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Truth
and Perspective: Unemployment is Bullish |
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Since last
week's reality check of consumer confidence struck such a positive
note with you - our readers - we're going to serve up another
important
reality check regarding unemployment and the jobs situation. Where
we're going to do to set ourselves apart from the rest of the lemming media
is look at the historical facts and the current trends, rather than
assuming anything or making discretionary interpretations of the data.
Here's an early
hint of the conclusions.... there's actually quite a bit of reason for
optimism.
We've
said it before, but it bears repeating now - we love your input, questions,
ideas, and suggestions. Though we're not going to be a mouthpiece simply
to pump up the stocks you own, if you've got a legitimate and founded trading
idea, or a topic you think we should cover, let us know about it.
 For
instance, the inspiration for today's write-up actually came from a reader.
Here's the question:
What
period of time after a recession is declared as over does it take for the
jobs to start coming back? In other words, when do companies start hiring
again? If possible list historical figures. Thank you in advance for your
feedback.
Thanks for the
question. As you figured out by now, it's a topic that's important enough
to cover for everyone.
The answer depends
on a lot of factors, the biggest of which is how you define 'jobs coming
back'.... seriously. There are several data sets you could use as
evidence of such, like the nonfarm payroll reports [which is due Friday],
the unemployment rate, new unemployment claims, and initial unemployment
claims.
Since we have
limited time and space, and since the nonfarm payroll data comes
out soon, we're not going to look at that information today. We'll just
wait to hear it then, and post some follow-up thoughts in the
blog.
For today, we're
going to examine the unemployment rate, and unemployment claims.
First and foremost,
continuing unemployment claims are falling, as are new claims... both
by more than a little. Historically, this has preceded the end of a
recession and the beginning of a growth/expansion phase.
 For
proof of this, take a look at the nearby chart. All the official recessions
(as defined by the NBER) are marked with a red 'up' arrow at their
beginning, and with a green 'down' arrow at their end. In all four recessions
between 1975 and 1991, new and ongoing claims started to fall at what was
eventually determined to be the end of the economic lull.
Interestingly,
and
though you may have to squint a little to see it on this chart, the
market started to recover well before the recession was technically over.
To help you gauge this, the recessionary periods are highlighted by the
yellow overlays on the S&P 500 portion of the chart.
If you'd rather
not squint, no problem - here's
a full screen version of the same chart.
In any case,
based on history, new and continuing claims start to fall immediately
at the end of the recession. Based on that criteria, it takes
no time at all for jobs to start growing again once the recession ends.
That's why investors should be encouraged by the way things are unfolding
now on this front, since both are falling now. Keep reading though - it's
still not the whole story.
If instead one
chooses to use the unemployment rate as a barometer of economic health,
evidence of job growth shouldn't be expected to show up anytime near the
end of the recession. It could be months after the economic lull ends
before the actual unemployment rate to starts pointing lower. In 1991,
it took 13 months after the recession was over for the unemployment rate
to peak. In 2001, unemployment peaked 19 months after the recession ended.
That said, the
multi-month lag time between the recession's end and the peak in the unemployment
rate is a fairly new phenomenon that emerged in '91 and '01. Prior to those
two cases, unemployment also turned the corner right as the recession ended.
 Why
the delay now? A handful of possibilities are out there. One example is
the likelihood that hiring managers are far more fearful of bringing on
new help than they were before 1990, since more employees also means more
expense and more liability.
Regardless of
the underlying reason, modern-era economics will likely continue to
create the conditions that show a substantial lag between an economic revival
and a hiring revival, as measured by the unemployment rate.
Now fast-forward
to today. Though the unemployment level moved marginally lower last month
[from 10.3% to 10.0%], that's hardly enough data to say the unemployment
rate is trending lower. If it was though, that would likely be all we needed
to see to say the recession was well in the past.
More importantly,
the lag time completely deflates the notion that there can be no such thing
as a 'jobless recovery', if the unemployment rate is the yardstick. There
can be, and there has been. That's not an opinion either - that's
a fact supported by real numbers... something the media and pundits
seem to conveniently overlook when it comes time to make their bearish
case.
In other words,
for the same reason we - the Micro Cap Press analytical staff -
won't yet say the unemployment trend is bullish for stocks, the doom-sayers
shouldn't argue that a lack of falling unemployment is bearish. The truth
is, at this point in time during a likely recovery from a recession, unemployment's
stagnation isn't anything we haven't seen before.
There are a
handful of arguments against this scientific interpretation of the raw
jobs data, though they don't really hold water. The biggest of them is
the manipulation theory.... the idea that the government is tweaking and
fudging the data to make the economy appear healthier than it really is.
 Our
observation of the federal government is that its data is often lagging,
and sometimes off the mark. But, nobody yet has provided any credible evidence
the government is deliberately or significantly misleading the public by
posting false figures. The folks making the manipulation accusations are
often the same types who think our drinking water is being poisoned, and
that the U.S. is hiding interplanetary aliens in Area 51.
Said another
way, though imperfect, the data is reliable enough as is, and can be
utilized for interpretative purposes.
Another flawed
argument against the unemployment claims data is that the expiration of
unemployment insurance benefits for the recession's earliest victims have
expired; these people no longer bother filing, lowering the actual claims
figure.
To a small extent
this is true, but the number of ex-workers who have seen their benefits
expire is far less than the difference between the weekly continuing claim
levels from the middle of the year and the continuing claim levels now.
In other words, the math doesn't add up to support that argument. Even
so, new unemployment claims are falling like a rock as well, which
isn't affected by benefit expirations in any way.
In short, if
we're not in the midst of an economic recovery, then this is a somewhat
stunning set of coincidences, where the unemployment claims and the unemployment
rate data is completely at odds with the way the data looked with
the prior six recessions and subsequent recoveries. The odds of this
case
being an exception to the norm are too low to bet on.
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The
Answer to the Question |
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Now, to answer
the reader question "What period of time after a recession is declared
as over does it take for the jobs to start coming back?", we have to
point out one thing we've not touched on yet.... the ridiculous lag in
the official declaration that the recession is over.
While we appreciate
the National
Bureau of Economic Research - or NBER - and its willingness
to be the official arbiter of when recessions begin and end, you should
also know they never make that announcement until months after the fact.
So, unemployment may be under 6% by the time we know for sure the recession
is officially over.
That's just
one more thing to keep in mind as you mull your own decisions about the
economy... the actual decision from the NBER is meaningless by the time
you get it, as the jobs recovery is already well underway.
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Updated: 6:01 am PDT (13:01 GMT), September 9, 2010
