The U.S. economy is stronger than Friday's job report suggests and the real problem for the Americans is not a slowing Chinese economy, it's us here in Canada.
The U.S. Bureau of Labour Statistics released the monthly non-farm payroll report on U.S. employment on Friday and the jobs gain of 142,000 positions was well below the consensus estimate of 200,000. The report came on the heels of multiple readings of weak U.S. manufacturing activity that many investors interpreted as a sign that the world's largest economy is not strong enough to weather slowing growth in the emerging markets.
But Douglas Porter, chief economist at BMO Nesbitt Burns, notes that Canada, not the developing world, is what's holding U.S. growth back.
"… [W]hat region is really hurting U.S. exporters? In the first seven months of the year, U.S. sales abroad were down almost $50-billion [U.S.] from the prior year. By far and away, the single biggest source of decline was seen in exports to Canada (down $13.2-billion) … So, while the market has tied itself up in knots stressing over the extent of China's slowdown, the direct impact of how Canada's economy is faring is arguably more important for U.S. exports and overall growth."
Global markets are overreacting to the U.S. employment report, according to Mr. Porter, not least because the Canadian economy has, in his estimation, bottomed and positioned for 2-per-cent gross domestic product growth for 2016.
Furthermore, strength in U.S. services sectors and overall consumption – the largest component of the American economy – continues to improve. U.S. auto sales are running close to record levels. The ISM survey of non-manufacturing business activity, released Monday, indicated healthy expansion at 56.9, only slightly lower than the 10-year high of 60.3 reported in July. The employment component of the non-manufacturing data (ISM non-manufacturing employment index) was well above expectations at 58.6, tying the second-highest reading since 2006.
The key point for Canadian investors is that the employment-driven U.S. economic recovery, while not explosive yet, remains intact. As the accompanying chart highlights, the improvement in employment continues to benefit consumer U.S. discretionary stocks.
(The fickle nature of consumers, exemplified by the recent bankruptcy of American Apparel Inc. and lagging sales at Abercrombie & Fitch Co., underscore my selection of an ETF on the chart. It's the most risk-sensitive way for investors to benefit from the trend.)
It is also important to note that unlike Canadians, U.S. consumers have ample room to expand credit when they feel comfortable enough to spend.
Domestically, the household debt-to-disposable-income ratio is well into record territory above 160 per cent. In the United States, consumers' average debt-to-disposable-income ratio of 105 per cent is dramatically below prefinancial-crisis highs.
Follow Scott Barlow on Twitter @SBarlow_ROB.