11.06.09

11.06.09

          The Labor Department reported on Friday that 190,000 more jobs were lost in October, only slightly worse than the consensus forecast of 175,000 lost jobs, and job losses for August and September were revised to fewer losses than previously reported. Good news. The negative surprise was that the unemployment rate shot up from 9.8% in September to 10.2% in October, considerably worse than expectations that unemployment would rise to 9.9%. If they included those who have run out of unemployment comp and are still not working, that number would be more like 17% or 18%.  As I have noted in this column before, and is widely understood, employment is a lagging indicator. Businesses won’t need more employees until well after the economy has bottomed, recovered, and consumers are buying their products at a brisk pace again.

          When an economy begins to recover from a recession, which it apparently is starting to do now, businesses are suspicious of the sustainability of the recovery and reluctant to hire additional workers until they absolutely must. Meanwhile, in efforts to cut costs during a slowdown, most businesses begin by cutting the hours of employees, and then are forced to cut costs further by laying off workers. That process reverses as an economy recovers, with the first step to meet improving sales being to increase the hours of remaining workers, first back to normal, and then to put them on overtime hours, before hiring more workers.

          The economic problems began in the housing industry and the recovery will begin in the housing industry. Home sales and home construction did pick up in the summer months, and were important to the 3.5% GDP growth (the end of the recession) reported for the third quarter. So I suggest  that we needed to watch for reports of housing activity in October, as this quarter is getting underway.

          Consumer spending in general is also of much more importance than jobs reports as an early sign of a sustainable economic recovery. According to the Bureau of Economic Analysis, consumer spending accounts for 71% of U.S. GDP (up from the long-term average of 65% since business spending has declined even more than consumer spending in the recession).

Unfortunately the most recent reports from the housing industry and consumer spending are mixed and indicate more evidence is needed one way or the other. For instance, new home sales unexpectedly declined in September, and permits for future new home starts plunged, even though the government bonus program to first-time home-buyers was still in effect. However, existing home sales continued to rise in September, as they had in the summer. We need to see housing numbers for October, the first month of this quarter.

          While we see some signs of stability coming into the economy, we must make sure that we view all the “news” with a question mark. You many times have to dig beneath the surface to find the truth. Take Thursday for example, The Nasdaq Composite gained 2.4% during the session, but volume was noticeably absent from the move. In a sound market, such large market gains should be accompanied by rising volume, but it was clearly not the case Thursday.

For now, we once again we will be staying 100% in CASH.

Till next time

The MTA Staff