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Monday, December 28, 2009

Unemployment: Headlines Gloomy, Yet History Tells Different Story

Our focus is primarily on companies -- not the economy -- but let's briefly address a popular American dinner table topic: unemployment. On this subject, a family member brought an AP article to our attention featured on MSNBC: "A decade of high unemployment is looming - ‘New abnormal:’ Some think 10 years won’t be enough to replace losses". The article is similar to others we've seen as well as worrisome conversations in which we've sometimes participated and/or overheard. The article raises various points, including:
  • The unemployed number 15.4 million. The jobless rate is 10 percent. More than 7 million jobs have vanished. People out of work at least six months number a record 5.9 million. And household income, adjusted for inflation, has shrunk in the past decade.
  • Most economists say it could take at least until 2015 for the unemployment rate to drop down to a historically more normal 5.5 percent. And with the job market likely to stay weak, some also foresee another decade of wage stagnation.
  • On the other hand, it's possible some technological innovation not yet envisioned could generate a wave of jobs. Yet at the moment, most economists aren't betting that any such breakthroughs will rescue the labor market.
  • The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.
However, Charles Schwab and Co's Chief Investment Strategist, Liz Ann Sonders, shared a very telling graph in her December Market update - link here (unfortunately, not captured with Mediasite). The below slide, with data back to 1948, shows that unemployment tends to quickly reverse course even amidst the most dire circumstances (e.g. 1970s and early 1980s) once a recession is officially over (per National Bureau of Economic Research - NBER):

Good news: risk factors notwithstanding, our suspicion (and hope) is that history will repeat itself and the gloomy mainstream outlook will improve in 2010.

Happy investing,

Jeffrey Walkenhorst

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© 2009 Jeffrey Walkenhorst
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