- The July US unemployment report was released Friday and was rather disappointing.
- While the report isn't positive, it doesn't say terribly much about the health of the broader economy.
- High unemployment persisting after a recession is a tragedy for those affected, but it is also rather normal.
- The report shows, above all else, the need for patience on the jobs front and a forward-looking mind for investors.
Friday, investors digested July's US unemployment report. The results of the report were rather a disappointment—a worse-than-expected headline reduction of 131,000 jobs. While the losses were driven by the end of temporary census work, private businesses had been expected to pick up more of the slack. The report showed private payrolls increasing by 71,000—likewise below estimates.
By now, even investors who know well that employment lags both market and economic recoveries—sometimes significantly—might be expecting to see some thawing of the unemployment rate. After all, we've seen sharp increases in global trade showing enhanced demand from Emerging Markets, advancing business spending, much higher corporate profitability, increasing revenue reports, and the global economy advancing despite rampant pessimism. But thus far, unemployment has yet to fully feel the recovery's force.
Some reading the report today might extrapolate a weak jobs report to indicate something much bigger about US economic health. But in the past, we've seen expansionary periods begin with lingering high unemployment many times. For example, following the last major US recession's trough in 1982 (much bigger than the mild 1990-1991 and 2001 recessions), unemployment levels remained elevated for many months—even quarters. In fact, unemployment during this period reached a marginally higher high than 2009's—10.8% vs. 10.1%—and was above 10% for ten months (nine after the economic trough). While directly comparing economic statistics between two separate contractions isn't totally apples-to-apples, it does show high unemployment didn't forestall economic expansion (including consumer spending), which was positive throughout 1983 (the first full year of recovery). While current US GDP growth is lower than 1983's, as far as unemployment goes there's no magic number triggering job creation.
Companies hire based on their unique, real circumstances—which aren't contingent on US GDP growth exceeding a certain level, aren't done out of charity, and aren't based on speculation. They'll hire when capacity limits strain the ability to meet demand—and given vast gains in worker productivity, perhaps the advancing economy's effect on employment is arriving a bit later than most expected. While this increased productivity is a long-term plus for the economy, it can also complicate life for those seeking work today.
While it's come down some, unemployment is likely to remain at elevated levels for some time. But for investors, what high unemployment tells us is the economy was bad—bad enough to necessitate extreme cost-cutting tactics. But it doesn't indicate what it currently is or will be—the exact opposite of the function of stocks, which price in forward-looking expectations. And, over time, an improving economy (such as we have today) likely begets better jobs numbers. Perhaps Titus Maccius Plautus put it best, saying, "Patience is the best remedy for every trouble."