While investors seem to have decided that
last Friday's jobs report was ultimately more bullish than bearish for the market and the economy, there are some who would disagree.
Recent Daily Interviews
Brown Brothers Harriman's
University of San Francisco's
Cohen & Steers Equity Income Fund's
Charles Lieberman, former chief economist of the
Federal Reserve Bank of New York
and currently chief economist of
Advisors Financial Center
, an asset management advisory company, is one of them. Lieberman thinks the rise in unemployment could seriously affect household income and endanger an economic rebound in the second half of the year. He also fears that unemployment could increase to 5%.
On the bright side, though, Lieberman thinks the stock market will continue to rally simply because it has already reached bottom. He also thinks the unemployment figure gives the
Federal Reserve all the more reason to continue to lower interest rates.
TSC: What does the increase in the unemployment rate from 4.2% to 4.5% tell you about where the economy is headed, and how does this figure mesh with other positive indicators we have seen recently?
The outlook had brightened considerably. Several recent economic reports had indicated that growth was improving. Industrial production, durable goods orders, new and existing home sales and
GDP growth of 2% in the first quarter -- all had indicated that growth was improving.
This unemployment report doesn't jibe with this string of economic reports and was utterly shocking. It tells me that recovery may not be so quick. In fact, this is the weakest employment report we have seen in a while, and these unemployment figures are consistent with the notion of a recession.
TSC: So what do you think the outlook for the economy is now?
I think there's an increased risk of a more protracted slowdown. This report is a threat to a rebound because it represents a significant hit to household income. The consumer is really the key to recovery. But if consumer spending can hold up, then a rebound in activity this summer is very likely.
Still, I think the economy has probably seen the worst, and I believe the dynamics of the business cycle will enable the economy to overcome this weak report. I also think the Fed will ease some more to ensure that pickup.
TSC: Do you think the rise in unemployment could put an end to the stock market rally we have seen in recent weeks? Surprisingly, both the S&P 500 and the Nasdaq Composite posted strong gains on Friday in spite of the bad news.
I think the stock market has found bottom, partly because the stock market already anticipated -- and was priced for -- a recession. You can only go down for recession once.
TSC: A lot of economists were surprised by this unemployment figure. But given all of the news we have been hearing about widespread layoffs, do you think they were wrong to be caught off-guard?
No, it was a shocking report. While the layoffs have been occurring, there have been hundreds of thousands of jobs created. In the first quarter, we produced almost 450,000 jobs. I think virtually every economist was caught off-guard because this report was not just weaker, but
weaker, than anything else we have seen.
Also keep in mind that in the first quarter, inventory adjustment was probably completed, and last month, we saw a pickup in industrial production.
TSC: One thing people seem to be forgetting is that unemployment is still relatively low. When the economy was growing, a 4.5% unemployment rate was seen as good news. Now that the economy is faltering, the same number is being interpreted as bad news. Do you think this unemployment rate is cause for concern?
First of all, that's exactly right. Four point five is still a low unemployment rate. What's disturbing is the
the unemployment rate is moving. We went from 3.9% to 4.5%. That's an indication the economy is weakening.
TSC: Do you think the unemployment rate could rise even higher?
Yes, I do expect it to rise some more, perhaps to as high as 5%, but much depends on how quickly the economy begins to improve. But it's almost too soon to say at what point the unemployment rate will top out.
TSC: How low do you expect the Federal Reserve to bring the prime rate?
For sure, another 50
basis points when they meet May 15, which would bring it down to 4%, and then again at the end of June, which is the date for the next
Federal Open Market Committee meeting.
Remember, the higher unemployment figure is actually desired by the Fed. What the Fed does not want is for the weakness to accumulate into a full-fledged recession. This is why the Fed will continue to be aggressive in providing support for the economy.