Felix Salmon

Chart of the day: Stocks vs unemployment

By Felix Salmon
May 25, 2009


Received opinion has it that stock prices are a leading indicator of economic conditions — they price in expected future events — while the unemployment rate is a lagging indicator, since it reflects the outcome of decisions made in the past, and businesses only just beginning to come out of a recession are generally hesitant to start hiring again.

Looking at this graph, however, it seems that the two indicators are much more coincident than you might think, and it’s pretty hard to look at that uptick in stock prices over the past couple of months and see compelling evidence of “green shoots”. Especially given the absolute magnitude of the unemployment rate, which is now so high that it’s seriously hurting consumption.

If and when the recovery does take place, we won’t just move cyclically back into a period reminiscent of the last boom. Rather, the new economy will look very different from the old economy: it will be much less reliant on personal consumption expenditures than before, and especially on expenditures which were financed by debt, be it on credit cards or the proceeds of home equity withdrawals.

A glance at the chart shows that stock prices are very volatile these days, and that you extrapolate from short-term countertrends at your peril. It’s the red line which really charts the state of the economy, not the blue line. And although there’s the vaguest hint of a suggestion that the red line might just be leveling off, it’s worth remembering that it’s pretty hard to paint a picture of economic recovery with the unemployment rate at current levels.

When unemployment starts to drop — then, and only then, will I start to believe that a rising stock market might be telling me something. Of course, I’m not a stock-market speculator, so I’m not worried about missing out on the market rising further — in fact I’d love to see stocks roar upwards, and the attendant inrush of liquidity help to kick-start the economy. But I’m not holding my breath.

(Update: The chart shows U6 underemployment, which is a broad measure of the number of people looking for more work than they have right now. But just about any of the unemployment ratios would show much the same thing.)

6 comments so far | RSS Comments RSS

Felix, the chart is labeled “underemployment,” yet you refer to it throughout your posting as “unemployment.” Is this a mistake, or are you implying a direct correlation between the two? If so, can you explain? Thanks.

Posted by Curmudgeon | Report as abusive

Curmudgeon: There’s room for semantic flexibility here – the U6 measure incorporates both the number of unemployed and the number of underemployed.

Felix: If it helps, stock prices haven’t been following changes in the labor force so much as they’ve been pacing changes in the expected future growth rate of stock dividends per share.


Curmudgeon, yes, there is a direct correlation. See here:

http://blogs.reuters.com/felix-salmon/fi les/2009/05/unemployment-underemploymen. gif

Posted by Felix Salmon | Report as abusive

I’ve noticed that another Seeking Alpha writer, Dr. Kris from MIT has developed a really interesting item called the SMC analyzer….it puts together Modern Portfolio Theory and several market timing oscillators – seems she prefers the CCI – in regard to properly allocating assets. I’ve been involved in markets for many years and fund managers have never shown that they can effectively time the markets. Maybe they should take a look at it, since this seems to be hard math and there is no ‘human’ element to louse the results….

Posted by Jeff | Report as abusive

To put it simply: the stock markets, most especially US ones, WISH things would magically — aka, suddenly and sustainably — go back to mid 2008! They want it SO very badly!! Many want to try to recovering their losses, and others want in on the action they missed …

Problem is, reality: unemployment, consumer spending, credit market situation, rapidly ballooning federal debt, unprecedented industry changes; just to name a few!

Notice what I did not list there: corporate profits. Those are a RESULT, not a driver in themselves, in the real world! (Only Wall Street can live in fantasy land, and try to ignore reality; “Masters of the Universe” my …)
Those results, too, we have seen so very vividly demonstrated can be manipulated almost arbitrarily, especially in the short-term!!

In the face of all that, why the hell would any rational investor have any faith in the rally being sustainable??!!??


1929-1932 reveals a stark correlation to today?

Have a look at the two graphs below.. To me it’s clear that during the period 1929-1932; as unemployment rose the DJI fell… if the period we are in now is quasi-reminiscient of 1929-1932 then we are in February 1930 now.. Watch out below…

Dow Jones Industrial Average 1929 – 1932


Unemployment Rate 1929 – 1932

If this is like 1987 then we’re OK…

My thoughts are this “feels” like Structural change and we are heading for a quasi 1929-32 type scenario albeit with less civilian pain because China will “buy” America’s knowledge and assets in return for forebearance of debt. This will ease the populations’ initial herdship but the net result will be the confirmation of the shift of economic power from US to China.

Posted by ChrisH | Report as abusive

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