Maybe Unemployment Is Not A Lagging Indicator After All
Erin Geiger Smith|Jul. 28, 2009, 1:19 PM|1
PrintTags: Economy, Unemployment, Housing, Housing Crisis, Jobs, Wall Street, Recession
The unemployment rate hit 9.5 percent in June and projections forecast it to go up to 10 percent in 2010. While the unemployment rate's recovery is generally expected to lag behind the recovery of the economy as a whole, what happens if it never comes?
Sunday's NYT Magazine says ominously that the "new joblessness" is different than past recessions and, "It's worse than you think." Compared to past recessions, the job shedding far exceeds what is normal and some economists think that the jobs market won't bounce back, even when the economy does. "It's an ugly picture out there," the commissioner of the Bureau of Labor Statistics told the magazine.
The increased joblessness is coming from employers not just cutting the excess, but also reducing pay rolls to the bare minimum and reducing the salaries of employees they keep. (One ready example is large law firms, where highly paid attorney who previously considered their jobs secure through good times and bad have seen massive layoffs, salary freezes and even salary deductions.)
The excess job loss comes during a time when even those companies who are expanding are adding fewer jobs - 6 for every 100 people on the pay roll, down from 7 out of 100 in the previous recession and 8 out of 100 at the end of the Clinton era.
So, what, besides being really bad news for the currently unemployed? It could mean the economy itself may not be on the road to recovery every one is hoping for. As today's WSJ points out, unemployment is seen as a lagging indicator, but lower payrolls have provided a revenue cushion for companies:
According to Deutsche Bank's calculations, 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets.
For the moment, earnings are only being held up by costs shrinking fast alongside revenue. For a true recovery, sales need to start growing, too. Rising unemployment may make that harder to achieve.
In other words, increased cuts eventually means less people to create and produce the products to sell, and less people to sell them.
If the slippery slope of a high unemployment rate results in continued consumer fear of spending leading to more job cuts - "the nasty feedback loop," the WSJ calls it - the false cushion of higher than expected earnings may disappear. So while no one is ignoring the unemployment rate, maybe considering it a lagging indicator is an that played better in past recessions. It is just one more example we are living in a whole new financial world.
________________________ ________________________ ________________________ ____
Consider this article the next time some shill on CNBC sats the economy is coming back.
