Welcome to the job market turnaround

Evidence suggests the economic recovery is gaining traction.

By Anthony Mirhaydari Feb 8, 2010 6:15PM

MirhaydariAlthough it probably doesn't feel like it, especially for the 8.4 million souls that have lost a job since the recession started back in 2007, the job market has started to heal. After peaking at 10.2% in October, the unemployment rate has fallen to 9.7%. Sure, some of the drop is a reflection of the large number of people that have left the work force over the last two years. And businesses still reported that payrolls fell by another 20,000 positions last month.

 

But according to Deutsche Bank economists, the unemployment rate (calculated from a survey of households) has a very strong record of predicting job market turnarounds. This is because it can capture job creation from small business startups that isn't reflected in the payroll data. And small businesses are the powerhouses of any early economic expansion.

 

There are more signs of strength. The manufacturing sector added jobs last month for the first time in three years. Temporary hiring continued to expand. Work hours increased at the fastest rate since mid-2007. So the obvious question is: Can these gains continue?

 

Unemployment

 

The team at Deutsche Bank found that the number of people who are unemployed for a short period (between 5 and 14 weeks) has a unique ability to anticipate changes to the unemployment rate on a three-month lag. And as you can see in the chart above, the number of short-term unemployed is dropping at a much faster rate than in the two prior "jobless" recoveries that followed the 1991 and 2001 recessions. This suggests the unemployment rate should dip below 9% sometime this spring.

 

The real driver of the turnaround remains the Federal Reserve's ultra low interest rate policy. The difference between the rate at which the economy is expanding (6.4% last quarter) and the Fed's short-term policy rate has moved to the highest level since mid-2003. Before that, one must go all the way back to 1978 to find a similar gap between growth and interest rates.

 

This phenomenon basically forces profit-seeking businesses and households to borrow cheaply to fund expansions and investments. And in all cases where this happened, economic growth continued to accelerate and create jobs.

 

The best way to play the job market turnaround is through consumer discretionary stocks, especially high-end retailers like Abercrombie & Fitch (ANF).

 

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

 

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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