Recent memory fails to remember a week bigger than what we had in store for us this week as a total of 16 economic reports were released, which should help verify if a recovery is in place. None of those reports has garnered the attention of worldwide investors and lawmakers on Capitol Hill as much as the jobs data, culminating with Friday’s October payroll report.
Four of the 16 reports pertained to employment: Challenger Report; ADP Report; Jobless Claims; Nonfarm Payrolls Report, which included the current unemployment rate. With unemployment hovering just below the 10% mark, many Wall Street economists were predicting a break above the double-digit barrier. The question remaining, though, is what happens if the unemployment rate remains above 10% as the recovery takes shape; a higher rate is expected to have a negative impact on the overall economy.
As Bloomberg reported:
The U.S. unemployment rate reached a 26-year high of 9.8 percent in September and Federal Reserve Chairman Ben S. Bernanke said last month the rate may remain above 9 percent through 2010. High unemployment and a depressed economy have prompted businesses to cut investment on plants and equipment as well as on product development and worker training.
“At current growth rates, we’d be lucky to see the unemployment rate fall by half a percentage point per year, meaning that it would take a decade to return to something like full employment,” Nobel Prize-winning economist Paul Krugman said in an op-ed published by The New York Times yesterday. “The government needs to do much more. Unfortunately, the political prospects for further action aren’t good.”
The Numbers
First released was the report from placement firm Challenger Gray & Christmas. This report, which provides data about planned job cuts announced by U.S. companies, declined for the third consecutive month, falling 16% in October to 55,679. Challenger says this figure is the lowest since March of 2008.
“While there are still some trouble spots, the continued decline in job cutting activity across most industries is a positive sign that the economy is slowly improving,” said CEO John Challenger. “However, it is important to realize that, as deep and widespread as this recession was, it is going to be a long and sometimes painful recovery.”
Soon after the release of the Challenger report, payroll firm ADP published a report about U.S. companies having cut an estimated 203,000 jobs in October. The data provided by ADP Employer Services was the smallest in more than a year and followed a revised 227,000 decline from the prior month.
The GDP Report
This week’s data comes on the heels of the Income and Spending reports released last Friday, and the third quarter GDP rate released on Thursday. Spending in September dropped 0.5%, an exact print that Wall Street consensus was anticipating, but challenged the 3.5% growth rate seen in the overall economy.
Several Wall Street analysts and traders reviewed the Gross Domestic Product report with skepticism, failing to see evidence of an actual recovery taking place. Considering, it looks as if the Cash for Clunkers program helped the GDP print, many will wonder if these short-term fixes can result in a sustainable recovery; particularly if the jobless rate rises above 10%.
To quote The Washington Post:
But if the [unemployment rate] disappoints again, particularly if the jobless rate crosses into double-digit territory, it would signal that the 3.5 percent rate of gross-domestic-product growth in the third quarter wasn’t enough to get the job market back on track and could send Washington back to the drawing board to try to find ways to stimulate the job market.
Wall Street was expecting Friday’s report to show October eliminated 175,000 jobs, and the unemployment rate to rise to 9.9%.
U.S. Economy Struggles to Recover
Speaking on NBC’s Meet the Press, Treasury Secretary Timothy Geithner told viewers “encouraging economic signs are emerging.” However, Geithner also admitted the U.S. recovery is choppy.
When asked whether the recession was over, Geithner said it was the economists who would determine that, but added, “The real test of recovery will be when we have unemployment coming down, people are back to work and businesses confident to invest again."
That could take several more months. Reuters reports, “the key number in next year's U.S. congressional election may be the unemployment rate, which last month hit a 26-year high of 9.8%.” Consensus is calling for a -160,000 jobs in October.
According to the Jackson Sun, the White House is claiming the stimulus 650,000 jobs saved or created under President Obama's stimulus plan. Further, “the White House also says the stimulus is on its way to meeting a goal of 3.5 million jobs by the end of 2010.”
However, not all experts and analyst agree. Many claim proving that number is difficult. But nonetheless, the number of unemployed Americans will continue to be a key benchmark of whether the economy is moving forward into recovery.
The U-3
As bad as the initial unemployment numbers seemed on Monday, the deeper numbers are likely a good bit worse.
The most commonly reported number is actually only one of six measurements. It’s called the U-3, and it excludes a number of unemployed workers – such as discouraged workers, those who have found part-time work only as a stopgap, and marginally attached workers. (Marginally attached workers are those who have temporarily stopped searching, for whatever reason.)
The U-3, the official unemployment rate, stood at 9.8% before the release of October’s numbers later this week.
However, we can be sure that the U-6 unemployment rate will remain well ahead of the U-3. The U-6 – which includes many segments of the unemployed that the U-3 misses – currently stands at 17%.
When comparing Monday’s numbers to numbers from the past, the U-6 is a more useful measure.
But even beyond the U-6, economist John Williams, a Dartmouth MBA graduate and consultant to Fortune 500 companies, attempts to estimate true unemployment numbers even more deeply.
Unemployment at 22%
By uncovering the numbers of discouraged workers “defined away” during the Clinton administration, Williams believes the actual number of unemployed currently is nearing 22%.
Barring a major surprise, all these numbers – the U-3, the U-6, and the Williams’ estimated “true” unemployment – will rise with October’s numbers. That makes for bad news for the U.S. economy.
Bloomberg has uncovered a number of economists pessimistic about unemployment rates, and what they’ll mean for the country’s recovery.
Rising unemployment “could be enough to push the country back into recession,” Gus Fraucher, director of Macroeconomic Research at Moody’s Economy.com, told Bloomberg.
When the Stimulus Runs Out...
Looking in the other direction, David Greenlaw, chief fixed-income economist at Morgan Stanley, said, “We’ve got a gradual recovery in the overall economy, but it’s not vigorous enough to knock down the unemployment rate by much.”
Further, most economists believe that consumer spending numbers are likely to tumble in the next few months, as government stimulus programs run out. The example often cited is Cash for Clunkers – while car sales were up markedly during the program, they’ve fallen by 35% in the past month.
Further depressing matters, with unemployment numbers likely worse than the official stats, many projections for consumer spending are likely too high. Given that consumer spending is currently 70% of the U.S. GDP, this is a very serious matter.
Simply put, if the economic recovery is to continue under its own steam, the country needs to see meaningful job creation – not just slowing job losses. Unless that happens, and top-line revenues begin to grow again at businesses, a double-dip recession remains a strong possibility.
The Skeptics
Not every Wall Street economist is of the mindset that the U.S. economy is about to turn the corner in regards to job growth. From Bloomberg News:
The [ADP Report] signals unemployment will keep climbing even after the economy begins to expand, one reason why Federal Reserve policy makers may pledge to keep interest rates low for a long time after their meeting today. ADP has overstated the Labor Department’s initial estimate of payroll losses by 103,000 per month on average in the five months to September.
“The losses, while smaller than in previous months, were nonetheless widespread,” Joel Prakken, chairman of Macroeconomic Advisers, LLC, said on a conference call with reporters.
The U.S. Bureau of Labor Statistics reports that nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate now sitting at 9.8% continued to trend up.
Most economists think the recession is over, but they say the jobless rate will keep rising until at least next summer.
"The Numbers Are Huge"
The high unemployment rate is slowing economic recovery of the U.S. economy. In fact, most people are living week-to-week and check-to-check in the worst recession in 65 years. In an article for the Orlando Sentinel, Heather Boushey, an economist with the Center for American Progress, a Washington-based think tank, says, "Long-term unemployment is off-the-charts. The numbers are huge."
Unemployment numbers are so high that just this week, the Senate voted 97 to 1 to end debate and move ahead on the overall bill that includes an extra 20 weeks of unemployment benefits.
As more people lose their jobs, that translates into less consumer spending, which makes up two-thirds of GDP. According to the latest statistics released by the National Retail Federation, consumers are expected to spend about 3.2% less during the holidays this year than they did last year.
“Weak demand from battered consumers will be a ‘major constraint’ on the U.S. economy for the foreseeable future,” said White House Advisor Lawrence Summers, director of the National Economic Council.
Major retailers such as Wal-Mart agree. Wal-Mart Stores Inc, the world's biggest retailer, sees a slow recovery from challenging U.S. business conditions, while its Asia operations are "a little better," its Chairman Rob Walton said on Friday as reported in WorldNews.
Now factor in that the U.S. economy’s service sector showed signs of slower expansion according to recent figures from the Institute for Supply Management. Figures of more than 50 indicate expansion, while below that show contraction.
Other Data
On the other hand, some data is showing signs of support.
Thursday, the Labor Department reported that initial jobless claims fell 20,000 to 512,000 for the week ending Oct. 31, 2009.
It’s the first decline in two weeks, and the lowest number of initial claims since January, says Rex Nutting for MarketWatch. He reports that initial jobless claims have been above 500,000 for 51 weeks.
The stock market climbed on Thursday’s jobless data. At 2 p.m. EST, the Dow was up 1.69%, Nasdaq up 2.2%, and the S&P 500 was up 1.53%.
Mike Stanfield, chief investment officer at VSR Financial Services, said that this was reassuring to investors following several weeks of concerns about the pace of the recovery, noted CNNMoney.
But true economic recovery is never supported by one data point.
A Bigger Picture
According to the Labor Department, U.S. business productivity grew at its fastest rate in six years in the third quarter.
“The Labor Department said on Thursday that productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003,” writes Lucia Mutikani for Reuters.
Both this 9.5% uptick in productivity and the decline of initial jobless claims to a 10-month low are great statistics to help support this recovery. The question now will be if we can sustain these figures…
Does the U.S. economy have enough juice to keep productivity climbing at near double digits? Will jobless claims continue to fall?
These two key pieces of economic data have an interesting relationship in cost-cutting times like these. Businesses that want to cut costs more often than not skim their labor pool for savings. Look at Johnson & Johnson (JNJ:NYSE), who earlier this week announced job cuts of 8,200.
Companies are squeezing more productivity out of fewer employees. Right now, most businesses are keeping up with demand with the staff they already have.
The jump in consumer demand will force companies to hire more employees, lowering productivity, and possibly lowering profits – depending on just how much demand grows.
The Big Tamale
And then the Big Tamale was served... The October payroll report showed that unemployment topped 10%, coming in at 10.2%, the worst since 1983.
Chris Isidore of CNNMoney wrote:
The nation's unemployment rate rose above 10% for the first time since 1983 in October, a much worse jump than expected as employers continued to trim jobs from payrolls. The reading, reported by the government Friday, is a sign of the continued weakness in the labor market even though the economy grew in the third quarter following the longest and deepest downturn since the Great Depression.
Economists had been expecting 9.9% unemployment.
The net job losses for the month came in higher than expectations, too. Most analysts forecast net losses of 175,000, while the actual figure was 190,000.
What Next?
Editor Michael Robinson of BreakAway Investor believes we will see a jobless recovery. Michael adds, “Ironically, as the overall economy starts to grow again, unemployment continues rising.”
Michael explains:
Living near Silicon Valley, I have seen firsthand how technology companies benefit from increase capital expenditures near the end of a recession.
In this kind of scenario corporate executives throughout the economy conserve cash by holding down labor costs to boost productivity. Often they will invest in new technology before committing to hiring more workers who bring with them other costs like unemployment insurance, workers’ compensation, retirement and medical care.
That’s why Michael has been recommending beaten-down technology companies to his readers. “As we do see recovery, they’ll be some of the first companies to post strong share prices,” Michael tells readers.
All these signs… rising unemployment, less spending by consumers and less expansion from the service sector signal the road to recovery will be slow. The Organization for Economic Cooperation and Development predicts that “the United States will endure a flat economic landscape in 2010 and may even face deflation.”
A flat landscape is also what Kent Lucas, editor of Taipan’s Safe Haven Investor, sees for 2010. “We won’t see a V-shape recovery like most analysts predict or hope for,” says Lucas, “but I think in 2010 we’ll see more positive trends.”
In his monthly newsletter, Lucas offers readers investment recommendations that are designed to protect your retirement wealth. Kent specifically looks for companies that are strong enough to weather the recession, and, at the same time, offer growth potential.
He also prefers companies that pay dividends, a strategy he believes is a great way for investors to help grow their wealth.
One thing is for certain and that is job losses continue to occur. Moving forward, what will relieve the tension amongst voters and all other Americans is some sense that the U.S. economy will begin to generate jobs.
When that will be – next month, next year or next summer – remains to be seen.
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