First the good news. Although it wasn’t exactly a popular view in the early going, we’ve been saying for some time that the recession ended early in the summer (our money is on the recession’s official end point being either June or July). And while it is dangerous to pat yourself on the back in this business, it is indeed nice to see that the vast majority of economists, including Mr. Ben Bernanke, now agree that the recession has technically ended. In fact, even the majority of the economists surveyed by the Wall Street Journal believe that the economy is now on the mend.
After the longest (18 months) and deepest (-3.8%) recession in the post-war period, the 48 economists surveyed this week by the Journal expect the economy to show a growth rate of 3.1% during the third quarter of this year. And it is for this reason that the stock market has enjoyed such a strong run since the beginning of July.
However, that is where the good news ends. It is positive that the WSJ’s survey of economists says the expansion in the economy will continue. But, the economists polled are quick to point out that the current rate of growth is likely to slow going forward and they don’t really want to make any projections much past mid-year 2010.
The problem is we are most likely entering something called a “jobless recovery.” As the Journal says, “The worst recession since the Great Depression has left a scorched landscape that will weigh on the labor market and the broader economy for years to come.” And it is for this reason that we aren’t likely to see a “V” shaped recovery in the economy.
“It’s the Economy, Stupid”
Given that the world’s manufacturing base is now located in the Far East, the Gross Domestic Product of the U.S. is now mostly driven by the consumer. And as such, it is tough to get too excited about the potential for a robust rebound in the economy given the state of the jobs market. Although this week’s initial jobless claims report was the best of the year and triggered a rally in stocks, we should keep in mind that another 521,000 people headed to the unemployment line last week alone and that 6.04 million people continue to collect unemployment insurance.
The fact that the jobs picture continues to be weak won’t make the evening news these days and shouldn’t surprise any investor that has been paying attention. However, when you are trying to look ahead six months or so, the state of the jobs market makes the picture murky at best.
According to Allen Sinai, "Never before has business shed so many workers so fast, so many people failed to find work who are looking for work, and so many dropped out of the labor force as in the current circumstance." And lest we forget, the current rate of unemployment nationwide is 9.8%.
The problem here is that the unemployment rate is expected to rise for the next five or six months. The Journal’s survey of economists suggests that the unemployment rate will peak out at 10.2% next February.
Since people have been talking endlessly about the employment picture lately, this concept shouldn’t surprise anyone to any great degree. But the fact that job growth isn’t expected to pick up any time soon just might. Diane Swonk of Mesirow Financial said this week, "It could take until 2014-2015 before we see a 5% handle on unemployment again."
Putting a pencil to the numbers, assuming we see an “average recovery” and the pace of job growth also comes in at an average rate, the Journal reports it would take 86 months for the economy to recovery the more than 1 million jobs lost since the recession began. And for those of you keeping score at home, that means it could be Christmas 2016 before the economy recovers the jobs cut during the credit crisis.
Back To the Malls?
With unemployment likely to continue to be a big problem, it is hard to see how the consumer is going to do much more in the way of discretionary spending than they are doing right now.
To put this into perspective, think about how you and your friends have reacted over the past year. In October 2008, the economy stopped on a dime as the credit crisis hit with a vengeance. In short, everybody stopped doing everything from a consumption standpoint. Nobody bought anything. Nobody
