Fisher Investments Editorial Staff
US Economy

Unemployment’s Jab No Knockout

By, 11/09/2009

Story Highlights:

  • US October unemployment rose to 10.2%, while other major countries also saw higher unemployment—renewing fears of a "jobless recovery".
  • Economic recoveries are typically jobless, initially.
  • Investors needn't be hung up on backward-looking employment numbers.
  • Expect stocks to continue recovering—and employment to lag the economy, but eventually follow.


October US unemployment rose to 10.2%, the highest reading in nearly three decades, while a few other major countries also saw higher unemployment—raising concerns once again about a jobless recovery.

Unemployment is a highly emotive subject. Much like housing, employment is something we don't just see in the headlines or read about in some nebulous economic report. We feel it in our neighborhoods, with our own families and friends, and sometimes ourselves. The employment situation hits home and has tremendous, experiential immediacy to us.

A good investor doesn't seek to mitigate the real emotional toll of an issue like high unemployment, but does seek objective clarity about it. And the objective truth about employment is that it both lags stock market recoveries and is one of the last things to turn upward in an economic recovery. And so far through this cycle, those themes are playing out in prototypical fashion. But why is that true?

We principally learn about the world via experience; we also tend to extrapolate what we see and feel immediately around us out to the larger world. When we experience unemployment in our communities, the depressive and discontented effect it has on communal sentiment is palpable. In sum, it makes people feel really bad about the world and its future—often worse than economic reality warrants.

But as we've said before in this space, economic recoveries are typically "jobless," initially. Labor markets lag the economy because the first thing companies do in a recession is get very lean (evidenced by huge productivity gains this year, see here for details) and boost profits by cost cutting. And here's where the bears howl—how can you get a recovery if people aren't working and therefore aren't spending? Profit growth via cost-cutting isn't sustainable forever and thus is a "fake" kind of recovery.

That logic is backwards. In fact, consumer spending is a lot less volatile than people realize. In good times and bad, folks' spending habits are mostly stable because the vast majority of what we buy is everyday "necessities"—stuff like gasoline and toothpaste. True, the headline-grabbing consumer goods like autos and retail apparel have taken a drubbing, but on the whole, consumer spending has held up much better than many envisioned.

Yet, hunkering-down companies slashed inventories and production through the recession—far more than consumer spending declined—and also cut headcount. The upshot is that, eventually (and this is already happening), shelves get bare, inventories ultra-low, and retailers have no choice but to order more goods just to keep operating. That's the tipping point—from there, capacity utilization begins to ramp up, and companies have little choice but to hire and/or expand to meet the demand. Again, remember inventories and production were slashed far more than actual spending—there's literally no choice but to eventually order more goods. Usually by this time, economic recovery has begun to take hold, generating demand for new products, new services, and thus new jobs.

The key to all this? New jobs come last in a typical recovery. It's frustrating and painful, no doubt, but it's also true and the beginning part of this cycle is happening as we speak.

Lastly—think of how myopic all of the above is. It's focuses on the US only, which is about a quarter of global GDP. Global trade and demand (much of it coming from developing regions) is surging, and that's helping pull the world back toward growth a lot faster than most anticipated.

One thing we know is that stock markets look ahead, reflecting the future. Therefore, if we know employment is among the last parts of the economy to turn up in a recovery, and that the stock market tends to move ahead of the recovery…well, employment numbers reveal themselves to be truly dismal indicators for a stock market revival.

Though we can't predict when labor markets will turn, it's worth noting the year-over-year decline in the hiring of temporary workers stopped accelerating in May, and temporary employment actually began growing month-over-month in August. In the last downturn, both these events occurred after what was later determined to be the end of the recession. And just as important, the monthly number of actual job losses has been trending fewer and fewer for months—another telltale signal job creation could be close at hand.

Employment is one of the main factors considered when the National Bureau of Economic Research (NBER) dates a recession. But the official beginnings and endings to recession always come after the fact, and by then, most economic measures have already turned up, and the stock market is well on its way higher. If you're waiting for the recession to be declared over (again, largely driven by employment), you will join the many who miss out on the beginning of the bull market—often the fastest and strongest part.

This won't feel good for awhile—unemployment is likely to stay high well into next year. But the initial stages of bull markets are built precisely on the kind of worry that packs a huge emotional punch, but objectively doesn't impede stocks' continued climb.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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