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DEVIL IS IN THE DETAIL



The United States was in focus last week. Not because of the sensational- albeit rather nonsensical- controversy surrounding Donald Sterling, but because of two important macroeconomic events. The first- the Fed’s monetary policy statement released Wednesday night- bore no surprises whatsoever. The second event was a string of labor market reports that were released at the open of the New York session Friday. Key among these was the Non-farm Payrolls report which showed that the U.S. economy added 288,000 jobs in April, beating expectations of about 210,000. Unemployment figures also outstripped expectations (6.3% against expectations of 6.6%). Within seconds of the release of these reports, the U.S. dollar rallied aggressively against other currencies, most notably the Euro and Yen. Although the dollar lost these gains in the course of the New York session (owing to the escalating situation in the Ukraine), many analysts expect the reports to buoy the dollar over the coming days.

But curiously, investors did not seem to read much into a statistic that I feel is perhaps more important than the NFP: the labor participation rate, which plunged in April to fresh lows. While the economy added 288,000 jobs, 800,000 people dropped out of the workforce in April, bringing the labor participation rate to 62.8%, from 63.2% in March. This drop in labor participation accounts for the drop in the official unemployment rate: people will only figure in unemployment statistics if they are seeking work.

This discrepancy is part of the broader variance between macroeconomic data and the much-trumpeted narrative of a U.S. recovery. The stock market is making new highs almost every week and the 30-year bull run in bonds remains intact. But when you take a long hard look at the facts on the main street, it becomes apparent why few people outside of corporate board rooms think the American economy is on the mend. With Fiscal year 2013 producing the highest number of people on food assistance yet recorded, and with median household income still far below pre-recession levels, that the recovery is an illusion under-girded by an inflationary asset bubble should not be a tough sell.

As the Federal Reserve begins to wind down QE, the moment of truth is fast approaching. Will the U.S. economy stay on the current track, or will it go into a tailspin once the monetary spigots are turned off? I think the latter is far more likely, but let’s wait and see.

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