U.S. unemployment data released this week revealed that another 263,000 jobs lost last month — roughly 80,000 more than anticipated — bringing the official unemployment rate to 9.8 per cent, the worst number since 1983. Although employment numbers can be quite volatile from month to month because of seasonal factors, it appears evident from these numbers that, although unemployment figures have dropped dramatically since the spring, American employers are still not hiring, which makes recovery slow and difficult.
However, many are asking if a jobless recovery is possible in the U.S. because many sectors of the market are showing signs of growth. I believe this is possible in the short run while government stimulus programs pick up the slack for lost spending on behalf of cash strapped consumers. In the long run, however, the U.S. will have to create jobs for any hope of a sustainable economic recovery because the government cannot continue to spend money at its current rate.
Until this week, economists were asking how the Federal Reserve was going to remove stimulus from the economy for fear of possible inflationary pressures. The price of gold has skyrocketed to more $1,000 per ounce on the back of such fears. However, with unemployment at such high levels and capacity utilization — a measure of how much capacity is being used to produce goods — numbers at an all-time low of 67 per cent, I believe these inflationary fears are unjustified. With so much slack in the American economy right now, it would take significant growth before inflation becomes an issue. The Canadian numbers don’t look much better, with an unemployment rate around 8.7 per cent and a capacity utilization rate of approximately 65-70 per cent. The fortunes of the U.S., our largest trading partner, has a huge affect on our economy.
Have things changed so much that there is now cause for panic that the most recent stock market rally is over? I don’t believe so. Investors can be swayed quite easily by what they read and hear. The U.S. has gone from a nation that wondered if it actually needed the entire $787-billion stimulus to accepting it and even asking for a second one. It’s helpful to remember that less than half of the first stimulus has been allocated as of yet and there have already been many positive effects on the U.S. economy. We have to wait until the remainder is spent to see its effects.
Unemployment is a lagging indicator for the economy, the last statistic to improve to show that things are getting better. Investors have to be patient — as long as there is a positive trend showing less job loss, at some point it will turn positive.
Investors today continue to hear the arguments from both the bulls and the bears, and there seems to be an equal amount of each. I am a bull market investor and believe that the most recent unemployment data is giving investors the opportunity to enter the equity market, especially if you have missed the most recent 50 per cent rally. A dip in the market I feel has been somewhat overdue is expected, but I think that the market will not fall back to its Mar. 9 lows. Most would agree the worst is behind us and although the road ahead will be full of bumps and at times potholes, those investors that have the ability and confidence to invest will be rewarded for doing so.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you.
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
