Friday, November 6, 2009

10.2% Unemployment!! Now What?

The Bureau Labor of Statistics (BLS) announced today that the unemployment rate increased from 9.8% in September to 10.2%, the highest since 1983. 190,000 non-farm jobs were lost. 8.2 million people lost their job since December 2007, the beginning of the economic meltdown. In October, the number of unemployed persons increased by 558,000 to 15.7 million.

On a normal day, one would have taken this as a disastrous number. After all, 10% was thought of a psychological level just like Dow Index 10,000. But, nothing, nada!

The news received fairly silent treatment from the market as the market wanders around a very narrow range for the most part of the trading day (It's 2.34pm EST now). With a number like this and there is no triple digit sell-off, not even a double digit sell-off, not even a knee-jerk reaction, there is only one obvious reason: People are not panicky. People saw it coming and people believed this was as bad as it could get.

On the hind sight, it probably should not be a surprise after all. The survey of 52 economists by Wall Street Journal in September reported that most economists still expected the unemployment rate would climb to 10.2%, from September's 9.7% , before falling early next year. These economists also in general expected jobs being added in the next 12 months although they expected only 200,000 jobs will be added. They expected the unemployment rate to stay as high as 9.3% in December 2010.

This is quite consistent with the Fed's forecast in September FOMC minutes. The Fed expected the unemployment rate to stay around 9.4% in 2010 and come down to 8% only in 2011.

So, now we know people did see it coming and it should not come as a surprise that the unemployment rate will stay high for quite a while (which is typical of recessions in 1990s and 2000s). The next question we have to get ahead is: Is 10.2% as bad as it can get?

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Anonymous said...

Nice blog and insightful comments about unemployment data today.

It seems your writing implies the current market is bullish. But, the question is this: Has the market reached its high at 10110 in the 6-month-plus rally already or has the pullback been over yet?

Compared to the 00-03 bear market, unemployment rate didn't affect the later rally, and only the rise of interest rate stopped that rally. So, maybe unemployment rate above 10% had already been priced in and shouldn't be a factor anyway. It's a good news for bulls as FOMC confirms a low interest rate.

However, if the economy is further deteriorated this picture could be completely and dramatically changed again. This is because of bad news from CIT and more expected from retail sectors. With such a high unemployment number and consumer debt shrinking monthly, could this holiday shopping season still be good?

Given that, my conclusion is the past week indicates bullish, but it's very risky looking for upside. It's bigger risk for bigger reward, or vice verse.

Always, happy trading!

coke said...

I do have bullish bias over the next 3-6 months as all the stock market needs is the economy "getting better". Other than the job markets, most indicators point to this toward the end of the year.

As long as the economy is perceived to be "improving", the abundance of liquidity is enough to lead less risk averse investors to put money to work.

That said, I am very cautious of an extended rally that can easily get almost 10% correction (as typical of previous recession) even after the recession is officially over. Just the fact that unemployment rate may stay high for an extended period is enough to create excuse from time to time to result in such a correction.

So, for those who want to take the ride, put on the safety belt and reduce the speed.