The S&P 500 has continued to rally after headline US employment data for June beat expectations, with the economy adding 265,000 private-sector jobs. At the same time, the Bureau of Labor Statistics revised its estimate of May payrolls growth to 11,000 jobs from 38,000.
Given the volatility associated with this data set, the labor market probably isn’t as strong as the June data would suggest and isn’t as weak as the May data would imply.
However, the US employment situation looks less encouraging when you consider the trend. In the second quarter, the economy added 147,000 jobs per month, compared with 196,000 positions per month in the first quarter and 282,000 per month in the fourth quarter of 2015. The rate of job creation has slowed.
Meanwhile, the Federal Reserve Bank of Atlanta’s GDPNow model estimates that US gross domestic product grew by about 2.4 percent in the second quarter. The Federal Reserve Bank of New York’s “nowcast” puts the rate of expansion at 2.1 percent.
Both estimates represent an improvement over the 1.1 percent logged in the first quarter; these data points suggest that the US economy will grow by an uninspiring 1 percent to 2 percent this year.
Robust inflows into US government bonds likewise suggest that market participants expect weak economic growth to prevent the Federal Reserve from hiking rates significantly over the next few years.
Subpar economic growth doesn’t support the S&P 500’s inflated valuation multiples, which have reached their highest levels since the 1999-2000 tech bubble.