09/06/2010 08:38 pm ET | Updated May 25, 2011

Job Report Wows Wall Street, but Strikes out on Main Street

The applause was deafening. It was as though Derek Jeter had hit a home in the last half of the ninth inning that won the ball game for the New York Yankees.

In this case, the ovation was not for a sports figure, but rather Wall Street's enthusiastic reaction to Friday's disclosure of a better-than-expected August employment report. That was the hiring of 67,000 new workers in the private sector, versus an expectation of just 40,000.

In turn, the Dow Industrials shot up nearly 128 points. That capped a four-day winning streak in which the Dow ballooned 438 points, all predicated on the belief that accelerated economic growth is now just around the corner.

In effect, investors swapped fear for greed, and for a while at least renewed their on-again, off-again love affair with stocks after having dumped $11.7 billion worth of U.S. equity mutual funds this year and switching much of it into the more safe bond funds. How long that will last is anybody's guess, but it's worth keeping in mind that love affairs die fast on Wall Street.

Madeline Schnapp, the economic chief of TrimTabs Research, a West Coast liquidity-tracking firm partially owned by Goldman Sachs, already thinks it's on borrowed time because she takes a dim view of the job report.

I related her assumptions, assuming she's right, to the three blind mice nursery rhyme. That's a reference to three powerhouses, each of which reacted positively to the latest job numbers. They were Wall Street, which bid up stock prices, the New York Times and the White House.

The Times responded to the job news with a front-page story that concluded a double-dip recession was now less likely. President Obama also got into the act, declaring after the revelation of the job numbers that "the economy is moving in a positive direction."

Schnapp takes issue with all three, essentially arguing that none of them is operating with a full economic deck. Her contention is that we've never exited from the recession, which kicked off in late 2007, that the jobs report was disappointing and says "investors' exuberant reaction to it was nuts."

That's strong stuff, but Schnapp, a crack, perceptive economist who has made a number of excellent economic calls, offers some compelling points to make her case.

Noting that the market ran up Friday because the creation of 67,000 new private sector jobs (about 25% of which were temporary) was somehow interpreted as good news, Schnapp says "give me a break." To put the latest employment numbers into perspective, she notes, you have to keep in mind that 8.5 million jobs were lost during the downturn. What's more, unemployment peaked at 10.1% and still sits at a lofty 9.6%.

Moreover, she points out, the jobs picture is pretty grim when you look at in its entirety. For example, she says, there are now 14.9 million unemployed workers. Add to that the underemployed and discouraged workers (those who have left the work force and part-timers who can no longer obtain full time jobs) and you come up with a total number of people in the unemployment doghouse of 25.7 million.

That's up 1.4 million from 24.3 million a month earlier, the kind of increase, Schnapp says, that one could hardly call good news.

In order to get back to 6% employment by 2013 (current optimistic projections), the economy needs to generate a minimum of 250,000 to 300,00 jobs every month, not 67,000, she says.

The big problem, as she sees it, is that job growth is dependent on consumption growth and housing growth. But housing is in a depression and consumption is weak.

Elaborating on the housing dilemma, Schnapp took note of the accounting rule change dating back to March 2009 that allowed banks to abandon mark-to-market pricing of assets and adopt instead "mark-to-make-believe," which created zombie banks. Then, she says, came the political pressure on banks not to foreclose on delinquent homeowners, which created more homeowners. The end result, not surprisingly, observes Schnapp, is a zombie housing market as far as the eye can see.

Her conclusion is that the economy is stuck in first gear and is trying to accelerate without the housing market. "Can't do it! Plain and simple," she says. "We're in a weak economy that could get weaker." No surprise then when she tells me that she sees putrid GDP growth ahead for the rest of 2010, on the order, she believes, of 1% to 1.5% in both the third and fourth quarters. That's well below the consensus of about 2.5% growth in the final quarters.

Peter Morici, an economics professor at the University of Maryland, also views the job report negatively.

"It was pretty bad," he says, "We're in a lot of trouble here. "The weak economy looks like it will get weaker and the second half will not be very good."

Morici also sees more bad news from Washington, notably "more spending, more taxes, more regulation and more failed policies."

The negative reactions of Schnapp and Morici to the job report raise an obvious question: Is the report nothing more than a paper tiger?

In any event, the bottom line seems pretty clear. The August job numbers may have wowed Wall Street, but they were an unmistakable bummer for Main Street.

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