Business Ahead of the Curve, But…Have Job Losses Become a Leading Indicator

I received the following email from a well-known, astute businssman and friend.  I have chosen to protect his anonymity.

I thought that both his major point and my reply might be of interest.  It won’t take much of an upturn in volume to produce some stunning profits.

Is it possible that job losses, normally a lagging indicator, are sufficiently severe to have transformed them into leading indicators, at least in the short run?

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Paul-

I enjoy your “musings”. I wonder if your recent comment about the weak employment situation could not also be seen in a different light.

My reading is that consumption is down “somewhat’…2.2% or so.

Business has pulled back strongly as seen by the unemployment figures and domestic investment which is down by 15% plus housing by 50%.

Wages as well as Disposable Income have held up despite employment.

This says to me that business is out ahead of the problem which may be good.

What do you think?

Regards,  J——

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Dear J—-,

You are certainly correct.  Business has been ahead of the curve in cutting employment and so far profits have behaved better than I would have expected, given the magnitude of the contraction.  The productivity numbers also indicate this.  When volume recovers the earnings results could be stunning.

My concern has been that employment has been falling so fast that, at least in the near term, its usual “lagging indicator” status might not hold, becoming more of a leading or at least a coincident indicator.  I think that has been more or less the case until now.  What I am anxious to see are signs that job losses are slowing.  The May numbers seemed to indicate that but the June report gave no such evidence.  One possibly hopeful sign is that last week’s initial unemployment claims declined, and now are down over 90,000 from the peak.  Initial claims ran over 600,000 for 22 consecutive weeks!  However, now we have simply returned to the January level, which we thought was horrendous at the time. July’s employment change may look better than June…but it’s still likely to be bad, only less so.

In the meantime, consumption is being supported by significantly lower taxes and unemployment benefits, and penalized by higher fuel prices (after benefiting greatly from lower fuel prices in the 1st quarter).  Disposable Income has held up pretty well, but I don’t foresee any real improvement for quite a while.

Inventories have been reduced big time, and any initial improvement in GDP will be largely the result of and heavily affected by what happens to inventories.  If inventory liquidation were simply to cease, GDP would jump by 2%.

Hope your summer weather has been better than ours.  New Hampshire’s  June was the second cloudiest  of the past 100, exceeded only by 1903!

Best Regards,   Paul

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