Condor Options

With uncanny contrarian timing, the Washington Post heralded the year-end rally in its Saturday edition with the headline, “No Santa Claus Rally for Wall St.” To be fair, the credit for this epitaphic declaration goes to the headline writer; the article itself was specifically about the market’s failure to rally last week, and the story writer was entirely innocent of any ill-considered prediction about the week to come. Nevertheless, the market reversed on cue, bouncing off the prior week’s lows Monday afternoon and never looking back until the final closing bell of 2008.

The Post article included worse-than-expected unemployment data among the supposed causes for the lack of Christmas-week buying interest; but interestingly, Wednesday’s initial market wrap-up pointed to a positive surprise in the latest initial-claims number as one motivation for the New Years Eve lift. For a more considered perspective on where unemployment stands today and what’s likely in store for the labor market, it’s worth taking a few minutes to listen to a segment from Tuesday’s edition of the public-radio news program, Here and Now. The interview with two Harvard economists—economic historian Claudia Goldin and labor economist Larry Katz—covers the history of unemployment, unemployment statistics and unemployment insurance, explains why unemployment is actually much higher than the official headline number indicates, and paints a considerably bleaker picture of the employment outlook for 2009 than what traders apparently took away from Wednesday morning’s good news.

We’ve written at length about how government statistics have been manipulated to make things seem better than they actually are, and Katz appropriately emphasizes the distinction between the official unemployment rate and the real one: “The current definition clearly understates distress in the labor market—the broader [measure from the BLS (which includes ‘discouraged’ workers who have given up looking for a job and ‘involutary’ part-time workers—ed.)] would give you an unemployment rate of 12½ percent,” compared to the 6.7-percent official rate. The former has increased more than 4 points in the past year, while the latter is up only 2 points. “So we’re missing about half of the growth in real unemployment,” notes Katz. (According to Shadow Government Statistics‘ “Alternate Employment Data”, the real unemployment rate is more than 16 percent.)

When asked about the significance of the Bush Administration extending unemployment benefits twice since last summer, Katz cites a historical precedent that is not encouraging:

[Besides the early 1980s recession,] the only other time since the Great Depression [that unemployment benefits were extended multiple times] was ‘74/’75 and the first oil shock, and that’s the worrisome scenario. The official unemployment rate went up 4% in one year in ‘74/’75, and the last several months start looking like that—that is, not only is employment declining in the U.S., but it’s declining at a more rapid rate every month for the last 12 months, and that’s the very scary situation we’re in right now.

Another discouraging trend, says Katz, is how job losses are spreading through the economy:

The thing that’s really striking about the most recent months of unemployment and employment numbers is how broad-based the economic recession has become. Early in 2008 one saw lots of job losses attached to the housing sector and construction; now it’s spread out to things that you usually think do well even in tough times—business services, consulting firms are laying people off. . .and retail trade has just been devastated.

Both Goldin and Katz find reason for optimism in the resources and tools that the Federal government today has available for addressing economic ills, compared to what it had in the 1930s, and Katz offers constructive suggestions for moving people into employment aimed at creating and sustaining a forward-looking economy. But anyone who thinks that we’re turning the corner with the arrival of the new year might want to think again. Katz sees that turning point coming much closer to New Years Day 2010: “The hope is that by the end of 2009 we really could sort of be moving into a recovery.”