Finally, some good news from labor markets—job losses are slowing, recovery is in sight, and the stock market is poised for robust rally.
The Labor Department reported the economy only lost 345,000 jobs in May, down from 504,000 in April and 2.1 million the prior three months.
Clearly, the economy must stop shedding jobs for the recession to end but a slowing pace indicates the bottom is near.
The consensus among forecasters is the economy will contract less than 2 percent in the second quarter, squeeze out less than one percent growth in the third quarter, and expand at about a 2.5 percent annual pace after that.
That is a very modest pace after such steep decline and much less than the 3.5 or 4 percent necessary to power rising living standards for most workers.
Why are prospects so limited? What does it mean for the stock market?
Stock prices will surge, because U.S. companies have slashed payrollsso much that even moderate growth will deliver big profits. Many willexploit opportunities in Asia through investments. Materials and energywill benefit from the upward pressure on commodity prices stimulated byAsian growth. High tech will emerge a winner as businesses seek morefrom fewer workers and less energy.
Through the Clinton and Bush years, U.S. markets were opened wide to the foreign manufactures—the inauguration of the World Trade Organization in 1995 and China’s admission in 2001 were seminal events. As automotive technology advanced, the horsepower and weight of cars increased, and Americans paid more for imported oil.
Lacking new exports to pay for imported TVs and gasoline, Americans borrowed from abroad and consumed more than they produced. The annual trade deficit jumped from $91 billion in 1995 to about $700 billion from 2004 to 2008, and the external debt now stands at nearly $7 trillion.
Banks loaned Americans cash against homes, cars and credit cards, and bundled those loans into securities for sale to the People’s Bank of China, Middle East royals and other investors. When payments became too burdensome, the bubble collapsed, the housing and car markets tanked, banks and GM needed bailouts, and Washington printed money as the creditor of last resort.
Now the federal government is borrowing even more from China and others to finance $789 billion in stimulus spending, but that can only jump start growth. Consumers need new good paying jobs, or must again borrow profligately, if they are to power a robust recovery.
Since December 1997, six million jobs have been destroyed—many in the high paying manufacturing, construction and financial services industries—and not enough equally rewarding jobs are likely to emerge in the months ahead.
The President talks about new industries, but jobs in alternative energy, health care and education will require huge government subsidies and taxes that limit private sector growth. Those jobs will not pay like working in an auto plant, putting up steel framing or marketing securities on Wall Street.
In 2010 and 2011, the economy will grow modestly, unemployment will stay above 9 or 10 percent, and the good wages necessary to power rising living standards and robust growth will not be forthcoming, especially in the face of rising state and local taxes, and the President’s planned levies on energy and health insurance.
Stock prices will surge, because U.S. companies have slashed payrolls so much that even moderate growth will deliver big profits. Many will exploit opportunities in Asia through investments. Materials and energy will benefit from the upward pressure on commodity prices stimulated by Asian growth. High tech will emerge a winner as businesses seek more from fewer workers and less energy.
The Great Recession caused stock prices to fall twice. The first slide began in October 2007 in anticipation of the slump that began two months later, and another slide started about a year later on doubts about the banks.
In 2009, a surge in bank profitability was just about guaranteed by generous low cost Fed lending and a steep yield curve, FDIC guarantees on bank bonds, and stress tests for banks that reassured investors. And from its early March low to the May 7 release of stress tests, the S&P index jumped 36 percent.
Stock prices have continued strong, but not gained a lot, as I predicted on the Kudlow
Report when the stress tests were reported.
Soon the stock market will soon smell economic recovery, as analysts drill down into the prospective profits of companies they cover.
That is how the stock market anticipates an economic expansion.
Those who get in now will be popping champagne in New Year, lots of it.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.