Recovery? On What Planet?

So a few of our savvier economic pundits are thinking that we've reached the end of the recession, at least in technical terms.

Hooray?

Pardon me if I don't seem excited. What's getting me down is the unemployment rate, which is officially at 10.2% -- but really, it's even worse than that. What that number doesn't include is the number of people who are underemployed. These are the folks whose employers have them working part-time when they'd prefer to be working full-time, those working at their local Starbucks (Nasdaq: SBUX  ) because they've been laid off from a much better-paying job at a bank (though don't get me wrong: Starbucks has its own problems), and so forth.

That number -- what the economic wonks at the Bureau of Labor Statistics call the "U-6" calculation -- hit 17.5% in October.

Think about that. One out of every 6 American adults who want to work and are available to work is either not working at all or works less than they'd like. That's a lot of households looking at lean times. That's a lot of households that aren't upgrading to iPhones or buying big new TVs or eating at nice restaurants, much less buying new cars or bigger houses.

Retailers like Target (NYSE: TGT  ) , Abercrombie & Fitch (NYSE: ANF  ) , and Home Depot (NYSE: HD  ) have reported "comps" -- same-store sales compared to this time last year -- down across the board. Even mighty Wal-Mart (NYSE: WMT  ) , a company many expected to thrive during tough times, is seeing falling comps when you exclude fuel sales. There's a lot of worry across the board about the holiday season. Folks still aren't spending.

And even for those who are still employed and still making what they were two years ago, there's less credit available for things like houses, which means that builders like Toll Brothers (NYSE: TOL  ) and Pulte Homes (NYSE: PHM  ) probably won't be calling back laid-off workers, won't have work for idle subcontractors … and the cycle continues.

An awful lot of Americans are still feeling economically vulnerable, even if their finances are in decent shape. Those people aren't spending, not in a big way.

And if nobody's spending, and nobody's going to be hiring anytime soon, where's the recovery?

We may be stuck here for awhile
Economist David Rosenberg of Gluskin Sheff recently pointed out a longstanding historical pattern -- unemployment tends to peak some time after the technical end of a recession.

Put another way, our unemployment number might well rise for a while longer. Rosenberg thinks it'll peak around 12%-13%, which seems reasonable to me. And there's a good argument to be made that it'll stay near that level for awhile as those underemployed people get ramped back up to full-time status. In other words, we may see that U-6 underemployment number start to fall even as the headline unemployment number continues to rise.

All that makes me conclude that tight household budgets are likely to be with us for some time. Again, if a bunch of people don't have a paycheck to spend and nobody's hiring, where's the recovery?

The Fed, the bubble, and you
Meanwhile, the Fed has signaled that it's expecting things to stay "suboptimal" for a while yet, possibly into 2011, and that it will keep interest rates at dirt-cheap levels until employment picks up. If you buy the theory that cheap Fed money is the driver behind the stock market's recent impressive gains, then it's reasonable to conclude that this run will continue for a while yet.

Of course, timing the big correction at the end could be tricky, and I don't advise trying. What I do advise is that you take a long, hard look -- right now -- at how much risk you're taking with money you might need in the next several years. If you're inclined to sell in order to reduce your exposure to the stock market, sell soon. If you're investing new money in stocks, focus hard on valuations -- there are still bargains to be had, but you need to look carefully.

Long story short: Remember those moves you wish you'd made in the summer of 2008, before the crash? This might be your second chance to get it right.

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Fool contributor John Rosevear has no position in the companies mentioned. Starbucks is a Motley Fool Stock Advisor selection. Home Depot and Wal-Mart are Motley Fool Inside Value selections. The Fool owns shares of Starbucks and has recommended a bear put spread on Abercrombie & Fitch. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2009, at 4:09 PM, stjosephfill wrote:

    How can people think that TOLL Brothers is worth buying? TOL will be lucky to survive with the glut of luxury homes, foreclosures still rising, incomes stagnant, credit tight, magins for luxury homes slashed, and the value of luxury homes down 20%+.

  • Report this Comment On November 17, 2009, at 4:45 PM, LoneWolf888 wrote:

    The article is quite correct..We "little folks' out here know full well how horrendous things are. However, the disconnect between reality and the manipulated stock market is so pronounced that reality took a backseat to gambling one year ago...

    There is no sense in fighting the tape. There is no sense in intellectualizing the market. Basically, you could have thrown darts and come up with tons of winners over this past year.

    The market is gambling pure and simple. Keep your stops tight and go with the flow. Even Cramer looks like a genius in an up market. Ridiculous but true.

  • Report this Comment On November 17, 2009, at 6:37 PM, MAcDScientist wrote:

    There is another group not captured by the U-6 - those people who still have the same job and same pay as last year but who are looking ahead to job cuts. There are many companies who have announced job cuts in 2010 and 2011. The pharmaceutical industry has in total announced thousands. At this point in time, there are individuals who know the chopping is coming but don't know yet if their neck is on the block. These people are putting off big ticket purchases because of the uncertainty. Because these cuts will be dragged out over the next couple of years, getting past these events and moving on will delay any recovery to the members of this group.

  • Report this Comment On November 17, 2009, at 7:00 PM, xetn wrote:

    Ludwig von Mises developed his Theory of the Trade Cycle around 1912 (I think) which states that EVERY boom/bust cycle is the direct result of credit inflation of the money supply. In other words, banks expanding the money supply (through fractional-reserves) creates a false signal to entrepreneurs that an excess of savings has occured and therefore an opportunity to develop longer-term projects (creating capital goods) instead of focusing on consumer goods. Since this is a false signal, many projects are never completed (think of the glut of new, expensive houses and commercial buildings). This false signal results in the boom phase and the inability to complete these projects is the bust cycle. The bust cycle is necessary to clear out the unsold/unfinished projects through bankruptcy.

    In other words the bust cycle is necessary to return the economy to a stable condition resulting in a new growth environment. In order to prevent this boom/bust cycle, we really need to end the Fed's tampering with the interest rate and creating massive amounts of money out of thin air.

    Mises predicted the great depression based on the fact that the Fed was increasing the money supply by over 60% during the '20s (the boom phase). His theory has now become known as the Austrian Theory of the Trade Cycle and it appears it has predicted most (if not all) of the boom/busts since.

    There was a depression in 1921-22, that was over very quickly because the Fed and the government did nothing. That is the real prescription for the current crisis. As a matter of fact, if not for the bailouts, and the Fed holding interest rates a near zero (or if you consider that it is paying banks for their reserves, negative interest rates) and at the same time creating trillions of dollars out of thin air, we might really be in a major recovery. But those actions have done nothing except prolong the problems.

  • Report this Comment On November 17, 2009, at 7:46 PM, TMFMarlowe wrote:

    MAcDScientist, that's a very good point.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 17, 2009, at 8:25 PM, jm7700229 wrote:

    "If we can put a man on the moon, why can't we cure the common cold?"

    Sorry, but there is not a direct connection between "recovery" and "rising employment." Recovery doesn't mean things are good, it means they have stopped worsening and started turning back up. In this instance, things have a long way to go before they become "good." Rising employment is usually a late stage development in a recovery because employers will continue to reduce employment UNTIL they trust that the recovery is under way and demand for their output has risen enough to justify hiring more people. And rising demand is the start of the recovery.

    I also don't care what measure one uses for unemployment, but using a broader measure just to make the situation look as bad as possible is called "lying with statistics." So U-6 is 17.5%? Okay, but compared to what?

    I expect unemployment to rise in 1Q2010, perhaps again in 2Q. I'd be surprised if it went much above 11%, but it wouldn't be the first time I've been surprised. At any rate, that will level out by 4Q2010 at the latest and begin its improvement by the beginning of 2011. Because the recovery has begun.

  • Report this Comment On November 17, 2009, at 9:35 PM, tkell31 wrote:

    Kind of a novice, but the premise of this article seems to be that our recovery is tied largely, if not solely, to economic conditions in the US. Considering the global economy and my limited understanding that other countries have recovered better then the US does it not follow that US companies doing business overseas would be recovering? Also, when looking strictly at employment numbers, would a 5% increase (there was unemployment and underemployment prior to the end of 2007) continue to have the impact that on the econonmy that the article seems to be suggesting? Afterall it is a lagging indicator, no? Jobs were cut in reaction and it follows they will not pick up until the recovery is underway and by all accounts that will be a gradual process.

  • Report this Comment On November 17, 2009, at 10:03 PM, KayZeeDee wrote:

    Agreed that these are lagging indicators tkell31. Virtually every metric we use is a lagging indicator... kind of hard to measure the future, eh? (not meaning to be sarcastic - sorry if it seems that way). I agree with the basic idea that we need to keep our eyes open for good business bargains right now. The question is with all the uncertainty, how can we know that the fundamentals we are watching will indicate a good business after our recovery begins?

  • Report this Comment On November 18, 2009, at 12:25 AM, oSUNo wrote:

    There's too much to balance in fundamentals.

    Unemployment is a very tempting indicator because it allows the apportioning of blame, and in my view it really only serves that purpose. What I mean is, blame is not the beginning of the answer to the problem of unemployment: not on a personal level, not on a community-wide level and not even on a national level. This is actually where my faith/trust/belief in the "genuine-ness" of politicians and the political process is tested.

    In the next month or so over Christmas, my technical indicators point very south. Not as deep as 2008. Southern Mexico rather than Northern Brazil, but south all the same.

    After that, another bull, possibly through most of 2010.

    Now, what is a more efficient way to spend your time?

    Calling the smiley-smile prophets out on their longs?

    Or finding technical indicators that will allow you to make investment decisions in line with conditions as they arise?

  • Report this Comment On November 18, 2009, at 1:05 AM, bc0203 wrote:

    As usual, xetn, you're right on point. The Fed does seem to be inducing a "monetary" bubble. As is the case with such bubbles, all sorts of artificial distortions are occurring, such as the dollar becoming the currency of choice for the carry trade. The government is also taking advantage of these cheap rates to finance it's debt. My concern is, what happens when inflation hits? Interest rates are going shoot up, which will bring the economy to a screeching halt, or we'll have hyperinflation, which will wipe out the middle class. In either case, I don't see a happy ending, particuarly with the current trajectory of public spending (Federal and State) in this country.

  • Report this Comment On November 18, 2009, at 6:29 AM, CarryOnAgain wrote:

    xetn is correct, but you don't have to go all the way back to von Mises to learn this. Peter Schiff has been saying basically the same as this for several years. Look at the pattern emerging:

    There was a small recession in 2003 after a major boom that lasted nearly a decade. Bush/Greenspan pumped cheap money into the economy forcing another boom and asset bubble through false signals. This second boom lasted about 4 years before imploding into a much deeper recession than before. Now Obama/Geitner are applying Greenspan economics to a previously unimagined degree, and have begun to re-inflate again. I predict that the next boom will be shorter than the previous one, maybe 2 years or even less, to be followed by an even bigger bust than the current one.

    It don't bear thinking about, but I am convinced this will happen.

  • Report this Comment On November 18, 2009, at 9:54 AM, TMFMarlowe wrote:

    Well, Peter Schiff says lots of things, and he's been predicting the end of the US economy since what, 1995? But hey, he likes to be on TV, and that's fine.

    But to the larger point, I (obviously, if you read the article) agree that government action is simply reinflating the asset bubble, and that it can't stay inflated indefinitely, and that the longer it stays inflated the more protracted our difficulties will be in the long haul. Invest accordingly.

    Thanks to all for reading.

    John Rosevear

  • Report this Comment On November 18, 2009, at 11:47 AM, dymty wrote:

    These valuations are based on forward earnings. Didn't most of the retailers get whacked because of guidance? One cannot count solely on all consumers falling back into the trends that put them under water in the first place. Some will still whistle past the graveyard, but I have serious doubts that the consumer will again account for 70% of GDP anytime soon.

    On another note, it will be interesting to see just how serious Buffet is about making a contribution. It seems rather unfair that these billionaires (and others) should all complain with their arms folded or their hands in their pockets about how much the gv't is pouring into the system. I thought capitalism was about making money? What ever happened to investing? C'mon, take a chance! Spend that dime, don't crap your pants!

  • Report this Comment On November 18, 2009, at 12:22 PM, AvianFlu wrote:

    JR:

    Are you suggesting that Schiff's theories are incorrect because he likes to be interviewed on TV? If so, I do not see the connection.

    The US economy HAS been melting down since 1995, although in slow motion. That is, until recently. The trend appears to be picking up speed. The signs are everywhere. You would have to be blind not to see them. We seem to be making the same mistakes that were made during the 1930's depression, but on a much grander scale. Couple that with a congress and president that seem to hate business and it is no surprise that companies like Ingersoll Rand are moving out of the country. As an employer, I can tell you that I will not be hiring again until the hostiles are safely away from the door. If I was not in fear of new taxes and regulations I could probably start hiring again right now. But as a country, I am afraid our little pain party has only been postponed briefly...at great cost.

  • Report this Comment On November 18, 2009, at 2:12 PM, TMFMarlowe wrote:

    I am suggesting that it's possible that Schiff tends to speak in terms of extremes because he likes the attention, yes. Like I said, my take on current events isn't that far off of his, but I don't care for his style.

    Thanks for reading.

    John Rosevear

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