In the latter part of 2007, the U.S. economy began shedding jobs. By the end of 2008, the number of jobs lost each month exceeded 700,000 per month. Although decreasing in total numbers, those losses have continued right through last month, February 2010. Given that 2/3 of our gross domestic output is dependent on consumer spending, it is hardly arguable that these job losses are the single reason we have remained in a recession. This Friday, this stubborn indicator might very well move to the plus side, and for the first time since 2007, we may actually see jobs added to the economy.
If this does happen, does it mean we have reached the crossroad of this recession? Does it mean we will now begin a strong bull rally that will last for several years? If historical precedent is of any use here, the implied answer is yes. However, we have seen so much in the past two years that does not follow historical precedent that one should be careful about assuming that historical precedent will apply. Consider that since the fall of 2008, Americans have been shedding debt and saving money, which is much different from the historical precedent for the last thirty or so years. Could we or should we assume Americans have changed their notions about debt and savings?
Should we assume that if the employment numbers are positive, those who are coming back into the workforce will spend money immediately on anything but housing, food, utilities, transportation, and health?
These questions are worth considering, given that much of the resistance in the market is attributable to the high unemployment rate. So much of what happens in the market is about perception and confidence. Will the market perceive a positive employment number as the beginning of the end of the “Great Recession?” Will a positive employment number instill enough confidence in the market to open the door wider to risk? Will the “over stuffed” bond market see a flight from minimal return to chasing higher returns in equities?
A positive employment report will no doubt bump the market up. The questions are how much and for how long? The answers to these questions are not so simple anymore, especially since historical precedent is no longer a guide for us to use. The world is so different today than it has ever been historically, especially in the economic and trading worlds.
Today, the U.S economy is one (albeit huge) part of a global economy. Consider that we seem to worry more about the overheated Chinese economy and the Chinese manipulation of the yuan than we do about jobs. Then again, one could argue that the Chinese manipulation of the yuan and the dramatic increase in Chinese exports are contributing to our inability to create jobs in America. In either case, what the Chinese do, or don’t do, economically is much more influential in our economy today than it has ever been.
The emerging economies of Eastern Europe and the rising economic prowess of India are, along with China, are creating middle classes that will rival the historically supreme American Middle Class. Will this bode well for American manufacturing (what is left of it), or will it add to the sucking sound of jobs moving to places where the cost of production is cheaper and the markets are hungrier to spend?
As well, Congress just passed historic healthcare legislation in this country, the likes of which we have not seen since the mid 1960s. How will this impact job creation moving forward? Will the implementation of this legislation create or cost the economy jobs?
In the past, one could easily assume that positive job creation coming out of a recession meant both a rise in consumer income and a rise in consumer spending. In the past, a positive employment report coming out of a recession could easily signal the start of a long-term bull rally. Not anymore. In these days of markets moving down or remaining flat in the wake of good economic news, one is hard pressed to argue for certain that a positive jobs report will send the markets running uphill.
So here we are, appearing to stand at the crossroad of continued recession or a new economic boom. Which way will the markets go after the report on Friday? Got me, but one thing that is for sure is that no matter which way the market goes initially, we can count on a near-term reversal, as so many other variables now weigh on the minds of traders and investors. Unless and until we work through many, if not all, of those variables, we have no reliable guide to predict what will happen if the employment report on Friday is positive.
