Don’s Outlook 5/22/09
One set of data receiving a lot of spin is the unemployment figure from the U.S. government. Weekly claims for unemployment have drifted slightly lower, and this has the bulls calling a bottom in the recession. On the other side are the skeptics, who point out that unemployment is still increasing by more than 600,000 people each week and lifting the total unemployment rate. Then there are the bears, who dig through the unemployment figures and look at line U-6.
The unemployment numbers reported in the press are on line U-3 of the Bureau of Labor Statistics report, and these exclude discouraged workers, part-time workers who want full-time jobs, and “marginally attached workers,” which are people who are not looking for work but are not discouraged; U-6 includes all these people. U-3 unemployment rose from 5.0 percent in April 2008 to 8.9 percent in April 2009. U-6 unemployment went from 9.2 percent in April 2008 to 15.8 percent in April 2009.
Increased uncertainty about the direction of the economy allows for outlandish claims on both sides of the debate. The bulls are certainly underplaying the risks in the economy, and the bulls’ optimism is itself pushing the bears further down the path of doomsday predictions.
There is reason for optimism in the economy. If the numbers have hit bottom, it means there will be improvement in the coming months. Nonetheless, the bearish arguments are not without merit in isolation. Maybe higher unemployment will damage the overall economy enough to derail the recovery, but rising unemployment will lead to mortgage foreclosures and credit card defaults, two things that will hurt the financial sector.
Additionally, the U.S economy has fundamentally changed, and when it emerges from this recession, it will not be the economy of 2001-2007. Current stock market optimism appears to be focused on rebounds in the worst hit sectors, but these are the sectors most likely to continue to underperform. They have bounced back from their oversold condition, but the next bull market will be led by new sectors of the economy. Investors seem to recognize this, as the rally has run out of steam along with the financials. Until investors sort out where to put their money, the next week will likely resemble the previous two.
