Jobs Report Increases Concern of Jobless Recovery.

Farrar:  Andy Foldenauer joins us now from RBC Wealth Management for analysis of the business and financial news.  He's sitting in today for Brian Ford.  Good morning, Andy.

Foldenauer:  Good morning, Wayne.

Farrar:  Well, the U.S. stock markets finished higher for a third week in a row last week, but the highlight for the week, undoubtedly, was the July employment report.  What's your perspective?

Foldenauer:  Yeah, aside from a market rally on Monday, you know, the market sat on its hands for much of the week, awaiting this past Friday's July employment report, almost as if the world could change on a dime upon its release.  The report came in slightly below expectations, indicating more government jobs were lost and private sector job growth was sluggish.  You know, the unemployment rate stayed at 9 1/2%. 

Quite candidly, Friday's employment report told Wall Street what Main Street already knows, that the job market is lousy.  You know, keep in mind that the country lost roughly 7 1/2 million private-sector jobs from December of 2007 through June of 2009, so while we have seen private-sector payroll growth increase in 8 of the past 9 months, you know, the pace of increase is minimal and almost immaterial when compared to the millions of jobs needed to get back to even.

The current rate of job growth is eerily similar to the two previous post-recession recovery periods of 2001 and 1991; both of those time frames are known as 'jobless recoveries' because, you know, private sector employment growth was either anemic or non-existent in the first couple of years of those recoveries.  So while some progress has been made, this economy has a long, long way to go until millions of private-sector jobs are created and consumer spending rises to more favorable levels.

Also to note is the lack of traction or meaningful improvement with the employment picture is causing many analysts to question the sustainability of the economy's recovery, and with this growing unease over the health of the economy, it is weighing on the popularity of the presidency and will definitely be a dominant topic in the upcoming mid-term elections.

Farrar:  Yeah, well, the pace of hiring is slow, undeniably, but it seems we are seeing some net new jobs each month here and there.  What parts of the economy are they coming from?

Foldenauer:  Yeah, I mean, as I said, the private sector is adding jobs each month, just not at the pace we'd like to see; actually, according to the latest survey by the National Association of Business Economists, nearly a third of companies said that they were in a hiring mode and close to 40% of the respondents indicated plans to ramp up hiring in the next six months, so you know, that's good news.

By sheer numbers, health care is still where the most hiring is going on, according to both the Labor Department and other industry trend surveys; the retail and technology sectors round out the top three.  So as we wrap up the vacation season this month and people get back to work, let's hope for all parties involved that we see the pace of hiring new employees pick up for the foreseeable future.

Farrar:  Well, if it appears that the economy is in for a long road back to normal, what can policy-makers do to help?

Foldenauer:  Well, you know, that's a good question with not really a simple solution.  We're starting to hear rumblings from various sources of the need for another plan or stimulus package of some sort.  We just heard on NPR here that, about a jobs bill that's going to be voted on here this week; the most likely scenario falls to the Federal Reserve and the policies or stimulus measures they could implement. 

The state of labor markets is definitely one of a number of factors that will impact the timing of their interest rate policy; if you remember, they reduced overnight lending rates to near zero in December of 2008.  In the past few weeks, Fed Chairman Ben Bernanke has said that the U.S. Central Bank could take steps to further ease monetary policy if the recovery were to falter.  It is important to note that the Central Bank holds its next policy-setting meeting this Tuesday, so keep an eye out for that this week.

Interestingly, though, some prominent economists are beginning to sound alarms about the risk of deflation, and again, Wayne, for those listeners who don't know, deflation is the rare occurrence that can have a devasting effect on a struggling economy as prices of goods and wages both fall at the same time.  St. Louis Fed President James Bowler, for example, said recently that the risk of deflation has risen and warned of a period of falling prices and slow growth in the U.S. similar to that of Japan in recent years, and you know, while we don't have the liberty of time to go into greater detail, the problem here is that deflation is much more difficult to control by policy makers than its cousin, inflation.

You know, those that are in the deflation camp will generally say that a new round of stimulus spending is needed quicker to avoid the downward spiral of falling prices and wages; you know, on the flip side, there are a number of economists, including RBC's, that doubt a long period of deflation would unfold in the U.S. like Japan, and are equally concerned about inflation.  Their general worry is more about, you know, the effect that additional government borrowing could have on the recovery.

Farrar:  Okay, we have just about 45 seconds left.  Now with all this talk and discussion about deflation, inflation and a slowing economic recovery, what are the investment implications of all this?

Foldenauer:  Yeah, the uncertainty of the current environment definitely creates a complicated picture, with recent talk and concern about deflation, the demand for a higher quality of longer-term bonds has increased significantly.  The yield on the benchmark 10-year Treasury note continues to be below 3%, which indicates to us that the desire for safety is very high right now. 

We would issue a word of caution to investors in longer-term treasury bonds, in that they would be a bad bet in an inflationary environment as their value erodes when costs and interest rates go up.  In regards to equities or stocks, we believe that individual investors should position equity allocations defensively at this stage; high-quality stocks that pay dividends and have a history of increasing dividends, and defensive-oriented sectors seem most appropriate, given that the economic recovery has lost momentum.

Farrar:  Okay, thanks to Andy Foldenauer, sitting in for Brian Ford today from RBC Wealth Management.    

Foldenauer:  Thanks, Wayne.