Dow Jones Rise: We Won't See Economic Benefits From It Soon
Much fanfare has been made about the Dow Jones’ surpassing of its 2007 all-time high of 14,164.53, and keeping with the cynical attitude of our times, much skepticism as well. Certainly, the stock averages of 30 companies reaching what it was before the recession does not mean that the economy is booming or even in the clear. Adjusted for inflation, the Dow would need to reach 15,731.54 points to truly equal its 2007 high, and while some bullish analysts think that it could approach that area by the end of the year, it will clearly take some time for the Dow to truly reach the level it did before its fall in the recession. But its rise should not be completely disregarded, for it paints a rather clear picture of the economy's trajectory.
This rise — and the recovery — have in part been fueled by the quantitative easing policies the Federal Reserve have been pursuing, and the resultant incredibly low barriers for access to capital it has resulted in. We see this reflected in the rise in house prices, which are appreciating at a rate not seen since Q2 2006. For most metropolitan areas (239 out of 260) the market has long since bottomed, and all but six are expected to bottom this year. The Federal Reserve shows no sign of ending QE in the near-term, and even so, it shows even less sign of taking any action on interest rates. So the market should continue to rise, and the 15,000 mark is certainly not an outlandish goal for the year.
But what about the man on the street? A casual reading would suggest that there would be not much to be excited about — after all, unemployment rose to 7.9% in January. But that itself is an indicator of the economy’s robustness. The true story is, in fact, that rising unemployment and added jobs indicate that the job market is expanding, and today particularly that previously discouraged workers who had stopped seeking work are re-entering the job market. And they are getting jobs, as this month, unemployment fell by 0.2% in February, adding some 237,000 jobs.
So how does this relate to the Dow? The Dow, fundamentally, is a measure of investor optimism on the outlook of the thirty corporations on it, which is meant as a vector for economic well-being in the United States. Unemployment is a lagging indicator which shifts depending on how companies, both large and small, perceive their personal economic fortunes. The decision to hire new workers in Q1 2013 was based on the earnings of Q4 2012 which were, in turn, forecast by the market in Q3 2012.
Therefore, the Dow surge we are seeing now means that investors believe that Q2 2013 will be very strong, at least in the US, which shall lead to a robust round of new hirings in Q3 2013. We saw this chain in the recession as well: the Dow plummeted in 2008, GDP bottomed in 2009, and unemployment peaked in 2010. So the jobs outlook is quite positive, and the economy should grow consistently. But there are some major issues that hide behind the statistics.
First, companies are hiring less than they were before the recession; this is undeniable. The cause, as the robust market shows, is not as much trepidation about the state of the economy as it is a simple lack of a need for them, or in other terms, a dramatic increase in efficiency. During the recession, firms of all sizes faced the challenge of having to stay in business with fewer resources and less staff, and those that survived generally did. So the need to employ further is depressed by these increases in efficiency.
Secondly, the rise in employment has not been driven by high-paying, skill-intensive jobs, but low wage, low-skill jobs. As again, indicated by the rise in efficiency, the recession afforded companies the opportunity to clear out unnecessary positions and streamline operations. Thus expansion would require, if at all, a few on-the-ground, physical jobs, usually low-skill and even unpaid, as the New York Times wrote in a recent piece. The third problem (or rather meta-problem) is that none of these issues seem as if they are going to be resolved any time soon. Companies will not stop increasing efficiency any time soon, but nor do they seem to be increasing skilled employment — as they are facing a shortage of skilled jobs — and educational attainment has stayed stagnant. These are long term challenges to the job market, and the economy
But in the meantime, the Dow is rising, and shall continue to do so for quite some time, as long as the Federal Reserve acts as predicted. We too, shall soon see the effects of its rise. But we will have to wait.