Why The Unemployment Data Should Be Taken With A Grain Of Salt
Many stock market bears
and pessimistic economists have been quick to point to the weakness
in the US employment data (which posted a decline of 45,000 jobs and a .7% drop
in hours worked for April) as evidence for their unfavorable outlook. When
viewed alone, this weak employment data could be cause for concern, but it needs
to be taken with a grain of salt when viewed in a broader context, which
currently includes many positives– lower energy costs, lower cost of capital,
improving sentiment, and expected tax cuts.
Investors should remember to look at the
macro picture and remember that not only is unemployment data backward-looking,
but job losses tend to accelerate right before upturns in economic growth. For
example, during the 1981 and 1982 recession, the US economy shed close to
500,000 jobs in the last three months of the economic contraction while the
economy expanded by 4.7 % and 9.8% in the proceeding quarters.
And during the ’91 recession, the economy lost
635,000 jobs in the last quarter of economic decline– it even lost 130,000
during its first quarter of expansion. By comparison, for the first quarter of
this year, the US economy shed 274,000 jobs, which includes the worst of the
Iraq war crisis, when businesses were especially pessimistic about the economic
outlook.