JOBLESS RATE INCREASES - STAY THE COURSE 9-5-2008

5 September 2008 by Richard Haskell.

The August 2008 jobless rate came in this morning at 6.1%, fully .4% higher than consensus expectations.  The stock markets correctly called this on Thursday as unemployment claims came in higher than expected and the DOW sold off over 300 points.  A jobless number in excess of 6% represents at least two problems for the markets and the economy, but it also represents one meaningful solution.

The problems are easily seen: fewer jobs in the markets equate to lower economic growth and that simply exacerbates the current economic slowdown.  If people don’t have income, they can’t spend it at the retail or durable goods levels, and that simply doesn’t help an already sluggish economy.  Additionally, fewer jobs represent reduced economic output in terms of fewer workers producing goods and services.

The solution it offers is less easily seen, but meaningful none-the-less.  Inflation, one of the greatest evils an economy can experience, and most often arising from more available dollars chasing a constrained quantity of goods and services, cannot be sustained in the face of rising unemployment and shrinking of incomes.  Even though we saw average hourly incomes increase .4% in August – up 3.4% over one year ago – that still equates to a decrease in inflation-adjusted, personal incomes, and that’s the number that counts.

Also troubling is the fact that an unemployment rate of greater than 6% virtually always represents an economy in recession.  In five of the last six recessions, however, the recessionary period was at least half over by the time the jobless rate exceeded 6%.  Historically, recessions last between ten and seventeen months. 

Brian Wesbury, Chief Economist with First Trust Portfolios LP,  reports in his September 5, 2008 column titled, August Employment Report, ‘The headlines from today’s jobs report are ugly, but key details show we are not in recession’.  Wesbury is a self proclaimed optimist; I tend to share the same attribute, so let’s take an alternative view for a moment.  If we’re in a recession, there is some evidence that it began in the 4^th Quarter of 2007, with GDP having declined by .7% in that quarter.  Eleven months have now passed since the beginning of that quarter, so it would suggest that we’re more than half-way through this recessionary period. 

Manufacturing numbers and durable goods orders most often begin to increase in the 2^nd half of a recession and ultimately bring the economy out of the recessionary period.  U.S. factory orders rose 1.3% in July, with core capital equipment increasing 2.5% and non-durables increasing 1.2%.  June’s figures also represented meaningful increases. These increases support that we may be past the halfway mark of a recessionary period.

Given the recent increases in GDP, there is a dichotomy in all of this.  The U.S. economy grew at a rate of 1% in the 1^st Quarter of 2008 and by 3.3% in the 2^nd Quarter.  Even if those numbers receive downward adjustments with future revisions, they will almost certainly evidence economic growth for the 1^st half of this year.  Some of this is a byproduct of 90 billion dollars in federal rebate checks entering the economy, but that only makes up for a fraction of the growth for these two quarters.  Increased exports to foreign economies, due to a weaker U.S. dollar, also represent a portion of this growth.  But some of the growth is simply ongoing, core growth in our domestic economy, and that would suggest that any recessionary period we have or will face will be minor (compared to other post-WWII recessions) and of shorter than average duration.

The slowdown we’ve faced is due in largest part to the overheated housing market, the credit difficulties resulting from that decline of that market, and the increase in the cost of oil.  This has not only eliminated many thousands of jobs in construction and banking, it has also strapped consumers as energy supplies have become more costly, banks have tightened credit standards, and falling real estate values have decreased.  Available home equity, that might otherwise have been tapped for retail and durable goods purchases, has evaporated at the same time that the cost of goods and services to consumers has increased.  This, then, has put pressure on the retail sector and more jobs have been lost and, just as worrisome, corporate profits have decreased.  As in all economic cycles, this will right itself given an appropriate amount of time and is most likely to be measured in terms of months, not years.

Going back to the presumption that we may have entered a recession in 4^th Quarter 2007 and that we should emerge from it within the next 6-9 months, it makes sense that the U.S. stock market should begin to gain value over the coming months.  The stock market is an excellent indicator of the economy 6-9 months out.  It is an amazingly accurate forecaster of the near-term future, while only being a very short-term reactor of current events.  Though these might be concerning times for those of us seeing volatile swings in our investment accounts, these are also times that spell opportunity for those who are willing to stay the course and keep their emotions in check.   

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