The jobs report for November gave Wall Street a jolt, but sky high corporate debt and declining earnings threaten to burst the jobs bubble.
The November U.S. jobs report sent the Dow surging Friday. With non-farm payrolls up 266,000, unemployment dropped to 3.5%. Jobs growth absolutely crushed Wall Street projections of 187,000 for the month.
But the real question is how secure are these jobs? Soaring payrolls figures are only good news if these jobs numbers hold. If they crash, then this is a jobs bubble. And there are many reasons to expect a crash.
Corporate earnings have remained flat for years. Figures from the U.S. Bureau of Economic Analysis show that corporate after tax profits are lower today than they were in 2012. According to financial researcher firm, FactSet, blended earnings for the S&P 500 declined 2.2% in Q3 2019.
The earnings decline marks an alarming milestone:
the first time the index has reported three straight quarters of year-over-year earnings declines since Q4 2015 through Q2 2016
The corporate earnings recession threatens the stock market as well as the jobs market. Profit and productivity are the key measures of economic health, not debt-driven valuations and payroll expansions.
As corporate balance sheets get lighter on profits, they’ve grown top heavy with crushing debt. U.S. corporate debt exploded since the last recession from $4.9 trillion to $9.1 trillion.
The sizable growth in business debt over the past seven years has been characterized by large increases in risky forms of debt extended to firms with poorer credit profiles or that already had elevated levels of debt.
And companies are showing signs of buckling under all that corporate debt. The charge-off rate on commercial and industrial loans for all U.S. commercial banks spiked 23% in Q3. How will job numbers hold up if firms can’t keep up with their loans and make payroll each month?
Taking these factors into account, November’s jobs report isn’t necessarily a sign of economic health. It might be a sign that the expansion is on its last legs, on the precipice of the next recession.
The growth in jobs this year looks like a jobs bubble. If it is a jobs bubble, it can only last until the underlying credit bubble bursts.
Since early 2018, virtually all forms of debt held in the United States have grown at a disconcerting pace. This U.S. debt machine is an inside-out complex of perverse incentives that dampen productivity by papering over losses.
The job numbers aren’t supported by productivity and earnings. They’re fueled by borrowing against the future. If productivity doesn’t keep up, the jobs will be the first to go when the bill comes due.
This article was edited by Sam Bourgi.
Last modified: January 31, 2020 12:03 AM UTC