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After June Employment Report, Stock Market Watchers Say: "Recalibrate"

To judge by the stock market's response to the full-month June employment report -- a drop of over four percent in the three trading days since July 2 -- the job situation is an ongoing, and increasing, disappointment. In terms of the percentage of jobs lost from peak to trough, this recession is already far worse than the 1982 slump, and by the time it's all done, will probably rank second only to the massive demobilization of the defense economy after WWII. Astute observers are saying we may need to rethink the labels of leading and lagging indicators.

The other day (July 2) I wrote that although the drop in net employment for June was far worse than expected, all was not lost, because the front end of the employment machine, new jobless claims was improving.

But over the weekend I read a couple of articles from very smart people that made me think otherwise. First, consider the net-net of employment and recessions over the past 70 years:

Source: St. Louis Federal Reserve

The graph plots nonfarm employment in the US since 1940. (Pardon its lumpiness.)

The circles denote recessions, and the red circles indicate the most severe ones, along with the net percentage of jobs lost, from the peak of employment to the trough. (That does not coincide with the peak and trough of each recession, but it's close.)

The biggest job loss was in the switch from a wartime to a civilian economy in 1945, a 10 percent drop, from which there was a quick recovery. Ranked by severity, after that was a 5.2 percent drop in 1949, and then ... today. In terms of net job losses, the comparison we have been fearing all these months, the recession of 1982, at 3.1 percent, is by now far in the rear-view mirror.

Again, the disappointment Thursday was not the fact of a month-to-month decrease in net employment; it was that the 467,000-job loss was so much worse than expectations -- 350,000 -- and that the losses were widespread.

In the Financial Times on Friday, columnist John Authers observed that the May report, which brought some green-shoot optimism, was likely a fluke. He adds that rate cuts by the central bank of Sweden, and more important, that

the calm words from the European Central Bank, make clear that it is too early for exit strategies [from fiscal stimulus].
More compelling was an op-ed article from Mohamed El-Erian, chief executive of PIMCO, an enormous investment management company, specializing in bonds. Typically, he states, the net job losses are viewed as a lagging indicator, and explains:
After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground - or so says conventional wisdom.
However, El-Erian cautions:
There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.
Today's broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.
In other words, El-Erian is saying, the end of the financial crisis may only be the closing curtain on Act I.