Questions for the economists

[Doctor_J]

How does the overall poor health of the economy jibe with the DJIA rally? It would seem to my untrained eye that the job loss, the growing consumer debt, bankruptcies, underemployment, and such, that investment money would be non-existant.

Second, if we somehow "win the war", and start pumping Saddam's oil at a rate good enough to fill everyone's SUV once a week, will that help?

Third, are the employment figures adjusted for seasonal factors? Here in Chicagoland, it is impossible to drive for 10 minutes without encountering a road construction crew. Around Sept 15, the barrels will disappear and the roads will once again be drivable. What happens to all those summer construction workers? What about lfeguards, tennis instructors, house painters, and all the other students who go back to college?

[mhr]

1. The DJIA

reflects the health of corporations and profits. Profit can be made in a poor economy by squeezing costs out of a corporation and improving the bottom line. The easiest way to do this is by reducing labor costs since labor is usually the largest single cost for any corporation. Hence it is not hard to understand that corporations can make a profit when unemployment is still high.

[lastliberalintexas]

5. Short term thinking too

Wall street also only thinks in short term (ie quarterly) goals. Layoffs may indicate that a company is in long term peril, but it may also increase profits for the current quarter. That's uaually all that Wall Street cares about, is what's happening right now.

This is also one of the biggest differences between corporate America and the rest of the world's businesses.

[whoYaCallinAlib]

6. In addition, the DJIA reflects the FUTURE expectation of cash flows

from those 30 companies in the average. Essentially, the price of any of those 30 stocks represents the net present value of all those future cash flows discounted at a rate that is close to its cost of capital.

The market looks forward. So if investors think the cash flows are going up, they will "bid" the price of those stocks up.

Lately, the market is telling us that they see better days ahead.

[JNelson6563]

7. ah but this cannot be repeated

often. You can squeeze one maybe tow good quarters out that way but then what? Well, we'll soon find out.

An aside, the DJIA only represents 30 stocks.

Julie

[Yavin4]

2. To Answer Your First Question

Low interest rates push money into stocks. If you open a savings account today, you'd get less than 1% interest. So, people who need a much higher rate of return have to put their money into the market.

[On the Road]

3. The Rally is Partly Due to Expectations

of an economic recovery. The market usually anticipates economic trends.

It's partly due to a lack of any better investment opportunity. Partly due to technicals -- lots of investors look primarily at chart patterns. Because the market was so overvalued at the height of the bubble, it will take awhile to return to normal levels. It isn't there yet.

[sangha]

4. Not an economist

but here's my thoughts

1) Corporate profits can go up in a bad economy. Job losses represent a lowering of (labor) costs, growing consumer debt becomes corporate revenue, and bankruptcies mean less competition.

2) No, because inflation isn't a problem right now. Deflation, on the other hand, is a distinct possibility, and lower energy prices could egg it on.

3) Yes and no. It depends on which figures you are looking at. Generally they are, but they will say so.

4) Many of those workers go on unemployment. The ones who are students go back to school.

[pw]

8. Yes, seasonally adjusted

Otherwise you would see huge changes every june/september and november/january (xmas rush).

Lower oil prices would help some parts of the economy, hurt others, but it will be a while (if ever) before OPEC loses its grip in prices. Meanwhile, you see the usual seasonal spikes in gas prices etc.

Stock market and health of the economy (however that's defined) are only distantly correlated. For example, you could have unemployment at 50% just as long as the some of the remaining employed people were making big enough salaries to buy the products companies produce. In addition, since many US companies have significant overseas operations, their profits may not be so dependent on what's happening in the US. Finally, the market is ultimately defined by what some trader can convince some other trader to pay for a particular chunk of stock, and many traders: not that well equipped with foresight.

[T Roosevelt]

9. Also keep in mind

that the unemployment rate does not include those people who fall off the roles, and who stop looking for a job. In this case I've seen unemployment numbers as high as 9-10%.

[ProfessorGAC]

10. A Few Answers

There is no direct and predictable link between DJIA and the macroeconomy. Most of the market is driven on speculation of microeconomic behaviors.

Layoffs actually stimulate buying because it's generally a huge cost cutting move that directly improves net income. So, high unemployment often creates a feeling that certain firms will show higher profit margins and accelerate the buying of that stock. It's not a direct link and is filtered by speculation. The investment money is never non-existent. Often, it just moves around in huge institutional piles. And, the issues you list don't affect centomillionaires, so that investment money never dries up.

Second question: Not much. Lower energy prices always help to lower the overall CPI/COL standards, but it doesn't help lower income people much, since those folks tend to live and work in the same area and take public tranport to work. (Subways and the like.) They wouldn't see much benefit.

Lowered energy prices will also add to some firms' bottom line, without layoffs, so that helps to stabilize employment levels without really boosting the economy.

Last question: UE figures are based upon the rate of people who apply for UE insurance payments, less those who fall off the role because they've got jobs. The figures are not seasonally adjusted, but one will see seasonality in the data.

Most of the positions you listed are filled in the summer with part-timers or short timers and are not included in the statistic which focuses strictly on "long term" employment potential. Teachers do not go on unemployment every summer. Many districts allow teachers to spread their pay over the 12 months, even though they're not there for 10 weeks. (My wife always did that.) So, if they are retained for the next school year, they never show up on UE.

I am not sure about highway construction guys, but i do know that some of them pack up and move south to do the same work in the winter where snow and cold doesn't halt construction. Full time college students (and high school for that matter) are considered part time employees, no matter how many hours they work per week, since they don't meet the "long term" definition. So, the UE numbers will not change because they go back to school.

There is a bit of wintertime seasonality in UE numbers. It's a combination of both the seasons for outdoor workers and layoffs near the close of fiscal year of companies that have FY aligned with the calendar. That effect is more variable and is sometimes barely noticeable, other times huge.

Hope i answered your questions adequately.
The Professor

[whoYaCallinAlib]

12. Damn. You always show me up!

Great post. I always look forward to your responses to economic questions.

[TreasonousBastard]

11. The DJ...

doesn't represent the entire economy, and often lags good or bad trends. Eventually, it catches up with reality, but never look at little blips as anything other than little blips. Actually, it doesn't really represent the entire market, either so the S&P and NASDAQ numbers have to be looked at, too. Other things, like machine tool orders, inventories on hand, durable goods orders, housing starts, etc. are better indicators of how the economy might be going.

There's plenty of money around, although it's more concentrated now,and we don't have what's usually called a "liquidity crisis." Money tends to go where it expects the greatest return, and that could be the stock market, real estate, venture funding, mortgages, bonds, precious metals, pork bellies... Right now, stocks seem to be the best investment for a lot of that money.

Oil is fungible. We still have to import over half of what we use, and it makes no difference where it comes from. Perhaps "trading" oil for our expenses over there will reduce our costs a bit, but it ultimately will probably mean little.

Employment figures are always seasonally adjusted. Summer workers are often teachers, starving artists and actors, and others who can take time off during the summer and some collect unemployment after the seasonal work is done. Or they find other seasonal work. Full-time students are not considered unemployed by the bean counters-- they are students and not in the workforce yet.

Employment numbers are always fishy. Some come from surveys, some come from the unemployment rolls, and some wqorkers are uncountable because of "contract" and under-the-counter cash work. The BLS really tries to be accurate, but a lot gets lost. This is a big country. Note that illegal earnings are probably huge, but for obvious reasons, no one knows just how huge, or how many people are involved. (Could car thieves, bookies, and pot farms be keeping the economy afloat?)

Not enough is known about underemployment. Multiple income families are often not starving when one loses a job, but they hurt, and obviously spending goes down. Sometimes they decide that the expenses, including taxes, don't make it worth while for the unemployed one to go back to work at a lower-paying job. Sometimes, though, an extra $200 a week means they keep a roof over their heads, or health insurance. Singles and one-earner families may be forced into a shit job, or maybe two, or three, to keep alive.

Lots of small businesses starting, often people contracting to do what they used to do on payroll.

[DemocratSinceBirth]

13. If You Want To See How The Whole Market Is Doing

than the Wilshire 7000 is your benchmark. This represents all the over the counter listed stocks sold in America.

Rising unemployment and a permanently rising stock market are mutually exclusive.

There reachs a point where the macroeconomy gets so bad it would be reflected in the stock market.

The stock market didn't do very well during the Great Depression.