Unemployment Up Dramatically! Stocks Rise! Huh?

By Dave Lindorff

Ordinary, average, struggling Americans might be scratching their
heads over the news today, as the Labor Department reports that
unemployment is up by four-tenths of a percent for the month to a
record 10.2%, fully three-tenths of a percent higher than economists
had been forecasting, and stocks do what? Rise by a quarter of a
percent!

What’s going on here?

Well, the tube analysts are quick to say, unemployment figures are
a “lagging” indicator. That is, employment generally lags the overall
economy, with layoffs coming after a recession kicks in, and hiring
waiting until a recovery is well underway.

But that isn’t true with a deep recession like this one, because at
some point—and we’re well past that point—high and prolonged
unemployment leads to reduced demand for goods and services, and to a
psychology of fear and consumer withdrawal. Once people feel that they
aren’t going to find a new job soon, and once those who still have jobs
feel that their employment is not secure, they no longer buy things
except what they absolutely need. And in an economy where fully 72% of
economic activity is consumer spending, that is no longer a “lagging
indicator.” High, prolonged unemployment becomes a causal factor in the
economic downturn.

If people aren’t buying stuff, then companies won’t make it, which
means that they stop hiring, and even lay more people off, and so
unemployment becomes a downward spiral of cause and effect.

But what about the stock market rise? Why would investors think that a worse-than-expected jobs report is a good thing?

There are several explanations for this ugly phenomenon. First of
all, rising unemployment—particularly sharply rising unemployment—means
that the Federal Reserve will definitely not, for the foreseeable
future, raise interest rates. A rise in interest rates would hit
companies hard, and always batters the stock market, and the government
and the Fed don’t want to do either of those things. So investors
almost always jump into the market and push stocks up when they get
some signal that the Fed is going to lower, or at least hold the line
on interest rates. With rates effectively set at 0, the Fed can’t lower
them, but it is saying, no doubt with the bad news about unemployment
in mind, that it won’t be raising them anytime soon.

But there is another reason high unemployment may excite investors.
Current layoffs are likely, for many workers, to be permanent. A recent
report that productivity—work output per worker—was up at a 9.5 annual
rate in the Third Quarter, is an indication that those companies that
haven’t shut down operations are making or doing more with fewer
workers. That kind of thing happens in recessions, because as
joblessness gets worse, those workers who still have jobs become more
docile and are willing to be worked harder by management. Of course,
you get more on-the-job injuries, more stress-related illness, etc.
along with that kind of speed-up, but over the shorter term, it looks
good on the books if you’re cranking out more product with a lower
payroll.

Of course, longer term, this is all a disaster, not just for
laid-off and afraid-to-be-laid-off workers, but for the country as a
whole. You can’t rebuild an economy with more than one-in-ten workers
unemployed. And remember, that’s just the people who are our of a job
and still looking for one; it doesn’t count those who have been out of
work for so long, or who work in professions that are so gone (like
construction or maybe manufacturing Saturns) that they’ve just given up
looking, or those who have taken part-time jobs in ice-cream parlors or
selling apples to survive but who want to be fully employed again. If
you add those people into the mix (which is the way the US used to
count unemployment until the 1980s), you get an unemployment rate
closer to 20%, or one in five! And you sure can’t rebuild an economy
with one in five workers unemployed.

That’s what makes all the happy talk in the news and in Washington
about the recession being over because last quarter showed a 3.5%
annualized jump in the so-called Gross Domestic Product so ridiculous.

Most of that rise was the result of government subsidies to
car-buyers and first-time house buyers. It was a one-shot stimulus that
pushed forward spending, but it was no indication of a recovering
economy, just a spasm of spending using taxpayer money. Furthermore, an
excellent article in Businessweek by Michael Mandel noted that fully
one-percent of that GDP gain was the result of a failure by government
economists to account for a collapse in corporate spending on research
and development and on training and retaining intellectual assets (a
complicated way of saying that engineers, scientists and technology
workers were being laid off at a higher rate than other workers, and
much R&D work was being shipped overseas for good), So really the
“growth” of GDP in the third Quarter should have been at a 2.5% rate,
and even that was largely government pump priming, not recovered
economic activity.

The truth is, we’re falling deeper into recession, and apparently,
according to the October unemployment figures, at an accelerating rate.
And there is no indication that the Obama Administration or the
Democratic Congress are planning any significant jobs-creation program.
They seem to be happy with this.

So quick, run out and buy some stock! It’s the American thing to
do. Probably not a bad idea either, since those dollars you are using
will keep sinking in value as long as the Fed is constrained from
jacking up interest rates.
______________

DAVE LINDORFF is a Philadelphia-based journalist. His latest book is
“The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net