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The US Economy: Afloat on Cheap Money

Friday's positive jobs news was the result of unsustainable monetary policies...

THE LATEST monthly employment data had a positive headline; a stronger than expected job creation number, writes Sasha Cekerevac at Investment Contrarians.

However, looking at the core information, there remain significant concerns regarding the US economic recovery and job creation specifically.

For February, job creation for non-farm related payrolls totaled 236,000. This number was far higher than expected, giving a boost to the stock market. (Source: "Employment situation summary," Bureau of Labor Statistics, March 8, 2013, accessed March 8, 2013.)

One might tend to think the economic recovery is going full steam ahead. I would urge caution, however.

To begin with, job creation data from the Bureau of Labor Statistics is notorious for large revisions. This latest report shows just how volatile this job creation data really is.

The Bureau of Labor Statistics has revised job creation data for January from 157,000, down to only 119,000. That is a huge revision in percentage terms, creating difficulties when calculating whether or not an economic recovery is occurring.

My biggest worry for a sustained economic recovery is the continued decline in the participation rate. This is the number of people who are active in the employment market. People who have given up looking for work drop out of this data, which is why this level continues to decline.

The current seasonally adjusted participation rate of working age people is 63.5%. This is the lowest level since September 1981. (Source: "Payrolls Surge as US Jobless Rate Falls to Five-Year Low," Bloomberg, March 8, 2013, accessed March 8, 2013.)

This means that a huge amount of people have given up looking for work and are not active participants in the economic recovery. The job creation machine that should be the American economy is not creating enough positions for all of our citizens.

The real worry is how much of this economic recovery and job creation has been boosted by the stimulus policies of the Federal Reserve. If the latest job creation numbers are purely from additional monetary stimulus, once the Federal Reserve begins to withdraw from the market, we could see a failure for the economic recovery to continue.

Look at the two of the strongest sectors: housing and automotive sales. The economic recovery in these two sectors is clearly driven by the Federal Reserve's monetary policies.

While over the short term, the job creation and economic recovery are positive, I don't believe they are sustainable without the Federal Reserve. This is the problem; we need to get a real, long-term structural economic recovery without a central bank trying to inflate various sectors.

Sure, as long as the Federal Reserve continues pumping money, I think both the automotive and home industries will benefit. But what happens later this year or next year when we hear of a possible reversal in monetary policy?

I don't believe housing or automotive sales can be generated at the current pace if interest rates rise. The economic recovery will have significant issues, as will job creation, once the Federal Reserve stops influencing the market.

We all want job creation and an economic recovery as soon as possible. However, I believe we must also balance short-term gains versus long-term costs.

The economic recovery that's being built for job creation over the next several decades needs to be structurally sound. Much like a house built with concrete is stronger structurally than a house built with straw. 

If this job creation is based purely on the Federal Reserve's policies, this cannot last forever. At some point, the economic recovery will fade, as will job creation.

Investors in the housing industry as well as the automotive industry should continue to see companies in these industries have strong earnings and revenue for as long as the Federal Reserve keeps monetary policy stimulus very easy.

However, I think investors in both of these industries should be very concerned in the second half of 2013, as these stocks will be extremely vulnerable. 

Once the discussion of monetary policy tightening begins, I believe both automotive and housing-related stocks could suffer a significant decline. In fact, the fall of 2013 could be extremely dangerous for all stocks.

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Investment Contrarians is a free financial e-letter whose editors believe the US stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion in the money supply. They question 'official' unemployment and inflation numbers and argue that rapid inflation caused by huge government debt and money printing will see interest rates, which have seen a quarter-of-a-century of falls, begin a new upwards cycle.

See full archive of Investment Contrarians.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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