Friday, August 7, 2009

Unemployment Rate Decline Not a "Win" When It Is Due to More Labor Force Dropouts

From Marketwatch:

Friday's nonfarms employment report out of Washington is a classic of the genre.

The Labor Department report showed U.S. unemployment fell in July to 9.4% even as the economy lost another 247,000 jobs, the smallest decline in nearly a year.

Even a cursory glance at the numbers tells you something's missing. That something, of course, being the number of people who gave up looking for work. Because that figure exceeded the number of jobs lost by nearly 200,000, the unemployment rate actually fell.

A win is a win, no matter how ugly, and the headline number did go down.

We beg to differ. "A win is a win" is simply not an appropriate statement. The win is not that the rate went down because more people dropped out of the labor force than were net fired vs. hired. That is a loss and must be called what it is: bad news. Not unexpected, but bad. What one sees that is better is the rate holding steady or even rising as more people (re)-enter the labor force while more hiring is going on. A self-sustaining expansion has been predicted for months by the Economic Cycle Research Institute and other forecasters but has not actually occurred.

The "win" is the general decline in the net firing/hiring balance. Unfortunately, it is taking massive monetary stimulus and direct injection of money into the private sector from a borrower- the Feds- simply to create the worst jobs creation situation in the 20th month after a recession began since WW II. Unfortunately it is the financial sector that has been propped up and already enriched massively after its misdeeds led a basically prosperous and well-functioning society into a depression.

The redoubtable Jeremy Grantham recently opined that fair value for the S&P 500 is 880. The only sector he thinks is undervalued, or at least is at fair value, is high quality U. S. blue chip stocks. The good news for the stock averages is that what passes for low P/E's in a stock market that never approached an extreme of historical undervaluation can be found in global companies with decent charts and dividend yields that while generally below that of a 10-year T-note compare favorably with cash or CDs. Long-term investors, especially those who are afraid of sustained and rising inflation, can buy and hold. EBR continues to hold to the quaint notion that an asset class proven as risky as publicly owned common stocks, where the benefits of the good times accrue disproportionately to the insiders, should not be heavily owned by individuals unless the current income from them makes it worth the risk. Because this situation is not in evidence, the Grantham advice makes a lot of sense.

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