1) Jobs, jobs, jobs … the most popular theme of questions I've been getting.
2) The gap between job losses and job gains is wider than normal given massive uncertainty—but there's a lot of reason for hope.
3) Investors need to be reminded of the link between the economy, jobs and the market.
December's employment report a dud
After a much better-than-expected jobs report for November, showing a cut to payrolls of "only" 11,000, hope for an even better December was evident as we entered 2010, with ever-rising "whisper" expectations as the monthly employment report approached earlier this month.
Indeed, it was a disappointing reading, with a loss of 85,000 jobs instead of the positive job growth that was expected. There was also a net downward revision of 1,000 jobs over the preceding two months. However, November was revised to a slight gain—representing the first month of job gains since December 2007 (the month the recession began).
The unemployment rate—the most popular (but most lagging) jobs metric—remained at 10%. There's almost nothing good to say about a double-digit unemployment rate, particularly given that, when adding in disaffected workers, the so-called "U6" unemployment rate is north of 17%.
Observed objectively, the unemployment rate remains one of the most lagging of all economic indicators. What we need to remain focused on are the leading indicators for job growth, and here the news is undeniably improving.
Jobless claims have plunged
Many are already declaring our eventual jobs recovery as "jobless," as the two that preceded this one have been dubbed. If we look at the decline in initial (not continuing) unemployment claims, there's much about which to be hopeful.
Notice that the sizeable drop in the four-week average of initial claims since the peak in 2009 is now quickly closing in on the pace that followed the brutal back-to-back recessions of the 1980s. The jobs recovery that began in 1983 unfolded to be extremely robust.
In contrast, the two "jobless" recoveries following the 1991 and 2001 recessions were indeed anemic. As you can see, the present trajectory of initial claims is trending much better than those two periods.
Not a jobless recovery after all?
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Source: FactSet and the US Department of Labor, as of January 19, 2010. Current (November 7, 2008-January 8, 2010). 1983 (May 14, 1982-September 30, 1983). 1991 and 2002 (average of November 2, 1990-March 20, 1992 and May 25, 2001-October 11, 2002).
There's more good news on this front. I've written a lot about the healthy improvement to the leading economic indicators, of which initial unemployment claims and the stock market are two subcomponents. The turn in the LEI, which coincided with the March 2009 low in the stock market, has now increased at a pace that's bested both of the past two recoveries.
Unemployment rate as investment "excuse"
There are other similarities between today's economy and that of the early 1980s, which was the last time the unemployment rate spiked above 10%. Many have cited high unemployment as their reason for remaining out of the stock market during the past year.
Many made that same mistake in the early 1980s, at the birth of one of the greatest bull markets and economic booms of all time.
In fact, a rising unemployment rate has rarely kept the stock market from advancing in anticipation of recessions ending and into the early quarters of recoveries. As you can see in the chart below, the typical path of the stock market was to bottom during recessions and continue to rise after their conclusions, even as the unemployment rate was still rising.
For those who question the seeming disconnect between the economic fundamentals and the strong market during the past 10 months, look no further than this chart to see that stocks have done what they're "supposed to" based on historical precedent.
Market leads economy which leads employment
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Source: Ned Davis Research, Inc. as of January 19, 2010.
Uncertainty remains rampant
There's an important difference between now and the early 1980s, though, and it partly sits behind what are very tempered expectations for economic growth in this recovery. In 1983-1984, real gross domestic product (GDP) grew at a 6.6% annual rate.
In the early 1980s, President Ronald Reagan was cutting marginal tax rates across the board while also keeping government social spending in check. Today, policy is the mirror image of that era and represents the biggest threat to the economy and confidence.
I wear no blinders to the other obvious perils facing job creation in today's environment. Typically, the strongest engine of job growth coming out of recessions is expansion of debt-financed consumption on housing, autos and other durables. Clearly, there are massive impediments to a repeat of this cycle.
In addition, small businesses, typically the biggest job creators, remain confidence-deprived. They continue to be denied access to credit and are less able to capitalize on the strong overseas growth relative to larger companies.
Profits and temporary hiring on a roll
Broadly, however, corporate profitability is a precursor to job gains, and here the news is decidedly rosier—especially for larger companies. Not only are upward revisions to earnings expectations (by Wall Street analysts) breaking previous records, but federal corporate tax receipts (a direct way to measure profits) have surged at a 595% annual rate during the past three months, according to ISI Group.
Here's the cycle: Layoff announcements ease first, then there's generally a surge in temporary hiring, followed by more permanent hiring, reflecting renewed profitability and pent-up demand. We're seeing that cycle unfold, as you can see in the chart below. The surge in utilization of temporary workers bodes well for permanent hiring in the near future.
Temporary hiring surging!
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Source: FactSet, High Frequency Economics and the US Department of Labor, as of December 31, 2009.
Ultimately, it's the strength of the economy that will dictate the pace of employment growth. You can see this clearly in the chart below, which tracks past GDP recoveries (horizontal axis) against payroll gains (vertical axis).
GDP and hiring highly correlated
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Source: Bureau of Economic Analysis, FactSet and the US Department of Labor, as of January 19, 2010.
I keep close tabs on economists' forecasts for GDP growth and, at best, the hope is for about 4% GDP growth in 2010. If you plot that 4% squarely on the linear regression line, it suggests a relatively anemic job growth of only a bit north of 1%—better than either of the immediate predecessors, but anemic nonetheless.
However, I will admit to being more sympathetic to the above-consensus economic outlook.
Where I think the consensus might be wrong (by being too pessimistic) is in taking account of the likely massive turn in inventories, which are likely to contribute well over 3% to fourth-quarter 2009 GDP alone! This has been one of the dominant "coiled springs" about which I've spoken and written a lot during the past several quarters.
Positive outliers cropping up
We are starting to see a few outlier forecasts for much higher-than-expected growth. One of the latest lofty GDP assumptions comes from a true icon in our business, my friend Bill Miller of Legg Mason.
In one of his latest musings, he mentioned a blistering 8% GDP growth rate at some point in 2010, which is intriguing to say the least. If he's right, when looking at the slope of the regression line in the chart above, it sure would boost the likelihood that we avoid a jobless recovery.
The task of rebuilding employment is daunting, no question—it's likely to be a long slog. Even if we don't ultimately declare this recovery as jobless, the time span ("space between") the era of job losses and meaningful job gains is likely to be longer than normal.
There remains too much uncertainty—about consumer demand, taxes, health care costs, credit availability, and so forth.
But I also think there remains too much pessimism about our economy's ability to pull itself out of this.
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