A Reality Check

Weekly Market Commentary 4-9-12

The market has rallied off of its lows from the third quarter of last year, but the jobs report last Friday is a reminder that the global economy still has room for improvement.

Economists were expecting 201,000 new jobs, and the actual result was only 120,000. The unemployment rate did drop by 0.1%, but an important statistic called the participation rate declined as well. The Bureau of Labor and Statistics only counts people as unemployed if they are actively looking for work; discouraged workers may be out of work, but they aren’t “statistically” unemployed. Bear that in mind when you hear investors getting overly optimistic because of a falling unemployment statistic, as the picture may be more complicated than it appears.

employment population ratio, participation

For some good news, the amount of jobless claims (new applications for unemployment benefits) has continued to trend downward, which is a good sign. The number of jobless claims is reported weekly every Thursday, and this can be a volatile figure, so the important measure to look at is the four-week moving average.

new jobless claims with 4-week moving average

This figure is encouraging. If we saw a sudden spike in jobless claims, it could be a sign of another downturn, but that has not happened so far. March could have just been a bad month, as it broke three straight months of +200,000 new jobs, but it is a reminder that growth continues to be slow.

The difference between this and other recessions

A problem is that employment has not recovered as fast as it did in prior recessions. According to our previous estimates, at a rate of 245,000 new jobs per month, it would still take around 34 months to get the unemployment rate below 5%. This graph from Calculated Risk gives a good visualization for the situation:

percent job losses in post ww2 recessions

The big difference between recessions in the past and the recent financial crisis is the amount of deleveraging (paying off of debts) that needs to be done to get things back to normal. People cannot spend like they used to when they are still trying to pay off their mortgage or credit card, therefore companies are not as profitable and look to cut costs (i.e., lay people off), and hence hiring is slow.

Fortunately, prominent hedge fund manager Ray Dalio recently said in an interview that he believes the United States has done the best job at deleveraging, but problems remain overseas. Europe’s problem is coming from national governments being overextended on debt; a government can be a lender of last resort to industries in trouble, but when the government itself is becoming insolvent, then the problem doesn’t have an easy solution.


While unemployment has been improving marginally, investors need to be prudent and remember that there is still a long way to go. An important number to watch for more context will be the consumer sentiment report on Friday. Also, pay attention to any announcements from the Federal Reserve to see if they are reconsidering another round of monetary stimulus based on this lower than expected jobs report.

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Alex Cook, Associate Investment Advisor – Phillips & Company