Jim Kopas

The 2007-2009 global financial crisis, the second most vicious bear market of the last century, caught many off guard and displayed unexpected characteristics when compared to past economic downturns.  With the decline being so atypical many are surprised to learn that the road to recovery has been just the opposite, as the economy has mirrored the typical business cycle recovery. 

In simplified terms, the sequence of events for a business recovery is first the stock market bottoms (March 2009).  Then the recession ends several months later (June/July 2009).  Next, the unemployment rate continues higher long after the recession ends, until economic expansion eventually brings job growth.  Finally, some time after unemployment peaks, the official end of the recession is announced – long after the stock market has bottomed (see table below).  Now the next logical step in the business cycle sequence is to see job growth and a peak in unemployment.  So when can we expect more jobs and how many will be created?

 When Will Jobs Rebound?

In recent weeks, some positive developments in the labor market have emerged amid the discouraging news about the climbing unemployment rate.  In November, the average workweek bounced to 33.2 hours from 33.0, which represents the biggest monthly rise since March 2003.  This is a strong precursor for the job market as business owners will typically ask current employees to work more hours prior to hiring new employees.  Ned Davis Research estimates that “the rise in the average workweek is roughly the equivalent of creating another 800,000 jobs!”

Another positive indication for the labor market is the recent growth of temporary employees. Temporary employees are the first to be let off in economic downturns and the first to be re-hired during expansions. Through October and November the number of temporary employment positions increased by 44,000 and 52,000 respectively.  Initial jobless claims represent yet another indicator for the future prospects of the job market.  The initial jobless claims 4-week moving average currently resides around 475,000.  Economists believe that job growth will occur should the average continue down below the 400,000 mark. 

Even as the unemployment rate continues to rise we are seeing some positive indications within the economy that should lead to job growth in the near future.  Former Federal Reserve Chairman Alan Greenspan echoes this sentiment, “We have a level of employment at this stage which is barely adequate to staff the level of output.  It seems to me virtually inevitable – if nothing else were to happen – that employment would start to come back fairly quickly.” So we are on the verge of experiencing job growth, but just how much job growth is the important question?  

How Many Jobs Will be Created?

At the cost of stating the obvious, jobs are highly correlated with the growth of the economy. Quite simply, the higher the economic growth rate is over the next year, the larger the increase in jobs and decrease in the unemployment rate.  A recent blog post on calculatedriskblog.com titled, “Employment and Real GDP” forecasts the expected unemployment rates under varying economic scenarios.

According to their data, “A 3% increase in real GDP (over the next year) would lead to about a 1.5% increase in payroll employment.  With approximately 131 million payroll jobs, a 1.5% increase in payroll employment would be just under 2 million jobs over the next year – and the unemployment rate would probably remain close to 10%.”  The table below summarizes the wide range of economic and job growth scenarios.

In my opinion the global financial crisis and rapid deterioration of the U.S. economy frightened business managers so terribly that they cut their payrolls more swiftly then they had in the past. Therefore, the payroll growth provided in the model and table could be understated.  Nevertheless, this forecast provides us with a general understanding of the relationship between the economy and the labor market. It certainly appears that the U.S. economy is well on its way to creating new jobs and taking its next step in this business cycle recovery.

As always, I look forward to hearing your opinions so please feel free to add a comment below.

–Jim   

Jim Kopas Economy

In October the U.S. unemployment rate rose to 10.2% thus capturing much of the economic and financial headlines over the last week. This was the first time unemployment surpassed 10% since June of 1983, and only the second time it has reached this plateau since World War II! With the recent news, many economists updated their economic projections and now believe that unemployment will peak by the middle of 2010 and will continue to remain high for several years. Obviously these unemployment numbers illustrate the recent devastating struggles of the U.S. economy; but investors must keep in mind that unemployment is a lagging economic indicator. So you might be curious how the stock market has performed in the past after peaks in unemployment? Historically the stock market has performed exceptionally well after unemployment has peaked!

The chart plots U.S. stock prices (red) and the unemployment rate (blue) over the last 40 years.  Unemployment has decisively peaked 6 times since 1969 and each peak accurately forecasted strong performance for the stock market (green arrows) throughout the following year.  After the peak of unemployment, the stock market advanced on average over the next 1 month, 3 month, 6 month and 1 year time periods.  In fact, only 2 of the 24 time frames exhibited negative returns (the 3 and 6 month periods in 1975).

Many investors are still fearful to enter the market with unemployment above 10% and on the rise.  How can investors expect the stock market to perform prior to the peak in unemployment?  In September 1982 the unemployment rate moved above 10% and finally reached a peak of 10.8% in November and December of 1982. The unemployment rate would remain above the 10% plateau for a total of 10 months and the stock market advanced over 37% during that time!  Yet another encouraging sign for investors.

Using unemployment history as a guide, investors should expect higher stock market prices in the months ahead!

Thanks for Reading – Jim     

Jim Kopas Economy, Investments

The overwhelming struggles of the global economy over the last couple years have been well documented, however many individuals are still struggling to understand the cyclical nature of the economy. Last week in an article titled, “Is the Economy in Uncharted Territory?” I outlined the business cycle and explained that we are currently in the recovery stage. In this article I will expand on the topic by explaining the 3 crucial economic indicators: leading, coincident, and lagging. These vital indicators will provide you valuable economical insight and will offer a roadmap to where the economy is going in the future.

Leading Indicators:

Leading economic indicators are the first to fluctuate as we will begin to see changes in these indicators prior to improvements in the global economy. The stock market and housing sector are great examples of leading economic indicators. These interest rate sensitive indicators tend to decline before the economy declines and also tend to improve before the economy recovers. Today the stock and housing markets continue to progress and at the moment it appears that both have formed sturdy foundations.

Coincident Indicators:

Coincident economic indicators tend to adjust after leading economic indicators, and simultaneously with the economy. The most commonly used coincident economic indicator is Gross Domestic Product (GDP). GDP is the monetary value of all the finished goods and services produced within a country’s borders during a specified time period (typically quarterly or annually). During the third quarter of 2009 GDP expanded for the first time since June 2008, at a better then expected rate of 3.5%. This broad measure of the economy shows that we have started to emerge from the recession.

Lagging Indicators:

Lagging economic indicators begin to change after the global economy and are the last indicators to show adjustments. It is not unusual to see lagging indicators trail the economy by one to three quarters. Most people do not really begin to “feel” that the economy is changing until after these lagging indicators start to make adjustments, because these indicators are easy for the typical individual to relate to. Contrary to popular belief, employment is a lagging economic indicator. Employment will show signs of progress after consumer confidence is revived, and the economy is well on its way to a recovery.

Courtesy of Economic Cycle Research Institute

The Chart Above illustrates the relationship between the Leading, Coincident, and Lagging Indicators since 1973. The shaded areas represent growth rate cycle downturns, while the horizontal dashes near the bottom mark off U.S. business cycle recessions.   Recently the leading and coincident economic indicators have improved, which leads us to believe that the lagging economic indicators (i.e. employment) should recover in the months ahead.

As always, I look forward to hearing your opinions so feel free to add a comment in the section below. I will have a new article posted early next week. –Jim 

Jim Kopas Economy