Unemployment Rate No Longer a Good Market Indicator

By Dennis Dick, PreMarketInfo.com Through the years, the mainstream media has chosen to emphasize different economic reports as the tell-all signal for the future direction of the stock market. Much attention is paid to the GDP, Consumer Confidence, Trade Deficit, Housing and other various economic reports. However, the main focus of the media has been on the monthly unemployment report. The last three unemployment reports have ignited sell offs in the market. Although the decline after the April report had follow through, the bottom put in place after the May report was the impetus for a 120 point rally in the S&P 500 Index. At this time, there has been a decline after the June report, but modest in nature. Why is it that the market seems to shrug off these terrible unemployment reports? Perhaps it is because the connection between corporate profits and the jobs market is becoming increasingly less correlated, as companies become more efficient. Let's explore the reasons why the unemployment rate is slowly but surely losing its significance as an indicator of future market performance. No matter what Obama or Romney says or does, the level of unemployment in this country is not likely to decline and is most likely to increase in the future for a number of reasons. The first reason is that there is no way to combat the structural unemployment rate in our country. In other words, the void left from the departure of jobs in the manufacturing sector is gone for good. For example, how can my home town of Detroit ever replace the thousands of manufacturing jobs lost in the automotive sector. Not only have our companies steadily lost market share over the years, but many of the domestic cars that are purchased are made on foreign soil. With lower wage standards and the absence of benefits in other countries where US cars are produced, it is a no brainer for US companies to opt for the more economical alternative. How many other large US multinational corporations in the manufacturing sector have pursued this cost-cutting measure as part of their business plans? Secondly, to say that the US unemployment rate in the US is at 8.2% is a farce. What about the functionally unemployed, those who are under-employed (with only a part-time job), or unemployed and have given up looking for a job altogether. Some economists have estimated this rate to be as high as 30%. That figure may be high, but one thing is for sure, the real unemployment rate is much higher than the 8.2% being reported. We have replaced many of our lost manufacturing jobs with service jobs, but even those jobs are now in jeopardy. The continuing rise in automation has continued to replace human workers with machines (and I'm not just talking about computers replacing humans on the trading floor). How often do you actually get a person to talk to when you call a business line? You have to navigate through the myriad of automated reception before you can speak with an actual person. There are a lot of receptionists that are now looking for work. Similarly, medical processes such as the reading of laboratory results are carried out at much greater speed and accuracy by automated systems. Automated teller machines have reduced the need for the number of bank tellers needed to conduct simple transactions. Even the internet has put a strain on the jobs market. Many retailers offer the majority of their products online, which forces consumers to shop over the internet. What this portends for the brick and mortar business model and its impact on the commercial real estate market is hard to imagine. Opening and maintaining stores is very expensive and many retailers are in the process of scaling back their physical operations. Not good news for sales clerks and sales associate jobs. The internet accounted for 4.7% of the U.S. economy in 2010 and that percentage will certainly be increasing in the upcoming years. If the internet was designated as its own sector, it would be larger than the education, construction or agricultural sectors. But internet companies are very efficient with relatively few employees. With companies like Facebook FB, who can service a billion customers with less than 5000 employees, this emerging phenomenon of corporate efficiency with less workers will continue but at an accelerated pace. This simply means that companies are now more efficient, and often more profitable by employing less workers. As long as the mainstream media places such an emphasis on the unemployment rate the market will continue to illicit false signals to investors. Eventually the media will realize the diminishing significance of this indicator and focus their coverage elsewhere. For the time being, the market has been able to maintain a large portion of its gains since the 2009 low in the wake of the current rise in the unemployment rate. Whether or not this trend will continue as the rate approaches 10% again (no matter who is elected) will be answered in the next few years .