Today's Insights

7/28/2010 Wednesday

Dow: -40 to 10498, volume 1.0 billion shares.
Nasdaq: -24 to 2265, volume 1.8 billion shares.
S&P 500: -8 to 1106, volume not available.

The three major indexes spent most of the time in negative territory and ended up with moderate losses today. There was no major news to push the market, resulting in lukewarm trading volumes. They call this a holding pattern, waiting for a reason to move in either direction later.

Topic for today (7/28/10): Jobless Recovery?

Despite all the uncertainties, one thing is sure about the US economy. It is recovering but not fast enough to create more jobs. The unemployment rate still hovers around 9.6 %. The recovery is only seen in corporate profits, corporate cash holdings, and corporate capital investment. As for the common people, jobs are hard to come by. The housing market is still in the doldrums after the bubble burst. Only retail sales have shown signs of pick up. That means consumer demands are slowly moving up.

The job market is always the last to recover. Why? The simple reason is that labor is expensive in the US. Unless companies cannot fulfill their orders, they are reluctant to hire permanent workers. Even when more labor is needed, management tends to hire temporary workers first to fill in the gap, before they commit to increasing the permanent work force.

How can we increase jobs faster? If the US were a communist country, the government would solve unemployment overnight by employing millions to do something irrelevant to demand at a very low wage, and nobody would dare to complain. But the US is not a communist country. So it all depends on the private sector to hire more people. The private sector consists basically of two groups of employers: big companies and small businesses.

Big companies publicly owned are slow to hire as explained earlier. With more cash in hand now, their priorities are: to reward top management by paying huge bonuses, reward shareholders by increasing dividends, increase share values by buying back some existing shares, take over weaker companies to increase market share, update plants and equipments; and lastly, increase labor force to fulfill demands.

Small companies that are privately owned behave differently. The owners do not have a management bureaucracy and shareholders to kiss. They also pay relatively lower wages. They respond quickly to small increases in demands by incremental hiring of one or more workers at a time. Considering millions of small businesses all over America, the effects cannot be underestimated once demands really pick up .

The US government cannot force any company to hire more people, but it can provide incentives through low interest loans, tax reduction, research grants for new industries, and improvement in business infrastructure. Among all the options, tax reduction receives the most attention even though it has the most dubious effect. The reason is that big corporations want tax reduction above all else. With their regular cash contributions to legislators, big corporations dominate the public debate about government incentives. I will discuss the tax incentive further tomorrow.

For those who play in the stock market, you won’t see a bull on the run if employment continues to be sluggish like it is now. A bull only comes when public participation is strong after employment is restored to near full level, around 5%. Currently, the stock market is a traders’ market where the public is mostly sitting on the fence for lack of cash and confidence. That is why you see these unpredictable frequent ups and downs, because the traders buy on the dips and sell on the rise within narrow margins.