The U.S. stock market has staged one of the more impressive rallies in history this year, as "green shoots" of economic growth whetted investors appetite for risk. The Dow Jones Industrial Average is up more than 40% from mid-March, while the Standard & Poor’s 500 Index has soared 46% and the Nasdaq Composite Index rocketed an astonishing 55%.
Despite investors’ newfound optimism, the economy is still contracting, unemployment is still rising and consumer spending and sentiment is still abating. That could mean the sharp "V-shaped" recovery many analysts are anticipating may turn out to be a more-prolonged "U-shaped" rebound.
"We’re looking at a U-shaped recovery, which means getting off the bottom is going to be a lot more difficult than people are anticipating in the market," Doug Roberts, chief investment strategist at Channel Capital Research, said in a Reuters interview.
Indeed, a bullish equities market means little to still-employed consumers who can’t be certain that they’ll still have a job next week. And since consumers account for as much as 70% of the U.S. economy’s output, the threat of unemployment poses a major risk to any recovery.
Why Unemployment Could Undermine a Recovery
The national unemployment rate hit 9.5% in June and analysts say it could easily surpass 10% by yearend. Statistics from the Labor Department today (Friday) are expected to show that roughly 328,000 jobs were shed in July, according to a Bloomberg survey.
Payroll firm Automatic Data Processing (Nasdaq: ) said earlier this week that job cuts are slowing, but that’s mainly because there are fewer people left to fire. ADP’s National Employment Report showed that non-government employers cut 371,000 jobs last month, compared to a revised 463,000 in June.
The ADP data "suggest the unemployment rate continues to rocket and household cash flows continue to fall," Ian Shepherdson, an economist for High Frequency Economics, told The Washington Post. "Not a great outlook for spending, we’d say."
Piling on the shrinking employment news was outplacement consulting firm Challenger, Gray & Christmas Inc., which said layoff plans in the United States ballooned 31% in July, compared to June’s 15-month low.
"We are still a long way from a full recovery," said Chief Executive Officer John A. Challenger.
Lastly, employment activity as measured by the Institute for Supply Management (ISM) was equally dismal, as the index contracted for the 18th time in last 19 months.
The ISM’s employment index for non-manufacturing jobs – that is, service jobs like retail work, health care, and public administration – shrunk to 41.5% in July, down from 43.4% in the previous month. Any percentage on the index below 50% represents contraction.
Comments from respondents in the ISM’s survey included "Continued attrition and layoffs due to economic conditions," and "Hiring freeze in place, and we are unable to fill open positions."
Since the recession began in December 2007, more than 6.5 million jobs have been lost and most economists now have the unemployment rate bottoming out at or slightly above 10%.
