The U.S. economy added 163,000 jobs in July, beating consensus estimates. This recent data raised the average job additions over the last five months to 106,200. This number is just under the rate required to keep up with population growth. In other words, there has been no net job growth for several months. This compares to a much more impressive monthly rate of 252,000 for the three months from November 2011 to February 2012.
In addition, the unemployment rate rose slightly to 8.3% in July from the 8.2% reading from June.
Estimates for job growth through the remainder of 2012 are quite optimistic in our view, in excess of 170,000 each month. While this type of job growth is possible due to seasonal and other factors, we remain doubtful due to what we believe will be a continued loss of momentum in the economy for at least the next 2-3 months.
We have even begun to see softness in productivity. As discussed last month, after the first phase of revisions, U.S. GDP for 2012 Q1 remained at 1.9%. More recently, preliminary GDP data for Q2 fell to 1.5% as we had anticipated.
This time last year we warned of a global economic slowdown that would intensify going into 2013. We also warned of some earnings weakness in 2013 and reiterated this point in early 2013. As we expected, the problems in Europe have spilled over to the rest of the world via trade, financial, and commodity price linkages.
So far, the intensity of spillover from Europe has been less than that seen in late 2011. As a result, we feel that there is potential for additional spillover depending on how the crisis in Europe is managed.
In contrast, Wall Street, the Federal Reserve Bank, the European Central Bank, the European Commission, the International Monetary Fund and several other establishment bodies claimed that if the problems in Europe did not develop into a crisis, the spillover effects to the rest of the world would be modest. Again, the establishment has been dead wrong.
As the European debt crisis continues to worsen, investors have piled into U.S. Treasury securities due to their safe haven status, causing yields to plummet. Make no mistake. Treasury yields are headed lower.
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