The equity market's reaction to the above consensus job report today would make one believe the only missing link in the economic recovery was today's job's report. The 255,000 increase in nonfarm payrolls exceeded the consensus of 185,000 and the top range of 215,000. The end result is the S&P 500 Index was able to breakout of its sixteen day trading range.
I will not repeat what Scott Grannis had to say about the report in his post, A Strong Jobs Number Doesn't Mean the Economy is Stronger, which reader will find insightful. Today's report makes one question the accuracy of the May report though with the June and July reports likely making up for the weak May report.
One concern is the fact those showing increased employment are the baby boomers, age 55 and older, as their participation rate remains above the level prior to the onset of the financial crisis and surely they have a desire to retire. The participation rate for all other age groups remains below pre financial crisis levels.
Further, using the pre-financial crisis participation rate of 66.1% shows the unemployment rate at 9.6% as compared to the current participation rate of 62.8%.
In summary, July's nonfarm payroll report was certainly a positive economic variable; however, it does not change our firm's view about the below trend growth rate of the economy. Importantly, corporate earnings will need to improve over the next four quarters in order to substantiate an improving economy as we noted in a mid-July post I wrote, Value Stock Outperformance May Indicate Stronger Economy Ahead.