Un-Labor Day Thoughts

August Unemployment data were released this morning and the numbers were not as bad as expected. The rate of job losses is slowing, and some economists think that the rate of jobs lost should reach zero sometime around year end with job growth returning in early 2010.


  • Better than consensus job losses (216K versus 230K consensus and compared to high of over 700K earlier in the year)
  • Trajectory moving in the right direction
  • Average hourly earnings rose a better-than-expected 0.3% (consensus 0.2%)
  • It certainly seems that additions to the unemployment roles are nearing an end.
  • This is an efficient hiring environment. Employers have a huge candidate pool and wage elasticity which will benefit the bottom line.


  • Big negative revision to last month’s non-farm payrolls
  • Although second derivative is getting better (rate of decline in jobs is getting smaller), job losses continue (216K compared to 230K consensus)
  • Rate increased to 9.7% from 9.4% – higest rate since June 1983
  • The “real” unemployment rate, all unemployed, underemployed, and discouraged workers, ticked up 0.5 percentage points to 16.8%.
  • Economy has lost about 7 million jobs since start of recession in Dec 2007

Data confirms our belief that a strong economic rebound is not forthcoming. We will see a near-term boost from stimulus initiatives (cash for clunkers, housing incentives, quantitative easing, etc), but strong end demand is unlikely to materialize given the employment situation and a need for consumers to repair their balance sheets. Consumers have lost over $14 trillion in wealth through a combination of housing price and stock market declines. At the same time, the supply of credit remains weak as banks tighten lending standards in response to unprecendented credit losses and capital shortages. We find it unlikely that companies will begin to hire aggressively without a rebound in demand. So we are in a chicken or egg predicament…hiring will not pick up until end demand is established, and end demand wont pick up until the employment situation improves. We believe it is unlikely that end demand will pick up first because 1) the consumer balance sheet has been so decimated, and 2) we don’t believe it is likely that banks will begin to extend credit aggressively any time soon. We think we are in a new paradigm of thrift and living more within our means, and this adjustement process will take years not months.

But don’t despair. A Recession’s end is always messy, and we expect this one to be messy too. But let’s not lose sight of the fact that we are seeing better data and are in the process of emerging. It may take time, but we believe that we are near the inflection point. It doesn’t seem to us that it will be a dramatic inflection point, but one man’s ’stopping of the dropping’ is another man’s ‘beginning of the climb.’ Remember, investors have made good money in 2009 as the recession has continued in force. While we believe that the early parts of this recovery may be as weak as eyewash, there will be ways to make money through that process too. Having a clear investment discipline that eschews the hype of short-term momentum and the emotional gusts of over-confidence and self-doubt, that can feel so certain at times, will garner rewards. Focusing too much on unwarranted hope or unwarranted despair is never productive and can be quite expensive. An objective perspective and a dogged, dispassionate, investment discipline are essential to successful investors in all market and economic environments.

Hang in there.