The trend remains our friend in the land of initial jobless claims. The absolute level is still reflecting pain in the labor market, but there’s no denying that the general ebb and flow of new filings for unemployment benefits is favorable.
As our chart below shows, new filings dropped again last week, falling to a seasonally adjusted 514,000, below the previous week’s 524,000, the Labor Department reports. That puts the latest number at the lowest level since the week ended January 3, 2009.
Confirming the trend is the decline in continuing claims, which dropped below the six-million mark in the week through October 3 for the first time since March.
All of which is encouraging and lends more support to our earlier calls that the recession is technically over. But that invites our standard caveat: sustained growth in the labor market is still far from imminent. Even the optimists don’t expect much good news on this front until next year. “We will probably have more sustained growth in the labor market starting in early 2010,” Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, tells Bloomberg News. “From there we will find a peak in the unemployment rate and ultimately create jobs.”
Part of the problem is that consumption may revive in fits and starts. For an economy that relies heavily on consumer spending, that challenge threatens to remain a thorn in the recovery’s side for the foreseeable future. Indeed, yesterday’s update on retail sales offers little reason to think otherwise. The Commerce Department reports that retail sales last month slid 1.5% on a seasonally adjusted basis. Of course, if we exclude auto purchases, which were artificially boosted in recent months by the government’s cash-for-clunkers program, retail sales inched higher in September by 0.5%. That encourages some observers, including Bruce Shalett of Wynston Hill Capital in New York, who tells Reuters:
“While the consumer may be more prudent in the way they spend money, the data would indicate they are certainly spending money. The consumer is participating in the recovery.”
The stock market seems to be buying into that outlook, or so the rally of late suggests: The media’s obsession with reporting that the Dow Jones Industrials closing above 10,000 for the first time in more than a year being the obvious example.
But until the labor market starts showing stronger signs of revival, we remain wary of declaring that consumption is set to return to the golden days of yore.
Inflation, meanwhile, still doesn’t seem to be a problem, which bodes well for keeping interest rates just above zero. The liquidity-injection train rolls on! But let’s also recognize that the deflationary scare is now history, or so it appears. The last time CPI dipped on a monthly basis was March. Last month’s inflation report is hardly worrisome—CPI rose just 0.2% in September. But the future will struggle with the question of how long the Fed can/should continue to pump money into the economy as if the world was coming to an end? Finding the sweet spot between juicing the labor market, consumer spending and at the same time keeping a lid on future inflationary pressures promises is the new new thing in central banking.
What does all this imply for investing? For our money, we’re increasingly cautious…again. Asset allocation decisions are tougher these days compared with early in 2009, when the price of risk looked unusually attractive. That doesn’t mean it’s time to run for cover. But for the moment, we’re of a mind to consider our Global Market Index’s passive weights as a guide for structuring portfolios. Until more convincing signals (or valuations) arrive, we’re inclined to settle for a neutral asset allocation. Or, to borrow Warren Buffett’s metaphor, we’re not tempted to swing at every pitch these days.