Perspective on the Employment Report

This morning the US Labor Department reported that 524,000 jobs were lost in December and that the unemployment rate rose to 7.2%. Expectations had been for around 550,000 jobs lost and a rate of 7.0%. The job loss figures for October and November were both revised upward. Despite these numbers, the stock market has opened mixed – suggesting that these figures are not significantly out of line with expectations.

The media seems to have difficulty in putting these figures into any kind of context. They seem to suggest that evil forces are at work oppressing the US worker ; they try to portray a sense of hopelessness and futility and point to the government as the “only hope” for the American worker. Clearly, this is nonsense. Recessions come and go and one of the benefits of them is “creative destruction.” Companies and industries which are no longer competitive will fail in a recession. The human and financial capital, management talent and creativity which was formerly deployed in these efforts will find new areas to bloom. I often think of the imagery of the dinosaurs being lead to extinction by some catastrophe followed by the emergence of small, furry mammals as the dominant form of life on earth.

The US economy has a rich history of entrepreneurship and this allows the nations to rebound quickly from financial and other crises. Most commentary today suggests that the current recession will be a long one (16 months or so), but that means that it should be ending sometime in the summer. This is consistent with James Swanson’s view. It’s to reflect on the idea that the stock market usually tries to discount the future. We also know that bear markets always end during the recession (it’s happened every time since 1929). These two facts suggest the equity market has the potential to be the best place to put one’s money right now.

One final comment about the employment report from the New York Times, “But for all the job losses, the current recession, now in its 14th month, falls short of the mid-’70s and early ’80s recessions, at least so far. The total number of men and women at work declined 2.7 percent in the 1974-75 recession and by 3.1 percent in 1981-82. In the current recession, the loss through November was under 2 percent.” It’s also good to note that the December employment report was marginally better than November’s.

Some might look at this and think, “Well, things can get a lot worse.” I would submit that the fundamental nature of the economy is different now vs. then – the economy is much less linked to energy consumption and manufacturing and more export and service oriented. This suggests a greater resilience to cyclical forces (it’s easier to re-train service workers than factory workers, for example) and a resumption in growth in large developing nations such as China and India may provide a much greater benefit to US mulit-nationals than would have happened in the 1970s or 1980s.

We can expect much of the economic data to be reported over the next few weeks and months to show a weak economy. I would be surprised to see the majority of data suggesting a weakening economy. Remember that the stock market does not need good news to recovery, but simply news that is “less bad” than before.