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What Does Employment Mean For the Market?


The outlook paints quite the ambiguous picture.

Predicting monthly employment data is usually a fool's game due to the extremely large margin for error in the statistical estimation – probably in the 100,000+ range in the case of unemployment gains/losses. With respect to this month's net job loss number of 247,000 that means that the actual net change in unemployment could have been between 420,000 and 220,000, a 30%+ margin of error up or down.

While today's number was within the margin of error, it's pretty clear that if one analyzes the figures for the past few months, there is a trend going on: The pace of net job loss is slowing very substantially. In addition, at the beginning of the year, most economists were talking about 500,000+ monthly net job losses for all of 2009.

What does this all add up to? It's just one more indication that contrary to expectations at the beginning of 2009 -- that the US would enter into a second Great Depression -- the economy is currently experiencing just a good-old-fashioned, run-of-the mill recession.

The sharp recovery of financial asset prices from absurdly undervalued levels, which I identified in March, is thus entirely understandable.

The question now is: What's going to happen going forward? With respect to the employment situation I would offer the following observations.

1) The importance of the inventory correction. With employment, as well as with much else, a great deal hinges on the development of the much talked-about and anticipated inventory correction, as I discussed in my most recent article. The decline in inventories has probably been excessive due to temporary factors such as the credit freeze as well as the general panic mood that affected business behavior in the first quarter of 2009. Thus, an inventory correction in which companies restock their inventories to more normal levels relative to final sales could goose up production numbers in the second half. In most cases, production will only be able to be ramped up in conjunction with increased hiring. Thus, the goosing of production to replenish inventories should jazz up employment numbers as well.

2) Another "jobless recovery"? Most economists, including the most bullish ones, are talking about and assuming another "jobless recovery" such as the one that occurred after the 2001-2002 recession. However, I believe that this economic consensus could be making a major oversight: The potential for a very sharp inventory correction was nowhere near as great after the 2001-2002 recession as it is today. Thus, there is substantial potential for a sharp stage V shaped recovery in employment in the early part of this recovery cycle.

In addition the jobless recovery after the 2001-2002 recovery was greatly impacted by the increasing US trade imbalance and the increasing share of aggregate demand being captured by foreign suppliers of goods and services. For various reasons that I outlined in "The US China Syndrome," and the virtual impossibility of the US sustaining current account deficits at prior levels, foreign competition will not pose nearly as severe a drag as it did after the 2001-2002 period.

The financial market's implications of such an employment surprise are enormous. This is currently completely unexpected.

3) Doubts about the vigor of the expected inventory correction. Notwithstanding the above, as I pointed out in my last article, while an inventory correction is likely, it's not a sure thing that the inventory build will be as vigorous as some folks seem to be projecting. There are two reasons for this. The first is psychological: "Shell shock" and "diminished expectations" could lead businesses to be extremely cautious about deploying capital to build inventories.
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