US Unemployment Rate and Investment Implications
united states currency seal - IMG_7366_web (Photo credit: kevindean)
The United States unemployment rate remains at an elevated level, the result of very slow job growth, as shown the the chart below. Â While the headline news is disappointing (80,000 non-farm jobs added and 8.2% unemployment), there has been positive employment growth for the past two years. Â Unfortunately, the job growth just hasn't been strong enough to replace all the jobs that were lost in the Great Recession. Â Depending on what happens in Europe and China, and also depending on the Federal Reserve's policy response, there's a good chance that the US could slip back into recession within the next year.
Most of the major developed economies are dealing with elevated rates of unemployment, as shown in the chart below. Â The United States is about average for this group (Japan is the best at about 4% and France/Italy are the worst at about 10%). Â Interestingly, France is planning a big tax increase to close it's budget gap, which will only make their situation worse, since tax increases tend to stifle economic activity. Â Similarly, in the United States, if the Bush tax cuts are allowed to expire at the end of 2012, this is expected to hurt economic growth in the United States and could be the necessary catalyst to put the US back into recession.
It appears that the "new normal"Â theory, marked by delevering, deglobalization and reregulation and associated slow economic growth continues to help explain what is happening. Â Clearly, central bank interest rate policies have been the major factor in the upward movements in both stock and bond markets recently and also a major reason why real estate has stabilized. Â When global investors are in panic mode, as they have been recently, they flock to short-term Treasuries and the US dollar and sell just about everything else.
What is the right investment approach for the current environment?
Cash is king, but not too much; you want to stay liquid in order to take advantage of buying opportunities and also to make sure you have reserves for safety, however low short term rates and inflation will hurt over the longer term
Be careful with bonds - keep the duration short; long term bond yields may look attractive but they will get hammered when interest rates rise
If you are in the stock market, make sure you have trading stops or other types of hedges, such as inverse Exchange Traded Funds to protect your portfolio; otherwise, sell now before that bubble bursts
Buy physical gold and silver on dips and hang on - with the entire world printing money now to re-inflate economies and bail out banks, the long term outlook for precious metals is excellent even if there is some short-term volatility
Buy an investment property (4 units or less) and take advantage of the generous, government subsidized 30 year fixed rate financing that is available; just make sure the property is cash flow positive - owning a rental property is looking better and better as rents continue to increase throughout the US
Related articles
80k jobs created in June, unemployment rate unchanged
Tepid job growth continued in June; unemployment rate flat
Unemployment rate unchanged at 8.2 percent; 80,000 jobs added in June
