10/23/2009 05:12 am ET Updated May 25, 2011

Labor Losses Loom Larger, Not Smaller

Ugh! Not another 10 months of job loss. Maybe so, Read on.

There's an old Wall Street saying: Buy on the bad news! That's exactly what fired-up investors did on Friday. Ignoring as irrelevant another dismal unemployment report that day -- a jump in the August jobless rate from July's 9.4% to 9.7%, the highest since 1983 and the 20th consecutive month of job losses -- investors eagerly bid up stock prices, pushing the Dow nearly 97 points higher.

The chief reason for that buying binge: Though August's actual job losses (216,000) were generally in line with expectations, they were somewhat less than the expected 230,000 and well below July's revised loss of 276,000. That, in turn, provided the economic bulls with fresh fuel that things are clearly getting less bad and that we're likely to see a meaningful economic rebound in the second half and in 2010.

Thomas Tusser, an English author and farmer, wrote, "A fool and his money are soon parted." Los Angeles money manager Leonard Mohr of MCR Associates thinks Tusser's observation could well apply to Friday's enthusiastic stock buyers.

"People are acting like less bad means we're now out of the woods," he says, "and that the worst of the unemployment crisis is behind us. I don't believe it because everyone is spending less and I can't see any sustained turnaround in housing for at least a year or two, certainly not with all the inventory on the market and prices weak in many areas."

Mohr, rates a double-dip recession as a distinct possibility because he's convinced a subsequent economic recovery will be painfully slow because of sparse rehiring. "Every store, every restaurant and every company I talk to tell me they're operating with less personnel and that will still be the case when good times return," he says.

Mohr says he was an aggressive seller on Friday, especially financial and retail stocks. He regards both sectors as overpriced based on fundamentals and the many lingering risks the two industries confront. "It's time," he says, "for investors to play it cool for a while, not to look for a disco."

British economist JC Spender also sees tougher U.S. labor problems ahead, which suggest fewer jobs, not more. Many businesses, he notes, have been very creative in responding to the recession by restructuring the labor market to permanently reduce their labor costs. They're also using increases in productivity as a way to get more for their labor dollar. But the private sector's restructuring of the economy is not without its costs, Spender explains, meaning it will be less easy to get a job and be adequately paid with benefits, such as health care and pensions.

Spender, professor of economics at the Open University in Milton Keynes, a town on the outskirts of London, observes Wall Street will love the restructuring (which will fatten the profits of Corporate America), but society will have a problem and politicians will be pressured to do something about it. It could create a lot of tension, he says.

Further, says Spender, the labor restructuring will disadvantage people. "You will need two family members working, not just one, to make ends meet," he says. "We're going into a new era where full employment won't mean what it has meant in the past."

Standard & Poor's chief economist, David Wyss, says the good news about the August report was that the monthly decline showed the smallest number of job losses in a year. But the bad news, he says, it was more job losses and more to come.

That, of course, raises the key question: what's ahead on the jobs front? No one, of course, knows the answer to that one, but Wyss offers a worrisome outlook. He expects another 10 months of job losses, with layoffs peaking in June at about 10.4%. Since every 1% hike in the unemployment rate is equivalent to the loss of about 1,250,000 jobs, an increase to 10.4% would throw another 250,000 people out of work. That, in turn, would raise the number of unemployed Americans, now at 14.9 million, to 15,150,000.

Wyss's rationale for such a bleak jobs outlook: He expects a weak economic recovery. The rebound from the last two recessions, he points out, was led by a sharp recovery in consumer spending. Not this time, he says, because consumers are cautious about spending and banks are not lending.

Economic consensus, as reported by Blue Chip Economic Indicators, a compilation of forecasts of leading economists, calls for GDP growth next year of 2.3%. Wyss's outlook: 1.5%. Aside from weak consumer spending, he points to such other impediments as record low capacity utilization (68%), softness in non-residential construction and the likelihood capital spending will remain soft.

"We'll see a recovery, slow," he says, "but it does have legs." One bonus, he notes, is that oil prices are half what they were a year ago.

As for earnings, Wyss sees weakness there, as well, with profits rising just a modest 5% next year despite all the cost reductions after a 10% decline this year.

Any major worries? His chief concern, Wyss tells me, is the possible failure of a major financial institution, especially one overseas since they haven't undergone stress tests like we've had here. "I know the financial markets are calming down," he says, "but they were also calming down last summer and we wound up with Lehman Brothers and AIG."

As for the stock market, Wyss figures the bull will continue to romp for a while, but notes, "we've come a long way in a short time (about a 50% rise from March's lows) and we're overdue for a correction."

Similar thinking is echoed by San Francisco money manager Gary Wollin of Gary Wollin & Co., who has made a number of uncanny market calls (both bullish and bearish) over the past couple of years. Given the big run in stock prices, Wollin, though bullish for the long run, thinks -- like lot of pros -- the market is ahead of itself and suggests short-term oriented investors (those with a 3-month time-frame) should take some money off the table. The reason: he sees the market is vulnerable to about a 10% selloff. As for the economy, he sees it chugging along -- not getting much better, but getting worse more slowly.

That's a standoff, and standoffs, observes Wollin, are not what rising stock prices are all about.

Write to Dan Dorfman at