Has The Last Shoe Dropped?

TORONTO, May 27, 2016 /PRNewswire/ -- For some time now, certain voices from economists, pundits, analysts and activist investors have been warning of the likelihood of an impending reality check for the US economy. At best, growth in the world's biggest economy could expect to slow to a crawl with GDP expanding at 1% or less and, at worst, America could tip back into a slow, inexorable grind downwards in which GDP could actually contract.

Those voices have certainly gained a more attentive audience in recent months but, up until last Friday, they had found it nigh on impossible to counter an argument that posed a simple question: "if the US economy is heading for recession, why is it still creating in excess of 200,000 jobs a month?"

On Friday, that argument evaporated with the release of the Labor Department's non farm payrolls data for April. According to the report, the economy created 160,000 jobs compared to a consensus forecast for 202,000. Last month's 245,000 was revised downwards to 233,000 while the official unemployment rate remained unchanged at 5%.

The miss suggests that the last shoe has begun to fall says Tony Harris Senior V.P of Equity Trading at Tokyo headquartered Softbank CIBC International, who handles $8bn of corporate investors funds. "It's always difficult to make predictions of a recession stick when an economy is still generating strong wage growth, but the people who are later described as "visionary" know all too well that unemployment is a lagging indicator. What that means is that they typically show where an economy has been, not where it's going," he explains.

"This data will be looked at very closely by the Federal Reserve because of the potential effect it has on the central bank's timetable for raising interest rates. We think that another miss next month will all but put paid to any notion of further rate hikes in 2016 or 2017 for that matter."

Indeed, the US economy has posted some decidedly downbeat data of late. Orders for durable goods – manufactured goods that have an expected lifespan of more than 3 years – are in decline as is consumer confidence and retail sales while the manufacturing sector alternates between contraction and stagnation.

Against this backdrop of anemic growth and an impending general election, it's hard to see how the Federal Reserve can realistically raise interest rates without killing off what little economic growth there is.

Tony Harris points out that the April jobs report could mark an inflection point for investors. "We've been extolling the virtues of precious metals and the stocks of miners that produce them and with good reason. Much of the last few years, gold and silver have been stuck in the doldrums but this year has seen a sharp reversal in their fortunes. Gold is up by more than 20% while silver – a far more volatile investment proposition – has shot up by a similar degree."

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SOURCE Softbank CIBC International