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Jobs, Double Dips and Obama's W

07/05/2010

Former President George W. Bush was often playfully referred to as "W."  Ironically, President Obama might have to deal with "W" once again. Unfortunately, the "W" I am referring to is a possible "Double Dip." Although historically rare, when a double dip emerges, it takes the shape of an economic patterned "W."

Now, I acknowledge that the price action over the past two weeks has been horrific - that happens during a Baseball Season of Frustration; I am less certain, however, that the economic slowdown we are experiencing is a double dip.

So, let's look back upon previous recessions for some historical perspective. The National Bureau of Economic Research (NBER) suggests that there have been 11 post World War II recessions. During that period, we have experienced one clear W shaped recession in the early 1980s. For me, as a teenager living on Long Island, it didn't feel like one - the Yankees and Islanders were both winning. But clearly it was a W. The economy initially experienced a recession from January 1980 to July 1980; one year later in July 1981, a W was confirmed and a longer period of recession unfolded from July 1981 until November 1982. I believe what triggered the double dip was tightening monetary policy to fight inflation at the time. In addition, let's look at private sector jobs during that period. What stands out is the loss of private sector jobs during the same time period of July 1981 to November 1982. An amazing correlation, peak in July 1981 and trough in November 1982.

Private Sector Job Growth January 1980 - December 1983

Source: Bloomberg

Private Sector Job Growth is what we need to watch!

Let's look at the current cycle. The "Great Recession" began in December 2007. If you look at the chart below, the trough for private sector job losses this time around was January 2009. Although there is a need to be cautious currently, we are not yet in an environment similar to July 1981. Obviously, the next two reports will tell the story of whether a downtrend is developing. But, we cannot confirm anything except a "softening." Please remember that I am looking strictly at the numbers and not predicting any future numbers, which is extremely difficult to do.

Private Sector Job Growth December 2007 - July 2010

Source: Bloomberg

Let's look at the jobs recovery after the March to November 2001 recession. Take a look at the chart below and you'll notice a clear "softening" from September 2002 into early 2003. That did not, however, foster a double dip.

Again, it is very difficult to forecast potential double dip recessions and certainly current underweight positioning in the capital markets is correct, but let's put some perspective on the historical data and understand the infrequency of a seeing a W, unless you live In Dallas.

Friday August 6th 8:30am EST - clear your calendar, we will know more then.

Private Sector Job Growth January 2001 - June 2004

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.