Where have all the green shoots gone? (Update)
Last night I began this post by saying the markets are sure looking ugly. The jobs report published this morning for June does nothing to alter the thesis of this post: confidence is waning because job formation is so weak. The “topline” number — 9.5% unemployment — looks superficially better than last month’s 9.7%. But actually the rate shrank because the size of the labor force shrank. And that’s not a good thing. Other metrics on the jobs report were weak: hourly pay edged down a tad as did hours worked. Translation: There’s plenty of slack in the economy. Even if business picks up, employers don’t need to run out and hire more people.
Private companies did hire last month, but at an anemic rate of 83,000. Bloomberg noted: “The pace of hiring signals it will take years for the world’s largest economy to recover the more than 8 million jobs lost during the recession that began in December 2007.” The chart at left, via Calculated Risk, say sit all. (Click to enlarge.)
And, man, the markets are sure looking ugly.
As I wrote in early June, I thought the stock market rally had gotten way ahead of the recovery story on Main Street; that’s why we shifted our portfolio to about 75% cash and bonds. An 80% rally from the lows is a bit hard to swallow with 9.7% unemployment and a record number of people who despair of ever finding a job. And so the official story for the recent correction is a new raft of weak economic data: Home sales falling off a cliff, as everybody likes to write, now that the tax credit has expired; jobless claims rising this week; weak construction numbers, etc., etc. And the European debt woes and slowdown in China are pretty good downers, too.
But I find it hard to believe that the numbers would be much of a surprise to market watchers. They are in sync with what many were expecting: a slowdown in the second half of 2010. But suddenly all of the elements that have been “out there” have shaken the confidence of investors. (And the confidence number out this week also shocked on the downside, falling to 52.9 in June from 62.7 in May.) Shaken confidence is the big enemy of markets. Can anyone remember when commentators dared last year to speak of “little green shoots” in the economy?
Confidence is the oxygen of the marketplace. The atmosphere is getting mighty thin.
Yale professor Robert Shiller recently wrote that fear of a jobless recovery is a key factor deflating confidence; the dreaded double-dip in the language of Main Street doesn’t mean that the recovery suddenly ends this minute. GDP is in fact expanding if slowly. But the fear that has seeped into the average Joe is that even if the recovery continues in its snail-like pace for another year or two, unemployment may stay high (which did in fact happen in the last few recessions). And then the economy may get hit again by another slowdown. It’s the long-term view that’s scary, not the short-term. And it can be self-fulfilling.
Confidence is also ebbing in the system itself. I think something may be changing in the way investors look at the market as a result of the May 6 “flash crash” when the market plunged 10% in 20 minutes, with some stocks falling to zero. It’s more than a month later and we still don’t know why the market went into cardiac arrest that day. I don’t hear much chatter about the roller coaster ride in May, but I think the after-effects linger. I’m wondering if the flash crash — along with the not-so faded memory of the 2008 meltdown — hasn’t helped to revive our sense of uncertainty in the plumbing of capitalism.
And it’s not just the plumbing of capitalism that worries. The fiscal battles in Washington don’t inspire confidence. We are witness now to an epic policy battle between those who fear more spending will drown us and those who assert more spending will revive the economy. It’s a battle that voters get. In the early days of the Obama administration, when his popularity was unassailable, I wrote that this very battle would challenge his stature more than any other. That moment has come.
Tomorrow, by the way, the June jobs report comes out. Once more, Census temporary hiring will make the report look weak as the agency releases workers. A Bloomberg survey of economists predicts nonfarm payroll will fall by 125,000 vs a 431,000 gain in May– including 411,000 temporary workers; but private payroll should rise by 110,000 vs 41,000 in May.