Shrugging Off Rising Unemployment
For many people, the state of the economy is defined by their own personal circumstances. If they are feeling secure in their own job then “the recession” is just a concept they hear about in the news. As President Ronald Reagan once said, “Recession is when a neighbour loses his job. Depression is when you lose yours.”
It seems that all too often the news of the day begins with yet another household name company announcing thousands of layoffs and plant closures. Often unreported is that thousands of medium and small businesses have also been laying off employees. At the same time, some blue chip companies such as Microsoft are announcing layoffs for the first time in their history. For example, while computer chip giant Intel laid off 5000 – 6000 people it followed that announcement with an increase in capital expenditures for its US plants to the tune of $7 billion.
As the chart below shows, about 3.6 million jobs (in the US) have been slashed since the current slowdown began (i.e. since the beginning of January 2008). Half of the total jobs lost have occurred in just over the last three months. How could anyone looking at these figures not be justified in believing that things can only get worse and the best course of action would be to “head for the hills”?
Our take is that these job loss announcements are indicative of the economy adjusting and these companies are taking the necessary actions – unpleasant as they are – to adjust to that economic reality. In short, they are “right-sizing” themselves. This is one of the strengths of a dynamic economy. Contrast this with Europe, where due to legislative constraints and labor agreements European companies are slow to be able to adjust themselves to changing economic landscapes. That is why the US tends to emerge first from these slowdowns – taking Canada along with it in time.
History reminds us to look for positives
The deep recession of 1973-1974, in which the market shed approximately 50%, can teach us about what we are experiencing today. Until this January 2009, December 1974 held the dubious distinction of seeing the most layoffs in the US in many years. Yet, the stock market that same month began to make its lows and went on to one of the great rallies of all time.
S&P 500 (US stock market)
Why unemployment is considered a “lagging indicator.”
To be sure if this recession is like the many that have preceded it, unemployment will continue to rise for some time even after the economy begins to rebound and the stock market has put together successive months of gains. Why would this be?
The stock market is the best economist there is. By some measures, the stock market in the US was building in an 8% unemployment rate months ago. The stock market is a forward looking entity that by its nature discounts future economic events. Again, let’s look at the fact that the market was topping out while jobs were plentiful and the economy was robust. Wall Street was earning record levels of income and the public was throwing all kinds of capital into mutual funds. Unemployment was not on the forefront of most individuals’ concerns. In fact, unemployment was low and cited as a reason by governments and other observers that recession concerns were overblown. Yet at that time, the stock market was already in the process of topping out; companies were starting to warn about earnings expectations and the banking system was starting to grind down.
As we can see from the chart below, the unemployment rate during the 1991 and 2001 recessions continued to rise even after the recession (grey bars) was over. Recall that preceding the boom of the 1990s, the economic recovery was deemed to be the jobless recovery. Yet, just a few short years later, there was a shortage of workers for industries such as technology. In fact during the tech boom, there were stories of companies offering inducements to students in unrelated fields such as nursing to drop their studies and to instead enroll in technology related programs – all expenses paid!
During the 1991 recession, it took about 32 months for unemployment to reach its pre-recession low and it took almost 50 months during the 2001 recession. Thus we can see that even after the recessions were deemed to have been over, unemployment rates continued higher for a while longer.
What can we look for this time?
It is likely that once again the economic recovery will be one in which the jobs will be slow to return. However, they will return and in all likelihood they will be preceded by a stock market that is already on its way to recovery.
While we cannot take past historical experiences for granted and just assume that history will repeat itself –we can be somewhat reassured that history does in fact rhyme. We had long been saying that there would be one or more months where the US experienced job losses number in the range of 500,000 to 600,000. That is occurring. When the first of these was announced in December 2008, the Dow Jones fell over 200 points and on the same day rallied to in fact close up 200 points. This was likely due to the market sensing that layoffs and job losses do not happen at the beginning of a slowdown but when we are starting to forge a bottom.
The chart below shows how during the last six recessions in the US, it took varying lengths of time for the economy to produce enough jobs to replace the number of jobs lost. For example, the green line (recession of the early 1970s) shows how it took almost 20 months for the number of jobs to get back to their pre-recession peak. The longest was the recession of 2001 – in which it took almost 50 months – yet the stock market would forge its lows in October 2002.
No one can doubt the obvious social consequences of job losses and rising unemployment but companies and economies have always managed to adjust. They will again. Our objective is to be just that – objective – and use past experiences as our guidepost rather than our road map.
The preceding entry is intended for general educational purposes only and should not be construed as financial advice nor is this information intended to replace the advice of a licensed financial advisor. All readers are encouraged to review their personal financial situations and needs with a licensed financial advisor prior to making any investment decision. Although efforts have been made to validate the information presented in the above entry, Pacifica Partners Inc. can accept no responsibility or liability as to the completeness or accuracy of the information contained above.