Stronger commodity prices trump stable jobs growth

The February jobs report was good (beating expectations plus upward revisions to prior months), but it only marked a continuation of the moderate 2 - 2½% growth trend that has been in place for the past 6-7 years. More impressive, however, is the emerging rally in the commodity markets and, by extension, the emerging market economies. It's looking more and more like the the threat posed by the China slowdown, plunging oil prices and soaring credit spreads is fading away. In its place global growth is likely stabilizing as commodity prices firm up. Against this backdrop, central banks, the majority of which are still deathly afraid of recession and deflation, seem out of step. I think that's why gold has done so well of late: markets are sensing that monetary policy may now be too easy and therefore inflation is more likely to rise than fall. Think of gold as an early-warning indicator of the direction of future inflation. Not always right, of course, but worth paying attention to.

Private sector jobs, the ones that count, have been growing at a fairly steady pace of 2 to 2½% for just over 5 years. This, added to weak productivity of less than 1% per year, is going to give us something in the neighborhood of 2.5% real growth this year. All the monetary "stimulus" in the world is not going to change the fact that this remains the weakest recovery ever. What needs to change is fiscal policy, and that won't change meaningfully until next year, provided we have a new president who understands that the private sector needs better incentives if it is to work and invest more. 

One thing does appear to be changing, however. Labor force growth has been tepid since 2008; the number of people either working or willing to work has been growing at an annualized rate of only 0.4% for the past seven years, until recently. Over the past six months, the labor force grew at an annualized rate of 2.3%. This equates to some stirrings of life in an otherwise sleepy economy. 

As a result, the labor force participation rate looks to have bottomed. It's too early to get excited, however, since new entrants to the labor force don't appear to be fighting for top-paying jobs. But it is an important change on the margin which bodes well for the future, and that's a good reason to remain optimistic.

What's changing today is the outlook for commodity prices. After falling from 2011 through the end of last year, they are turning up. Gold prices are up 20% in just over two months. Industrial scrap metal prices are up 10% since mid-January.

And one of the most important commodities (crude oil, see chart above) is up 37% in just under one month. What this means at the very least is that market forces—prices—have brought commodity supplies back into line with commodity demand. And it's not too hard to imagine that as supplies have been reduced, demand has picked up. Rising commodity prices probably signify that the fundamentals of the global economy are improving on the margin, and that is very good news.

One example: vehicle miles driven last year were up 5% from mid-2014, which is when oil prices started to plunge (see chart above).

After falling 80% from early 2011 through January of this year, Brazil's stock market is up a staggering 45% in dollar terms, thanks to the confluence of stronger commodity prices and promises of a badly-needed change in government. Mexico's stock market is up 15%, and Australia's stock market is up 14% over the same period.

In this last chart we see that gold has shrugged off its 4-year losing streak, jumping 20% since mid-December. TIPS prices have jumped too, as have 5-yr breakeven spreads, which are up from 1.0% a month ago to 1.45% today.

Deflation? That's yesterday's news. Today markets are beginning to worry that inflation might be on the rise while central banks still have their policy pedals to the metal.