The Best Bad News We've Had In Months

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It's bad, but not as bad as this, and may be getting better

Don't these people know that bad news can be good?

The August monthly unemployment rate practically exploded to 4.9 percent, the Labor Department reported Friday, as all non-farm employers cut 113,000 jobs from their payrolls for the month. Manufacturing, as usual, led the way with 141,000 job cuts all by itself, bring the sectorís grim total to the 1 million mark over the past 12 months. And Wall Street, already in its traditional-of-late Friday short-selling mode, was clearly not in any condition to hear more scary numbers: Both the Dow and NASDAQ sold on the pre-bell news and didnít slow down until mid-morning.


Oh, the rising rate! This is the sort of spike thatís supposed to scare consumers into thinking recession, and bringing one on by acting accordingly. Read headline — close wallet.

But TIME senior economics reporter Bernard Baumohl tells us that statistically — going back 40 years — thereís no immediate causal link between a reported spike in the unemployment number and decreased consumer spending. Scary news affects consumer confidence and often that shows up in their spending habits. But not for a few months down the line; for September, anyway, the people with jobs are likely spend, and the bottom line is still that more than 95 percent of the work force that wants a job still has one. (Even if maybe the new one pays a little less.)

So even if Fridayís number is moderately useful in predicting consumer behavior, how does it do for diagnosing the condition of the economy? Depends on how you use it.

Employing the unemployment number

Monthly unemploymentís most recent bottom was the 3.9 percent it hit last October — about the time when the economy was first hitting the skids. Since then, weíve slipped into what is all but in name a recession — even though we haven't posted the required two consecutive quarters of negative growth, the revised-downward-once-already GDP Q2 growth number of a whopping 0.17 ought to convince you of that. But unemployment numbers tend to rise most on the way out of a recession, and indeed often continue to rise as a recovery gets under way.

See, as a measure of the economyís state going forward — recession-watch-wise — itís pretty lousy. Unemployment is a classic lagging economic indicator; it tells us a little about happened in the economy in August — employers cut payrolls, mostly in manufacturing — and maybe a little more about what happened in the months before that; namely, that business was lousy and production lines were idle, so a lot of workers were neither useful nor affordable. (In the business world, of course, thatís the same thing.) But the only thing it tells us about September and the months ahead is that manufacturers, especially, have a lot less workers on their payrolls than they did before.

Thatís bad news for the machinist whoís out of a job, but itís nothing but good news for the economy as a whole. After all, hereís the scheme for the recovery, whenever it comes: Companies cut costs. Eventually they return to profitability. Prospects improve. Wall Street rewards them with increased stock valuations. They use the cash to invest in further efficiency and productivity gains so they can sell more for less, and voila! The business cycle is back on the upswing.

That recovery weíve been hearing about

This, in case you just joined us, is the cost-cutting phase. Labor costs are two-thirds of business costs, and cutting production was the first thing manufacturing has to do to get humming again. The second was shedding labor. Labor takes longer, hence the lousy Q1 productivity number; the improved Q2 number signaled that the columns were coming back into line. And cutting 141,000 more jobs in August will only help manufacturing find its profit margins again.

For the Fed, this should be good news as well, and certainly thereís been no compelling forward-looking evidence lately that the economy is about to fall off a cliff. But this is the last unemployment number theyíll have before the October 2 meeting, and the political/emotional pressure associated with a rising unemployment number — as well as fears about consumer confidence — should be enough to ensure another quarter-point cut. Ho-hum.

The next step will be Wall Streetís. Investors are waiting to see some new business to go with those slenderized costs — thatís why the NAPM manufacturing report caused a 200-point rally in the Dow when it hit last week. The reason for Wall Streetís general glumness is merely that the news from individual companies hasnít yet endorsed that view. And donít think too much of the Friday morning selloff — lately, Fridays have been dominated by general-pessimism short-sellers cleaning up their portfolios ahead of the weekend. The unemployment number was a psychological catalyst more than anything else; the latest report that August was rife with cost-cutting is news on which Wall Street will look back with a smile.

One of these days.