy-money policies and other types of government intervention have created a stock-market bubble that will burst when the feds pull back. "It's a zombie stock market, pumped up on steroids," Todd Morley, CEO of the G2 Investment Group, said at the recent Milken Institute gathering of business leaders in Beverly Hills. "I just don't think it's a real market anymore."

Stocks could still go higher for a while, as long as investors continue to believe in the power of the Fed to offset other policies constraining the economy. But a couple of big disappointments could quickly undercut that confidence. So maybe it makes sense to celebrate now, before the picture darkens.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.