Now that the U.S. economy is growing -- GDP grew at a 3.5% annualized rate in Q3, according to U.S. Commerce Department data, one key question for investors large and small is: Is the U.S. economic expansion sustainable? Investors can immerse themselves in data on consumer spending, retail sales, new home sales, auto sales, and factory output etc., and all of those provide clues, no question. But if you're time-pressed and you want one metric to gauge the U.S. economy's likely health 6-9 months from now, monitor: monthly non-farm payrolls, as tallied by the U.S. Labor Department. I.E., how many jobs the U.S. economy lost or created in the previous month.
Why is the monthly job statistic so important and predictive? Well, it's virtually impossible for a U.S. economic recovery to 'have legs' or sustain itself without job growth. During the recession, Fortune 1000 companies did a good job cutting costs to, in most cases, keep bottom lines respectable, but profits via cutbacks can only go so far. Eventually revenue increases are needed to propel earnings growth, the key to revenue growth is an expanding economy with new customers and new households, and the latter is driven by job growth.
And in this recession -- the worst recession in more than 25 years -- household formation has taken it on the chin, largely as a result of the loss of more than 7.2 million jobs, including 263,000 in September. That's reduced aggregate demand. Why has the Dow risen this year, despite the lay-offs? Institutional investors have bid-up the Dow, a lead indicator that anticipates economic conditions 6-9 months head, on the calculation that the worst is over regarding lay-offs. In other words, investors expect the economy to start creating jobs at some time in the near future, leading to gains in household formation, and the all the good stuff that implies for corporate revenue and earnings growth. Should that scenario not ensue, and lay-offs continue, the Dow at 10,000 would represent a generous valuation, at best: more than likely, institutional investors would exit stocks en masse, and the Dow could easily lose 1,500-2,000 points or more. Dow 10,000 with the prospect of increasing payrolls in the year ahead is credible; Dow 10,000 amid another year of job losses would be downright frothy. And, needless to add, Dow 10,000 and a double-dip recession do not go together.
Market Analysis: So keep your eye on job growth. The October data will be released by the U.S. Labor Department next Friday, November 6 at 8:30 a.m. EST. As of now, it looks like the October data will confirm the mild economic recovery narrative that's in place: a loss of 150,000-200,000 jobs -- still a large monthly job loss, but a substantial improvement over the 'off-the-table' job losses of the financial crisis' acute stage. Provided that trend -- the vector toward job growth -- continues, better days and quarters will be ahead for investors, businesses, and typical citizens alike.
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Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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Reader Comments (Page 1 of 1)
10-30-2009 @ 10:53PM
clikdawg said...
"As of now, it looks like the October data will confirm the mild economic recovery narrative that's in place: a loss of 150,000-200,000 jobs ... "
Guy gets mugged in an alley. Gets his throat cut. At first the blood is fighting itself to spill out onto the waiting pavement. By 'n' by, the flow slows down, but he's still bleeding -- if only at half the volume-per-minute that he was initially. Slows down to a trickle eventually, all by itself because how much blood is in there to begin with and the body and heart go into shock to minimize the trauma, but the blood flow is still strictly outgoing -- not a drop being pumped back in.
Question: Can this guy really be said to be "in recovery"?