Farrell: Unemployment Is A Lagging Indicator


The unemployment news released on Friday was as dismal as had been expected. 663,000 jobs were lost and the rate of unemployment hit 8.5%.

The director of Soleil I had the dinner-bet with on where the rate would go (I foolishly had less than 8.5%—but the bet was made a long time ago!) instantly started a fast so he could be appropriately, and expensively, hungry for our dinner.

I hope there is a lay-away plan offered.


Initial claims for unemployment insurance were also discouraging to read earlier in the week.

But it's key to remember that unemployment is a lagging indicator and markets turn up long before unemployment peaks.

I remember well that unemployment hit a post-Depression-era peak in November of 1982 at 10.8%, but the market had bottomed the prior summer. I remember it so well because that was the year I joined my pals in what became Spears, Benzak, Salomon, and Farrell. Our money was on the line and our good names were on a lease, and we paid very close attention. On average, the rate of joblessness will continue to climb for seven months after the market bottoms.

If the revised January 2009 jobs number were to be the worst of the cycle (it showed a loss of 741,000 jobs), then history tells us the market will likely be higher not only a year later but also three months later and six months later. The brain trust at Strategas, especially Don Rissmiller and Tiffany Smith, crunched all the data and found that to be true with very few exceptions for the past eleven cycles. Their report is illuminating and very well done.

The non-manufacturing Institute of Supply Management (ISM) survey declined to 40.8 in March from 41.6 in February. Remember that 50 is the dividing line between expansion and contraction, so both numbers were poor. But the decline in March's reading from February's was due to the employment index component of the survey. And we know that unemployment lags any upturn in the economy. The market took the reading in stride as it appears that more and more are seeing the light at the end of the tunnel.

Soleil's Lyle Gramley feels that Q1 GDP may well be close to the decline we saw in Q4 2008 (negative 6.3%, I think), but that we should be slightly positive by Q4 2009. He feels unemployment will hit close to or reach 10% and stay there for a bit. It's therefore good to remember the market will have this figured out.

A couple of things I'll be looking for this coming week are the April due date for subscriptions for TALF money. Bloomberg news reported that $8.3 billion was requested last time. I didn't think it was that much, but the Fed has designated a ton of money to this program, and, even if it was $8 billion or so, it needs to be more enthusiastically embraced. Also, the SEC meets on April 8 to discuss the up-tick rule, which I see as needing modification. And I'll be looking at the Fed's balance sheet. It appears the Fed bought $32 billion of mortgage-backed debt last week, and they have indicated that $1.25 trillion could be spent to absorb this paper and drive mortgage rates down. $32 billion was the biggest weekly total so far, but it's a long way to a trillion.