Will the Jobless Recovery Hurt Stocks?
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Saturday September 13, 2:44 pm ET
By Dick Satran
NEW YORK (Reuters) - It's still the economy, stupid, to paraphrase Bill Clinton's campaign mantra.
Stock market investors, like George W. Bush (News), are facing the same annoying question that arose back in 1991: Will the economy improve enough in the year ahead to leave the recession behind? Things are improving right now. But in the politically sensitive area of employment, the data keeps disappointing.
Wall Street is still betting on an expansion, however, and stocks during the latest week have edged lower while still staying near the highest levels in a year-and-a half. For the week, the Dow Jones industrials closed 0.33 percent lower, Nasdaq fell 0.17 percent and the S&P 500 fell 0.27 percent.
The market has gained lately on optimism that expanding corporate profits eventually will lead to growth in jobs and general expansion in business activity. Companies will hire more staff, the reasoning goes, because they can make more money if they do.
"The greater focus in the stock market has been on profitability," said Richard Hoey, chief economist at Dreyfus Corp.
But corporate profit gains alone won't do much for George W. Bush's re-election if unemployment persists. The stock market, as well, needs to see an expanding jobs base for the simple reason that companies can't keep churning out earnings gains simply by eliminating jobs. Indeed, if jobs remain weak, consumers may spend less, threatening renewed recession.
But so far there have been few signs of improvement in the jobs market. The Labor Department on Thursday surprised Wall Street by reporting that jobless claims passed the critical 400,000 number, at which economists consider the employment market to be deteriorating, instead of improving.
The worst job figures in two months, the report doesn't bode well for the economy or the stock market, which has been rising on a string of otherwise rosy economic reports.
"The very good news we had on consumer spending for the months of July and August will not last unless employment growth returns," said John Lonski, chief economist at Moody's Investors Service (News - Websites).
It was the "stupid" economy that turned Bush the Elder into a one-term president. The country was slogging through an ugly recession at the same point in his administration as in Bush the Younger's right now. Economists were forecasting an upturn, but the electorate was losing patience.
"It's very similar in a lot of ways," said Jay Mueller, economist for Strong Capital Management.
"It's the economy, stupid," became the explanation in 1992 for the president's withering popularity after a successful war in Iraq. Similarly, recent polls are showing the economy is an Achilles heel for the otherwise currently popular president.
Mueller and other Wall Street economists see a luckier set of circumstances for the present Bush in the White House. The economy is clearly on the upswing and unemployment is just over 6 percent, unlike the nearly 8 percent of the early 1990s.
"It was a modest recession and it's going to be a gradual recovery in jobs, not dramatic," Dreyfus's Hoey said of the recent economic cycle.
But the fall in corporate profits during the most recent recession was dramatic, and it's that legacy that haunts the younger Bush and the jobs market. The "irrational exuberance" of the 1990s New Economy led companies to hire far more people than they really needed, so the slowdown in demand hit corporate earnings extremely hard.
"The flights of fancy in corporate planning put costs structures way out of whack," said Strong's Mueller.
Getting rid of those jobs has helped reduce costs enough for big companies to boost profits, so they are not in any hurry to start rehiring. That has fueled growing debate over whether the job losses are a permanent fixture or just a passing quirk for an unusual "business-led" recession.
Because of that concern, Wall Street is watching the jobs data with an unusually high level of interest. A continued jobs slowdown would lead to a "shift from current (bullish) expectations" on the economy and the stock market, says Hoey. But he doesn't expect that. "We're in a fundamental bull market for the old-fashioned reasons of a cyclical uptrend in corporate profits after a recession," he said.
However, Mueller cautions that "If we're still at where we are now a year from now, that would be a signal that the cyclical rebound has stalled."
For now, nearly all economists agree that with the economy growing at well over 3 percent a year, a job recovery will come. "We have plenty of reasons to believe that," said Mueller. "It's just taking longer than most people thought" |
