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A Market Crash by Jobless Recovery?
By Economic Forecasts & Opinions
While certain signs have pointed to the end of the recession, unemployment remains rampant. With a double-digit unemployment rate, President Obama has been traveling throughout the nation, pushing his job-creation agenda.
Meanwhile, the House overwhelmingly approved extending the filing deadline for unemployment benefits and the COBRA health coverage subsidy through the end of February, and also narrowly passed the $154 billion jobs bill.
Billions would probably go toward highway construction and mass transit. However, the total is considerably less than the $780 billion stimulus bill passed earlier this year, and is not expected to hit the Senate until early next year. But if the legislation is ultimately passed into law, the total spending could amount to almost 1% of U.S. gross domestic product (GDP).
Worse Than You Know
The nation’s employment picture is certainly grim. The unemployment rate jumped to 10.2% in October, the highest in 26 years, albeit the number went down to 10% in November (most likely a sampling error). Nearly 16 million Americans are out of work, and there are now six workers competing for every job vacancy.
The headline unemployment rate; however, does not take into consideration discouraged workers, part-time workers who want full-time work and underemployed workers. Include these people, and the rate increases to 17.2% in November vs. 12.2% from a year ago.
Additionally, the U.S. Labor Department survey of companies doesn't count the self-employed and undercounts employees of small businesses. So the economic picture could be even more dire, as small businesses account for about 60% of the nation's jobs. Adding to the demand decrease associated with the recession, small businesses have been crimped further by banks tightening credit not willing to lend.
Stimulating the Wrong Way
In a recent Forbes article, Mr. Joel Kotkin points out that the latest job growth trend reflects the critical weakness in the stimulus package. The stimulus focused on government bailouts and transfers of research funds to universities while with less than 5% going to basic infrastructure.
“The strongest growth in high-end services is usually propelled by growth in tangible industries, such as energy, agriculture or manufacturing. When those industries tank….high-end services decline with them.”
A Different Joblessness This Time Around
The number of people unemployed for longer than 27 weeks is almost 6 million. Generally, the number of these workers is about half those unemployed for less than five weeks. This relationship switched midway in 2008.
Now, the mean length of unemployment is about 27 weeks, up from 15 weeks in December 2007. While the number of unemployed and the duration of unemployment is running deeper, those who are employed are working less hours resulting in smaller paychecks.
Recovery Paradox
Job losses have been unusually steep in this latest recession with some 7.3 million jobs have been lost since December 2007, according to NABE. And little evidence suggests that employees will start hiring on a mass scale anytime soon.
The severity and the speed of the downturn has made businesses exceedingly cautious about the recovery and is contributing to a substantial disconnect between their more cautious forecasts, and more confident recovery talk from government officials as well as many in the investment community.
Businesses remain skeptical about the economy and just how much Washington can do as the White House and Congress are tied up with health care reform and foreign policy issues. In addition, their ability to institute new programs will be hampered by the nation's record budget deficit.
Unemployment & GDP
One economic theory - Okun’s Law, suggests an empirically observed relationship relating unemployment to losses in a country's production.
The theory posits that for every point above normal that unemployment moves, GDP growth falls by 2%, and vice versa. While not an exact science with plenty of critics, the equation does provide a good quantifiable estimate of the effects of unemployment upon GDP output.
Indeed, unemployed workers represent wasted production capability, and it also means less money being spent by consumers. With consumer spending accounting for about 70% of the U.S. GDP, prolonged high unemployment leading to chronic lower spending has the potential to lead to lower growth, more unemployment, beginning a vicious cycle. (Fig. 1)
A Lagging Indicator No More
The unemployment rate is traditionally characterized as a lagging indicator, and Raymond James just reminded investors that on average, unemployment starts to go down seven months after the trough in the S&P 500 is reached.
Nevertheless, due to the sheer speed and volume of job losses across a wide range of sectors, I have to agree with PIMCO’s Mr. Mohamed El-Erian that the unemployment rate should no longer be regarded as a lagging indicator as it does have the potential to influence future market behaviors and outlooks.
Unemployment Could Go Even Higher
Just last month, the OECD noted that growth in the world’s industrialized economies has resumed, but warns that unemployment is set to continue to rise well into 2010.
This is echoed by the testimony before the Senate Democratic Policy Committee this week from Brookings Institution, who warned that even if the economy adds 200,000 jobs a month (a tall order, by the way), it will take seven years to lower the unemployment rate to 5%.
Moreover, even if companies do start re-staffing next spring, the unemployment rate could easily hit 11% from a growing labor force, the return of discouraged workers, the hiring of part-timers instead of the unemployed.
Bull to Bear from Tightening Liquidity
Now, the Federal Reserve has just upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.
This tightening could potentially boost interest rate along with the dollar. This, coupled with lower consumer spending/growth in the US could mean the current liquidity-driven lofty commodity and equities price level could no longer be supported however bullish the market sentiment is.
Market Crash by Jobless Recovery?
Investors are moving in unprecedented lockstep driving up almost all asset classes (stocks, commodities, bonds and emerging markets) mostly on a weak dollar and easy money.
The simultaneous rally also suggests market is betting on a V-shaped recovery, particularly in the second half of next year, with companies getting their earnings growth mainly from outside the U.S. However, America is still the largest consuming country in the world. A majority of the emerging economies, even China, remain largely dependent upon exports to the U.S. for their livelihood.
As discussed here, with the high unemployment plaguing the U.S. economy, the rest of world is unlikely to enjoy a robust growth as some tend to believe. In that sense, if the unemployment rate does not go down below 9% by the end of 2010, it is conceivable, for example, that crude oil price could fall to the $40 to $45 per barrel range, the generally considered fair-market-fundamental price by oil industry leaders.
Meanwhile, the market herd mentality could leave investors with no refuge amid more signs that the worst U.S. recession since 1958 isn’t abating as perceived.
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USA Today: Fewer states add jobs as recovery sputters along http://usat.me/?37066012
ZH you need to go after Bloomberg like you did CNBC. Read this:
Unemployment Decreased in 36 U.S. States in November (Update2)
http://www.bloomberg.com/apps/news?pid=20601087&sid=axHY6ofJ9O3g&pos=3
Pat,
They only see the apocalypse here and when you present them with this type of evidence, you're infringing on their entrenched bearish views! I stand by my call: next few employment reports will surprise to the upside.
Let me explain. An unemployment decrease is not an employment increase. The reason it's is decreasing is that the current labor force is razor thin.
A jobless recovery is an oxymoron and should be stricken from the language.
great piece. Employement is oxygen to the economy. We need input to make the model work. Regardless, employment is tantamount. It will take 5-7 years to get back under 6%. It's much like ice skating...you have to put forth effort to stop the backwards motion and propel yourself forward on a dime. I am not a hockey player so I am talking about average joe plummer.
It takes so many new jobs just to take the number of Losses down. Not adding jobs.
Most important is that we are in deep shit. They know it but try to hide it.
Keep bangin!
It is quite probable that the employment/population level may stabilize here. Then it remains to be seen if the Treasury can continue to support incomes in the bottom half to avoid a grinding social catastrophe, and if the markets can at least stabilize with less Fed and other world cental bank liquidity injections . The first is a hugely complex issue which I dare not speculate about. On the second i remain neutral.
Not sure where where exactly your "categorizations" begin and end but there are allot of middle class people that have lost jobs.
$50 to $100k+ jobs.
Anecdotaly speaking, I was just laid off with 20 others from a tech company that is attempting to outsource everything to china and india. Then I wen to a xmas party and met a woman who is getting the boot along with 200 others in the Boston area at an insurance company. She was doing 401K loans. (how long can people keep borrowing from their retirement funds?)
So I don't see any improvement on the jobs side and I thin we will get some very ugly unemployment numbers in the next few months.
Agreed. This will go on for some time. 24 months or more?
It went on for decades from 1929 to 1949.
The draft was hardly full employment.
WWII killed 70 M people...
Get the old folks out of the workforce and generate jobs. Lower early retirement on SS. Lower age limits on Medicare. This will funnel older workers out of the system. After all, the young people are the ones who will be buying the cars, houses, and other assorted stuff to get the economy moving again.
Social Security is a fraud, moron.
SS??? Social Security?? Oh, that tax I have been paying since 1973????
17 years from now I expect to see zero from that.
but chinese solar, is going to the moon
Who gets the contract to run the power cable back to earth?
Leo, is that you?
dont forget the thousands and thousands of college graduates who cant find jobs out of college
And in 6 months, there will be more.
The banksters and the upper quintile can steal all they want, but when the rule of law and social order breaks down, life will be bad for them too, regardless of how much money they have.
the stock market is a rigged farce
it will crash when Government F*cking Sachs wants it to crash
Burnt prime rib just isn't what the bulls were wanting for Christmas. The entire mess is fraud. The big secret is that consumer spending is zero percent of GDP. Whomever invented the idea that domestic product had anything to do with going to the mall was full of it. The amount paid retail employees is GDP, but the spending is just spending. Might as well call getting drunk at the bar GDP while you are at it.
Reality is that the credit machine broke in the 1980's when Volker starved it. We haven't had a recovery since 1990 that started when they said it started. Instead we have had green pukes and the social psychology nonsense. It seems that no one is catching onto the fill in the blanks. UE claims are 480K, normal in an expansion is about 320K. There are a very low number of jobs available. at 320K, there are 2 million new jobs a year or about 170,000 a month. 480K represents 160K additional layoffs a week or about 700K a month. It would stand to reason that this would produce around 530K job loss a month, but the stats say 11,000? So at a boom we get 170K job growth with the one figure and 11K loss with the other with many fewer jobs being available? This is a hidden depression, not a recovery.
There's another immeasurable, which is people restoring themselves financially. The 1990 recession officially ended in April of 1991. I didn't recover from the staggering financial loss until December 1995, four and a half years later. Actually, I've never recovered the entire loss. The ends of recession are nothing but nice charting by arm-chair statisticians, but bear no indication of the reality.
there will be no market crash due to joblessness...the market's value is driven by other factors....
i also disagree with the term jobless recovery....without full employment there is no recovery except for banksters....bankster recovery yes....
to make sense of employment you have to understand which income quintiles are suffering - it is certainly not the upper quintile and that is the only one anyone cares about....the folks in that group will provide enough buoyancy to survive the morass....
furthermore, to consider the longitudinal aspects of unemployment you need to consider the methodology...unemployment is calculated differently today than pre-clinton....as such the p-c unemployment is 22%...
and thanks for commenting on the sampling error on u-3 unemployment....i get so disgusted with fucktards who get emotional about changes in data without knowing the sampling error...gdp sampling error is +/- 3% or 3.5% - see john williams for details....as such any gdp within sampling error is meaningless!!!!
Zero Hedge is great reading.
Maybe a little paranoid, but interesting.
Gold to $5000
Stocks to crash
Buy guns and food.
The government has bailed out the banks.
A depression was avoided, or at least delayed.
Maybe no crash, no depression, just a lost decade like Japan? Time will tell.
Before the Great Crash of America, you would think, other countries would crash first - Greece, Spain, France, Mexico.
I do love Zero Hedge. I respect Zero Hedge
Cry wolf too often, you know what I mean.
I gave up timing stuff once the manipulation went into over drive....i know the overall trend and direction....so prepare for the worst and pray for the best...it definitely wont hurt you to be prepared.
We are living during times that call for paranoia.
The problem with crying wolf here is that the wolves have already consumed the herd and the town shepards are so sky-high on 'hopium' that they care not to look out the window - at least the ones that are still working 33+ hours a week.
Interesting you mention work week hours. The mandatory furlough scheme to shorten hours within government employment ranks is vital cover in the " hidden depression " a commenter referred to earlier.
Here in Cali.....facing a $21B deficit.....furloughs will expand to an additional work day per month on January 1 for most State, County and municipal workers ( non-emergency types ).
How much longer this can go on without straight up mass layoffs is anyone's guess. But you can be sure that stimulus funds are geared toward keeping the employment figures in local governments stabilized, albeit with shorter work weeks. Extend and pretend.
Government employment is in a state of complete disconnect with the dialed-back economy and the projected tax revenue base.
Sorry folks no recovery. The jobs continue down too, and not coming back.
remember when honest candidate for prez told Detroit that jobs that they lost are not coming back? he was right. Not a single job that was shipped overseas will come back, they are gone for good.
A crisis of confidence will come if the global coalition fails. Does total hopelessness always lead to wars?
Liberate Vos Ex Inferis
Where we are going, you won't need eyes to see . . .
What color is the sky in your world, Leo?
It's prolly a lot of colors. Dewd is trippin'.
The dogmatic and cheerful determination to talk his book of economic optimism into reality despite a plethora of empirical evidence to the contrary is wearing a little thin.
IFF Congress torpedoes National Health Care and Cap and Tax, and shelves plans for higher taxes on small business, then business may start hiring. Absent that, all the business owners I know are looking to hold the line or lay off workers. And that doesn't include the businesses that are picking up and moving all the jobs to China or India. One of my recent taxi drivers just lost his managerial job to that phenomenon.
NO small businesses that I personally know are hiring.
First of all, a real national health care would save small businesses. The cost of health nsurance is killing small business owners, and it is one of the reasons bigger corporations move overseas. Foreign countries provide national health care for their citizens so businesses dont have to. Or the countries are so terrible they provide nothing, don't have worker benefits, don't have unions, don't have consumer protection laws--and so businesses have no extra costs. Of course their products can kill you or your pet, but no one seems to really care.
As for the recession ending, that is such a crock. It has only ended for the big banks that got bailed out. Everything else is tanking and nobody has extra money. Nor is this deflation. For the past two years, everything from utility bills to food to taxes keeps going up--but my income has stayed the same. We're going to have to take to the streets in huge numbers, and start burning down Wall Street, before Congress pays us any attention.
No chance, next four or five employment reports will surprise to the upside, and there will be upside revisions to thhe previous months' reports. Why? Corporate profits are up, new orders are up and inventories are lean. Firms are responding by hiring more people. Cheer up folks, the glass is half full.
LK, are you out of work?
What planet are you on friend?
Certainly not Earth.
Sales still declining, Inventories and
Shipping stagnant, debts deleveraging
Corporate profits manufactured out of
thin air FASB with no mark to market.
Market selling over 80 times earnings
last checked.
Do you really think real profits will
quintuple to get us back to 10-year
trailing normal?
Central command economies have been
failing since before Babylon.
Small business is where the productive
jobs are created, not big bloated
government with TBTF fantasies and moral
hazards...
well see...keep an eye on Detroit
Detroit's Unemployment Nears 50%
The unemployment situation in Detroit has truly become dire as the "real" unemployment number climbs to 45 percent.
Detroit News: Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can't find a job or are working fewer hours than they want.
Using a broader definition of unemployment, as much as 45 percent of the labor force has been affected by the downturn.
And that doesn't include those who gave up the job search more than a year ago, a number that could exceed 100,000 potential workers alone.
Wait until Detroit's unemployed cross the
Windsor bridge to head up LK's way...
Leo,
Now that is some Genuine Wall Street Jibber Jabber at its finest, your joking right?
SELL!
"Firms are responding by hiring more people."
As somebody who is "living it" with regard to a thoroughly bleak job market, I can assure you that they are not. Normally, I would look in the mirror and, in fact, I have (the resume has been tweaked/updated so many times I've lost count). In this case, however, I am beginning to meet more and more folks in the same employment situation as me.
Therefore, I take exception to your quote above; it has not been my experience and, I'm learning, I'm not alone in this regard. I am basing my opinions on my actual boots on the ground (call it anecdotal, if you wish).