Unemployment is Up, and the Markets Don't Know What to Think

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That bleating camel sometimes known as the U.S. economy kicked a little sand on the resurgent markets Thursday, when the Labor Department reported that weekly jobless claims had notched up again, to 421,000, putting the rolling four-week average at more than 400,000. That's arguably a more recent snapshot of the employment scene than Friday's unemployment figure for April, but it's that number which, judging by volume, the traders had been really waiting on. That number ticked up too, to 4.5 percent for the month.

Is this good or bad news for the traders? They weren't sure. After the morning bell the Dow quickly dropped 123 points, with the Nasdaq falling 56, but both indexes quickly recovered to just slightly down by late morning.

A weekly number of 450,000 is thought to mark the presence of a recession, and 421,000 is pretty close, and 4.5 percent (while historically low) is higher than last month's 4.3. Free-spending consumers got us two percent GDP growth in the first quarter, but what are they going to do now? Possibly they have been charging it so far on their credit cards, expectant of continued employment. That feeling of security may be about to erode.

The good news is, the Fed, set to convene on May 15, is back on the horse. Because if there's one thing that gets Alan Greenspan salivating, itís a loose labor market. There's not yet a reason to panic — 4.3 percent is a long way from 5 percent, which was as low as unemployment used to get before the '90s came along. A lot of these numbers are the same layoffs we heard about in January, February and March; now they've kicked in.

Yet 4.3 percent in March and 4.5 for April are upticks, and that might worry consumers, which worries Greenspan no end. New home sales will spur all sorts of furnishing purchases, that's true, and those who bought homes — or other large investments — into this wind will be obligated to follow through and buy all the other stuff. But there are a lot of other people who are worried about their jobs, or dissatisfied with them, and, really, who couldn't stand to sock a little money away in these turbulent times? Unless inflation hits hard, Greenspan, again, has little excuse not to take another stab at getting this economy back to a nice canter by the end of the year.

Four cuts so far; two on the meetings, two in between, for a total of 200 basis points, or two whole percentage points, off the short-term interest rate. These cuts, in turn, are supposed to pulling down the longer-term interest rates, which is supposed to bring down the cost of borrowing and increase the availability of capital, which is supposed to spur investment and business spending along with consumer spending — consumer spending of the type we apparently saw in the first quarter.

The betting here is he cuts 50 basis points May 15.

We may not know much about consumer psychology, but one of the stronger theories is that a consumer's confidence is his job. Most companies are cutting costs. Some companies are going out of business. Severances are shortening, and everybody knows somebody out of work or scared about it. And it says in the paper that unemployment numbers are the highest they've been in years, and still going up.

Best case? Faith in Greenspan, good humor and some nice summer weather keep consumers barreling on until fall — they can pay it back "when things pick up," and later, thanks to the Fed, they do.

Worst case is pump prices and power bills go through the roof, whole incomes disappear, and everybody just skulks around feeling miserable. And not buying stuff.