- The Washington Times - Friday, January 15, 2010

Last week, the stock market reacted to worse-than-expected December jobless claims as well as the negative revisions in aggregate with regard to that data for October and November. That stock market dip continued into the early part of this week as Alcoa, Chevron and KB Homes shared December quarter results below street expectations.

In the past few weeks, I shared my view that earnings growth expectations are aggressive for 2010, and so far, the early data are confirming that. Not to be outdone, earlier this week the White House announced that the impact of its stimulus plan began to fade in the December quarter. All of this has prompted many to reconsider the possibility of a double-dip recession.

The Obama administration’s report on the stimulus impact, released by the Council of Economic Advisers, claimed the stimulus package added between 1.5 and three percentage points to the gross domestic product (GDP) in the fourth quarter of 2009. By comparison, the same council estimated a stimulus-related impact in the third quarter between three and four percentage points. Keep in mind that final GDP for the third quarter was 2.2 percent, which means the private sector actually contracted in the third quarter.

Private forecasters project that the economy grew about 4 percent in the year’s final quarter, which would imply one to 2.5 percentage points of non-stimulus related growth. To be fair, this would be not only a sequential improvement for the private sector but it also would be the first sign of positive GDP growth for the private sector in several quarters.

While that sounds promising, there are two sobering points to be made. First, the adjusted data shows that the underlying economy on its own is not as strong as a number of indicators would suggest. Second, we have to be mindful of eventual revisions to preliminary GDP data, as initial indications can be overly optimistic. Case in point, preliminary GDP for the September quarter released in late October was 3.5 percent while the final figure released in late December was 2.2 percent.

With that as a backdrop, it comes a little surprise that Alcoa, Chevron, KB Homes and others reported performances in December that did not live up to expectations. Now to be fair, we are in the early innings of earnings season for the December quarter and as it tends to be the case, we likely will see some positive surprises as well as negative ones in the coming days and weeks.

When will we start getting stronger-than-expected earnings growth? Based on head-count reductions last year and rising costs, the most likely answer hinges on when we see sustainable job growth, which should stimulate true consumption.

When should we expect to see job growth? Much the way there are pockets of the country that are seeing some improvement, there are also ones characterized by continued weakness - some of which are likely to remain a drag on an eventual broader-based domestic economic recovery. Can you say “Detroit?”

Odds are the country is experiencing some job growth offset by continued job losses as evidence by a recent Gallup report. Gallup’s Job Creation Index, based on U.S. employees’ self-reports of hiring and firing activity at their workplaces, showed that job-market conditions nationwide actually deteriorated in December.

While we can pay attention to a number of different indicators to try and get a clearer picture as to when job growth may return, several of those data streams will be influenced by the stimulus package.

In my view, a better way to get a handle on when a broader-based job recovery will begin is to keep an eye on the average workweek and hourly earnings. Over the past 12 months, the average workweek as reported by the Bureau of Labor Statistics has held steady at 33 hours and factory workweek hours have also remained fairly constant at 40 hours as well.

With manufacturing capacity utilization levels in the second half of 2009 running well below trough levels posted in 1990-1991 and 2001-2002, its easy to see why factory overtime levels have remained low over the past several months. One has to wonder then whether it is prudent to expect new jobs to be added when employers are more likely to deal with any demand improvement for their business by first adding overtime and ratcheting up hours for existing employees.

I would expect employers to try and wring out more productivity from the existing work force before adding additional players to the team that bring additional wage and benefit cost. Thus far, we have not seen those signs emerge.

With enough slack in the economy, it raises the question as to whether “better” unemployment-claims data reflect actual job creation or simply the fact that we are approaching the end of head-count reduction?

Just because one slows or stops does not mean the other has begun. If we are simply just seeing an end to head-count reductions, 2010 expectations for the overall economy and its pace of recovery as well as corporate earnings will have to be revisited.

c Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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