The stock market is clearly viewing today's economic news as a glass-half-full situation. But it's uncertain if investors are justified in being so optimistic.
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This morning, the Labor Department reported that the economy created only 138,000 new jobs in April, marking a significant drop-off in job creation compared with March, when a revised 200,000 new positions were established.
Yet despite this seemingly disappointing news, stocks went on a tear this morning. The Dow Jones industrial average soared more than 100 points in early trading, sending the Dow over the psychologically important 11,500 level. Now, the Dow finds itself only around 200 points away from an all-time high. In other words, the Dow is close to having regained all its losses from the bear market that began in 2000.
Why the euphoria? The stock market is betting that slower-than-expected job growth will convince the Federal Reserve that the economy is slowing sufficiently to relieve some of the inflationary pressures building in the economy. And if the Fed believes the economy is slowing, it might stop hiking interest rates shortly after its next meeting on Wednesday.
But these investors seem to be overlooking a key fact. The very same Labor Department report that shows job creation is moderate also illustrates that wages are growing at a faster rate than consumer prices.
In April, the average earnings for nonsupervisory workers grew 9 cents an hour on average to $16.61, the government reported. This comes on the heels of a 5-cent-an-hour increase in March and a 7-cent-an-hour bump in February.
All told, average hourly earnings are up 3.8 percent over the past 12 months. Compare that with the 3.4 percent annual increase in consumer inflation.
Average weekly pay has jumped even higher – 4.1 percent, reflecting not only the bump in pay but also a slight increase in the average number of hours being worked each week. Merrill Lynch economist David Rosenberg points out that this marks the fastest annual growth rate for weekly earnings since the summer of 1998.
Rosenberg noted in an economic memo released this morning that "we cannot dispute that this report showed wage pressures building." And if wage pressures are building, that could be construed as inflationary, which would mean the Fed would have even more reason to continue hiking rates — not less.
Ashraf Laidi, chief currency analyst for MG Financial Group, was even more emphatic.
"It was the worst of both worlds," he said, noting that today's Labor Department report illustrates an economy that is slowing yet still creating inflation.
