Fisher Investments Editorial Staff
Media Hype/Myths

Upbeat on Unemployment

By, 05/06/2010
 

Story Highlights:

  • ADP's revised March payroll report made it the third straight month of jobs gains. Official BLS numbers have ticked higher too.
  • Yet, for all the improvement, the unemployment rate has been stuck at 9.7% since January.
  • A stubbornly high unemployment rate shouldn't surprise, nor should it drive portfolio strategy.
  • Investors waiting for improvement in unemployment to signal an all clear for the stock market risk missing big gains.

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With so much focus on Euro woes lately, let's spend some time looking at what's happening here on US soil—namely, joining other positive economic signs, there's upbeat news on the jobs front too.  

ADP (a payroll processing firm), recently revised a March payroll loss of 23,000 to a gain of 19,000. Including 32,000 jobs gained in April—12,000 more than expected—it was the third straight month of private sector growth. A separate report (which includes Census workers) estimated April's payroll gain for public and private sector jobs was 262,000. All this comes ahead of Friday's official monthly employment update (from BLS), which is expected to show 187,000 jobs added in April. And while initial BLS estimates for January and February payrolls showed job losses of 26,000 and 36,000, respectively, the revised numbers were better—January actually gained 14,000 jobs while February only lost 14,000. And in March, nonfarm payroll employment increased by 162,000. We can bicker about whose survey is more accurate, and why they're all inherently wonky, but all signs are pointing to an improving jobs landscape. 

For all the improvement, the US unemployment rate has been stuck at 9.7% since January. But a stubbornly high unemployment rate shouldn't surprise, nor should it drive portfolio strategy. Unemployment is calculated by taking the number of people seeking work and dividing that by the total labor force (those seeking work, plus those already working). This makes for a strange effect early in an economic recovery; the recovery sparks renewed confidence, and folks who've given up typically start hitting the pavement again—increasing the denominator, possibly at the same rate or faster than the numerator. So the rate can stay flat or even rise. Pretty confusing—the economy is getting better and jobs are being added, yet the unemployment rate isn't budging or may even worsen. (See here for more on the confusing ways the unemployment rate is determined.) 

There are other good reasons not to focus solely on the unemployment rate. Previous periods of elevated unemployment little hindered past bull markets—the one that began in 1982 for instance. (See this excellent interactive historical table on post-war unemployment from the WSJ.) Folks may think this is the worst job market since the Depression—not so. Unemployment peaked at 10.8% in December 1982 and remained over 10% for 10 months. In contrast, this time around, unemployment peaked at 10.2% in October 2009, but stayed over 10% for only three months, falling to 9.7% in January 2010. After stocks bottomed in both periods, unemployment continued to worsen for months—yet little hindered significant gains in the stock market. Back in the 1980s, unemployment didn't sink below 7% until 1986 and 6% until 1987. How did stocks do over that period? Recorded one of the strongest bull market advances in history.

We've said before economic improvement isn't always perfectly captured by the unemployment rate. And, as history shows, those who wait on some magic number (7%? 6%?) to signal the all clear can miss major bull market gains. The good news is firms are adding jobs again. With other increasingly stronger economic data, it's just another reason to believe this recovery will last.  

 

 

*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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