Economic Insights: A Wake-up Call on the Economy
Business and investors alike must face the reality of a plodding economy.
by Milton Ezrati, Lord Abbett & Co.
The recent weak jobs report should serve as a wake-up call to economic reality. The disappointing news that payrolls in March expanded at only a meager 120,000 was far from momentous in itself. But it should, nonetheless, remind investors and businesspeople that earlier signs of strength overstated the fundamentals and that the recovery, though reasonably secure, was plodding all along, as it has for some time now and will likely continue to do.
Economic statistics seem at times to have their own ebb and flow, sometimes overstating and sometimes understating the underlying fundamentals. Sadly, these often meaningless data variations can create false feelings about economic possibilities—enthusiasm, when the statistical flow leans toward the strong side, or despair, when it leans on the soft side. Investors, in particular, succumb to such swings in attitude, but, to a lesser extent, so do businesspeople. So, it was with a string of insupportably good numbers late in 2011 and earlier this year.
Unseasonably mild winter weather created a particularly pronounced distortion in the much-beleaguered housing sector. Sales of new and existing homes through February indicated growth of 11.4% and 8.8%, respectively, over the same period in 2011. New home construction showed a gain of almost 35% over a year ago. Though these were welcome signs that the worst of the housing slide had passed, the degree of strength was suspect. After all, credit standards at banks had remained tight, as they still are, and lending for real estate had continued to decline. The housing market still showed an inventory overhang of unsold properties, both in the official statistics and in foreclosures not yet executed. Declines in housing prices, by 4%-plus from a comparable period in 2011, according the S&P/Case-Shiller Housing Price Index,1 also suggested something less robust than the sales and building statistics implied. The full array of available information was sufficient to conclude stability, but little more.
The jobs figures have followed a similar pattern. After disappointing reports through much of 2011, the pace of payroll expansion picked up in 2012, with reports of almost 250,000 net new jobs created each month in January and February. While this was welcome after a long soft patch, many, it seems, lost sight of the still subpar nature of even these improved rates of expansion. Past cyclical recoveries showed payroll gains closer to 400,000 a month or more. The basic picture, though improved, still exhibited the cautious management attitudes toward hiring that have dominated since 2009 and for the same reasons, uncertainty and the legacy of fear after an especially difficult recession. As with other aspects of the economy, the recovery in jobs was still plodding. It was, then, hardly surprising that a month or two would offer news of even less adequate jobs growth. And it arrived with the meager payroll growth for March.
The unemployment rate has offered a similarly false signal of faster improvement than the fundamentals can support. Falling from 9.1% of the work force last August to 8.2% more recently, the figures, on the surface, suggested considerable progress in turning the jobs market around. But much of this improvement reflected the decisions of frustrated job seekers to abandon their search and exit the work force altogether. Because the unemployment statistics count only those actively seeking employment, these drop-outs lowered the measured unemployment rate, even though no one found a job. But the existence of frustrated job seekers fits the picture of sluggish recovery. In March, those of working age not in the work force increased by 333,000. During the past year, this group has grown by almost 2.3 million. Though not an especially encouraging trend, and surely a sign of continued slow growth, the pattern had quite the opposite impact on the statistics. What is more, any substantive uptick in the pace of hiring, even just to 250,000 a month, will likely tempt these frustrated job seekers back into the search and, because they will not likely find jobs immediately, cause a temporary rise in the recorded rate of unemployment. No doubt that rise will generate an equally false sense of retreating fundamentals.
As the weaker statistics remind people of the plodding nature of this recovery, the more excitable, no doubt, will speculate, again, about a “double-dip” recession. Such speculation arose in 2010 and 2011 on similar stretches of weaker statistics. Both scares were false and no more justified in the fundamentals than the recent enthusiasm was. If a spate of soft numbers now causes another such scare, it, too, would likely be wrong. In the meantime, the underlying message of continued slow progress in this economy’s recovery is clear. Businesspeople will have to continue to position themselves for uninspiring growth. For investors, the slow growth will also be less than inspiring, but, crucially, it still can support an earnings expansion that, given still cheap market valuations, should propel equity markets higher, despite the distinct absence of an economic boom.
1 The S&P/Case-Shiller 20-City Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States
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