No Recipe for Weak Housing

Something strange happened after last Friday's jobs report - the yield on the 10-year Treasury Note fell, finishing Friday at 2.95%, down four basis points from Thursday's close. To us, this makes no sense. If anything, it serves to reinforce our view that the bond market is making a big mistake.

Yes, we realize that July nonfarm payrolls (at +157,000) were lighter than the consensus expected 193,000. But, as we wrote in our Data Watch, May and June were revised upward by a total of 59,000. In other words, July payrolls were 216,000 higher than the Labor Department estimated in June. If we assume these new workers make the average weekly wage, that equals $10.5 billion more in annualized earnings for American workers (216,000 x $933.23 x 52) – in just one month!

Meanwhile, civilian employment (an alternative measure of jobs that includes small-business start-ups) rose 389,000 in July, helping push the jobless rate down to 3.9%. Even more impressive, the U-6 unemployment rate - what some people refer to as the "true" rate, which includes discouraged and marginally-attached workers as well as and those with part-time jobs who say they want full-time work - fell to 7.5%, the lowest reading since 2001.

The Hispanic unemployment rate dropped to 4.5% in July, the lowest on record dating back to the early 1970s. At 6.6%, the black jobless rate was not at a record low, however, these figures are volatile from month to month and have averaged 6.9% in the past year, the lowest 12-month average on record. Notably, the unemployment rate among those age 25+ who never finished high school is 5.1%, also the lowest on record dating back to the early 1990s. You sensing a trend?

Put it all together and we see plenty of reasons to be optimistic about economic growth in the third quarter. It's early, but right now we're tracking 4.5% real GDP growth in Q3, which would boost the year-over-year increase to 3.3%. Some analysts tried to discount the growth in the second quarter because of a surge in exports, but we think the more important quirk in Q2 was that companies reduced inventories at the fastest pace since 2009. A return to a more normal pace of inventory accumulation means a large boost to growth in Q3, more than offsetting any impact from trade.