New York (MainStreet) -- The stock market closed after sharp losses on Monday, the largest of a several-day downturn driven in large part by fears of economic trouble in China. The Dow Jones Average lost over 1,000 points during morning trading, and closed 588.4 points down after a mid-day recovery -- one of the biggest single-day drops in history.
Coming as they did during an already-uneven economic recovery, Monday’s losses have re-raised the specter of the Great Recession. Several observers have voiced concerns that this is another warning sign that, despite strong gains in corporate profits, the global economy is considerably weaker than it appears six years into an official recovery.
For the average worker all of this translates to one thing: jobs. The sight of a weak stock market has sent renewed jitters through the labor force as workers worry about whether this really is the sign of a weakening economy, and what that might mean for their jobs in the coming months.
From a labor perspective, the first lesson from Monday is don’t panic. A one-day dip in the stock market, even a severe one, can be a sign of trouble to come, the correction of an overvalued market… or absolutely nothing at all.
In fact, historically single day dips have tended to have very little connection to job market performance.
“In 1987, we had the worst one day stock market crash... in the history of American stocks," said Senior Fellow with the Brookings Institute Gary Burtless. "The S&P 500 fell 22.5% in a single day. In the 12 months leading up to that employment had grown at an annual rate of 2.72% which is quite healthy. In the six months from October 1987 to March 1988, so the six months after the crash, employment in the United States rose at a 3.6% annual rate.”
In other words, in terms of employment, Burtless said, “looking at the numbers, it’s very undetectable that there was any dip at all.”
What matters when it comes to employment is not stock prices, Burtless argued, but whether those prices reflect a change in the actual economy (as opposed to traders’ expectations). When economists respond to a stock market shift like Monday’s, it’s because they believe the numbers represent an actual slowdown in offices and factories nationwide, or because they’re worried that businesses will behave as though that were true.
While one day isn’t enough to know which is happening, lowered expectations for the economy can sometimes turn into a self-fulfilling prophecy. Describing the stock market and labor market as having “a fairly interesting feedback loop,” Indeed.com Chief Economist Tara Sinclair pointed out that all it can take to slow the economy down are the concerns generated by a temporary slump.
Over the long term most economists agree that the stock market generally reflects the fundamentals of its participants. In the short run, however, it can be just as easily influenced by traders’ expectations.
This "market sentiment" boils down to a trader buying or selling not because he believes Company X has changed in actual value, but because he can make a profit by doing so. Although this influences short term stock price, it reveals little about what to expect from that company's performance.
But managers nationwide keep an eye on those numbers… and as the stock market cools, even temporarily, they can get cautious. That can effect employment, even if only temporarily.
“When you have a drop in the stock market, like we saw today,” Sinclair said, “then employers may hold back when making hiring decisions.”
“I don’t think I would go and tell individual workers that this is a signal that they should be concerned about their job…. [but] one thing that we’re seeing is that employers are being more cautious about full time jobs until they see strong economic performance.”
Citing a causal relationship, Stanford economist and Director of the Realtime Analysis and Investment Lab Kevin Mak, emphasized that stock performance can absolutely drive employment decisions as companies respond to their perception of economic conditions.
“It’s pretty much completely causal,” he said. “When stock markets are doing well there are higher and higher expectations for companies to grow, and that puts pressure on managers to have more sales, to build more products, to conduct more R&D, and that causes unemployment to decline rapidly. Once stock markets start going down, that puts everyone into a cost-benefit rationalization mode and one of the most efficient ways to cut this is in your labor force.”
Both Mak and Sinclair also suggested the possibility that Monday represented a market correction, bringing an overvalued market back into line with the actual performance of the economy at large. Instead of meaning that losses are foretelling economic troubles to come, under this theory, they would simply be bringing prices down to more accurately reflect weaknesses already at work in employment and wages overall.
“One of the confusing things has been that we’ve seen performance that’s been quite strong, especially in the U.S. stock market,” Sinclair said, but the labor market “hasn’t been gangbusters. A lot of it has been returning to levels that we had before the Great Recession [and wage growth] has been notably slow, and that’s not consistent with the growth that we’ve seen in the stock market.”
Workers should hesitate and then hesitate again before reading too much into Monday’s stock plunge, which most likely represents nothing more than a bump in the road for their retirement account. Although further losses could reflect actual weakness in the economy at large, and therefore trouble to come, a single day probably means little for the already employed.
“Companies can’t manage themselves by constantly firing 10% of their workforce and then rehiring them,” Mak emphasized. “That’s where we’re at right now. It’s a concern, but I would be surprised to hear about companies having layoffs in response to today or the last few weeks.”
Job seekers on the other hand may find their search slowed down by jittery hiring managers who want to wait out the uncertainty. Sinclair, in particular, emphasized that an event like Monday’s losses generally won’t make companies reconsider their job postings altogether, but it “may slow hiring decisions.”
“Job postings across all industries were up last month so it really seems like employers were quite keen to hire," Sinclair said. "They might keep those postings up there, because they might want to wait and see what the stock market means for demand for their product, as well as what their company’s stock is doing. And that might cause a pause, and even a pause in hiring might have a real effect.”
A short term delay in hiring is probably the worst that one day of losses will lead to. Another two or three, however, and all bets are off.