As the Dow tiptoes towards the 10,000 mark again, many wonder what difference that could possibly make on the reality of a recession. Having studied this in a former life, I can tell you that in and of itself, it is only a number. The Dow Jones Industrial Average represents American industry only insofar as people believe it. Having said that, the Dow is a mathematical representation of the health of an overview of the business sector. It carries a great deal of psychological weight on the general population but almost never affects the decisions of those who actually wield the power on Wall Street. The real importance of the DJIA and other indicators is that they are leading indicators. They typically rise prior to general improvement in the overall economy.
When money starts to flow back into stocks, it's money that investors have started to pull out of safe havens, like money markets and bonds, and begun to invest into industry. That belief underlies the notion that things are turning around and stock issues are about as low as they're going to go. Another way to state it is, money plowed into Wall Street eventually makes it to Main Street.
Other leading indicators study the actions of manufacturers and the effect on raw commodity prices. If people that make things aren't ordering raw materials, they aren't going to be producing widgets. This is where things get tricky. Manufacturers aren't going to ramp up production and order raw materials until they sense demand from consumers for their widgets. Kind of a Catch-22, no? This is where it can all take time to work out.
Employment is a lagging indicator. An improvement in employment is usually at the tail-end of any recovery. Why? As capital, the fuel of the economic engine, frees up a little and manufacturers work through their inventories, little by little, the producers in our economy will begin to produce more. This has to be met by a smidgeon more demand from consumers, which means the producers will hire a few more people, who will buy a few more widgets...... You get the picture. It's a tenuous and lengthy process. America may be in full recovery before anyone starts hiring again. Bad news for the unemployed - good news for the nation.
When will the employment picture get rosy? Well, first employers have to quit shedding jobs. This process is still going on and despite the dancing around the bonfires because it seems to be slowing, nonetheless, we're still shedding jobs. Line up all the economists in the world end to end and they can't reach a decision. Nevertheless, the consensus opinion among the best of them is that we won't see hiring begin in earnest until late next year, maybe well into 2011.
Is the recession over? No. Can we suffer another downturn? Yes. Will we? Who knows. My sense is that we are in recovery mode and unfortunately, it will take years, not months to look back and say we made it. In the meantime, there will be more job losses, more banks will fail, the DJIA will slip back a few times but, it is generally believed that the worst is over. Just don't try to tell that to a family facing foreclosure, or a breadwinner running out of unemployment money. This is capitalism at its best, and its worst.
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