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Investors have been reading the labor-market tea leaves more closely than ever lately in hopes of finding signs that the economic recovery is either gaining or losing momentum. In the past few weeks, this exercise has probably done them more harm than good. Even at their most accurate, labor-market statistics can't really tell you much about the future direction of the recovery because in an economy this large and dynamic, even the most efficient government agencies need time to collect and analyze data about who is working and who isn't. But that hasn't stopped market mavens from focusing in on employment releases.
Those labor numbers have been particularly hard to interpret lately in an economy that's sending all kinds of mixed signals. News stories on Feb. 7 that the unemployment rate fell to 5.7% from 6% in January were particularly misleading. Here's the simple truth on jobs right now: The labor market has been flat for close to a year. The unemployment rate has wavered between 5.7% and 6%, with weekly unemployment claims around 400,000.
For investors, that means the economy is in a tepid recovery where layoffs have abated but hiring activity hasn't picked up. Gross domestic product (GDP) would have to be growing more than 3% before enough new jobs could be created for all the laid-off workers to be rehired, as well as for new entrants to the job market to find work, says Edward Deak, an economics professor at Fairfield University.
WAITING IT OUT. In 2002's fourth quarter, GDP grew just 0.7%, the lowest rate since it fell by 0.3% in 2001's third quarter. Growth averaged 2.4% for all of 2002 (up from 0.25% in 2001). Most estimates have the economy growing in 2003 about 2.7%, with the strongest growth coming in the second half -- and that's if any war with Iraq is swift and victorious.
Sophia Koropeckyj, a senior economist at research firm Economy.com, expects unemployment to rise to 6.2% by midyear as war fears continue to impede the recovery. "Employers are just holding on and waiting out the next few months to see what happens with the war in Iraq," she says.
Koropeckyj then expects numbers to improve modestly through the rest of the year. A healthy decline in unemployment is unlikely until 2004. On the bright side, she says, "Companies are in a much better position to begin hiring than they were a year ago."
YESTERDAY'S NEWS. Analyzing the employment data isn't what leads her to that conclusion, however. Instead, Koropeckyj scrutinized inventory levels and believes they leave room for rebuilding. Plus, based on the low levels of capital spending, she thinks companies that have been stalling purchases for more than two years now will need to replace goods and update technology. Higher levels of demand for goods and services will then translate into more hiring.
The bottom line for investors is that so-called headline labor-market statistics, like the nation's unemployment rate and the number of jobs created each month, are a great way to get a quick read on economic trends -- of the recent past. Even though the job market's health is linked to the strength of consumer spending, which has been keeping the economy afloat, you can find other, better, ways to figure out how much consumers might have to spend in the future.
The raft of monthly confidence statistics put out the likes of the Conference Board and the University of Michigan are earlier indicators, yet even they aren't foolproof. While consumer confidence has slipped lately (thanks to heightened fears of war and terrorism), economists see other positive signs for why people should keep spending, such as growth in average hourly earnings and a slight uptick in hours worked.
SKEWED STATS. Labor-market statistics like those, which are linked to how much money workers are taking home, are probably a more accurate gauge of what the economy is doing now. However, investors should take into account that many things can skew monthly employment statistics, despite the government's best efforts to adjust for special factors.
For example, the January report of 5.7% joblessness had two big problems, which traders quickly grasped. First of all, the way the government adjusted the numbers to take into account the holiday season made December look worse than it was -- and made January look a lot better. When you factor out that discrepancy, job numbers were essentially flat, says Koropeckyj.
Second, the January report included a change in methodology for calculating the number of households. Even though the government says the adjustments should not affect the main unemployment number, "it's hard to reconcile the 5.7% with the flatness that is evident pretty much everywhere," says Koropeckyj.
RULE OF THUMB. Weekly reports on jobless claims, a more timely indicator of the labor market than monthly statistics, haven't provided investors many useful insights lately, either. On Feb. 13, the number of U.S. workers filing for initial unemployment-insurance benefits dipped to 377,000, which was taken by investors as a sign the job market is improving.
The rule of thumb they're following here is that if the number of claims is below 350,000, then the job market is expanding. If it's above 450,000, then jobs are contracting. Yet weekly claims numbers are notoriously volatile and have been zigzagging in a fairly narrow range between 380,000 and 400,000 in 2003 -- which doesn't really tell investors much about whether the job market is on the rebound.
The economic recovery is at a fragile point. Koropeckyj puts the risk of a double-dip recession at one in three. But even in that unlikely event, studying the headline-generating jobs numbers won't help investors to see it coming.
Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column Edited by Beth Belton
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