Friday, June 04, 2010
Anyway you look at it, the jobs report released Friday was flat ugly. Almost all the new jobs created were government census workers. Even though the unemployment rate ticked lower to 9.8%, the lack of new jobs in the private sector was an unpleasant surprise to economists and stock traders. Stocks fell sharply and bond prices rallied. We believe the stock market's reaction to the news is overdone, but it is clear that the US economy is still limping along and, thus, employers remain very reluctant to add new jobs. Indeed, if you look at job growth over the last decade no one should be surprised at the weak US job data. According to economist, Ed Yardeni, since 2001 nearly 90% of all new jobs have been created by small businesses. So, if you want to know why job growth is so paltry, you only have to consider the current mind-set of small businesses. It is not a pretty sight. Small businesses will take a direct hit from the increased costs associated with the Obama administration's government health-care and financial reforms. In addition, many small business people will take the full body blow of the tax increases that the president and his Democratic colleagues have proposed. Finally, consider that as a result of the increased scrutiny of banks by federal regulators that it is now more difficult for small businesses to get bank loans for expansion. When you put it all together, it becomes clear why small businesses don't feel particularly optimistic about the future, and why, in the current political and business environment, that their attitude is not likely to change. This pessimism is made worse as small business people watch as industry after industry is hauled in before Congressional inquisitions and accused of being a scourge on society. The question we hear over and over from our small business clients is, "Where is this all going to end?" While small businesses are taking their lumps, we believe that larger companies are thriving. The reason is simple, the world economy is growing faster than the US economy. The developing nations of the world are growing two or three times as fast as the developed world. Large multi-national companies, by their very nature, are taking advantage of this world wide growth. Additionally, they have access to the capital markets, which means they are not reliant on the banks to fund their growth. Finally, they have corporate staffs to sort out and attempt to understand the thousands of pages of new regulations that are coming out of Washington. As we have written in previous blogs, we are optimistic that large corporations will continue to show very strong earnings growth. As long as this trend continues, we believe stock prices will eventually calm down and begin to follow the rising trend of higher earnings.