Is a Jobless Recovery Possible?
July 23, 2009
The news doesn't usually happen on the same day. But it did today. And that's why it brings the topic back into focus. Today, new jobless claims jumped by over 30,000. On the same day, several large companies reported increased profits. So, it has everyone talking about a "jobless recovery" again.
The question is this: how long can companies continue to report profits if unemployment continues to rise? Stated another way, how can the market continue to go up, when the unemployed see no relief in sight? Stated another way, is it possible that our economy is undergoing some fundamental changes, such that companies can continue to post profits while the currently unemployed remain without a job?
Now, I am not an economist. But here is part of what I see.
The market rewards profitable companies. If a company is making money, then an individual can participate in this profit through the ownership of shares in that company. Therefore, at least for the short term, a profitable company causes demand for shares to increase and therefore the price of shares increases. The stock price goes up.
But, if a company becomes profitable by becoming smaller and leaner, does it deserve the same stock value it acquired in the pre-recession economy? Probably not. At some point, it must grow internally and externally in order to command higher stock prices.
At the same time, parts of our economy (historically, at least) depend upon growing consumer demand. A company that sells furniture, for example, can cut expenses and wean itself to the bone. But, if 1 in 10 Americans are out of work and 6 of the other 9 are worried about the possibility of losing theirs, then it doesn't make people want to go out and buy furniture. This "lack of sales" affects manufacturing, the income of sales staff, and thus the broader economy where these sales associates shop.
Ideally, at some point companies begin hiring new workers. Personal and household income increases. People begin to buy furniture and other things and services. Money is spread around like manure, and the economy gets back into its groove. But, what if these companies see no need to hire? What if these companies are able to run efficiently on less, asking current employees (who are scared of losing their jobs) to do more for less? At some point, do we hit a brick wall? Is sustainable growth possible without job creation? Or, will the economy change is some fundamental way so that consumer spending becomes less of a driver of our economy? Will other values and markets and products step in to redirect the more modest spending habits?
No easy answers here. And I am not proposing any solutions. I'm just adding to the discussion, or at least summarizing some of the questions. I am not a policy maker or a politician or an economist. But I am a trader. And therefore I am interested in trying to understand the market and in making a living by understanding the market.
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