The Great Disconnect Between Stocks and Jobs

UnemploymentHow can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.

In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.

In the Great Recession of 2008-2009, companies are going a step further. They’re using this sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, setting up shop in China and elsewhere, contracting out, replacing people with software and automated machines – they’re doing whatever it takes to get payrolls down so earnings bounce up.

Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. Caterpillar’s stock is up 165 percent since March. How did Caterpillar do it? Not by selling more bulldozers. It did it by cutting over 37,000 jobs.

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. That’s why we’re seeing the prices of foreign commodities and other assets go through the roof.

At the same time, the Treasury continues to be fixated on keeping banks afloat. The Administration’s mortgage mitigation efforts are lagging. Small businesses are starved of credit. The White House has announced a “jobs summit,” which is better than nothing but not nearly as good as pushiing immediately for a larger stimulus, a new jobs tax credit, and a WPA-style jobs program.

The Fed and the Teasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn’t sustainable.

robert_reich.jpgNo economy can recover without consumers. Yet American consumers, who constitute 70 percent of the U.S. economy, are facing mounting job losses as well as pay cuts. They’re in no mood to buy and won’t be for some time.

Where is this heading? No place good. Without a major shift in policy — both at the Fed and in the White House — the economics point to a big stock-market correction and a double dip. The politics point to substantial losses for Democrats next year.

by Robert Reich

This article first appeared on Robert Reich’s Blog. Republished with permission


  1. says

    Of course they wouldn’t get away with this if it were not for the ‘safe district candidate centered ” system. The “no party “system , where interest groups and contributions rule and where local party members and organizations are irrelevant for the most part. Safe from their party members as well as opposition.

  2. says

    Clean Energy Reverse Mortgages, would be like an Environmental WPA. But Democrats as well as Republicans will not hear a word of it. Reich in the past has joked about the “fortunate fifth” people making over $100,000 a year. We now have the “unfortunate fifth” people unemployed under employed or people who avoid even looking for work because it’s so hopeless. About twenty percent of the population.Democrats won’t even look at Clean Energy Reverse Mortgages because it will help the environment and economy and create jobs. Aside from the “unfortunate fifth” most homeowners would qualify to help the environment and economy and create jobs. But Democrats are blacklisting the idea. Even though it could be based on sound lending , solid loans and responsible borrowing and investing. It will slow down our outsourcing so Democrats say “no.” Sent letters to Pelosi , many handwritten from San Francisco residents, her staff says “take a hike.” Approached Lee and Stark, they think not. The job issue is very sticky. The campaign contributors are outsourcing.
    This could be the last recession with so many jobs being outsourced.Maybe D.C. will be outsourced as well. Corporations have global vision, oil giants have even more global vision. The unemployment rate is under 5 percent in China, maybe we can ask them to develop a job program for the U.S.Or maybe the White House will focus on jobs and the environment after Christmas after health care is resolved. Maybe it will be our Christmas present. I hope so.

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