Liz Ann Sonders: Job Gains Possible by Year-End

Liz Ann Sonders is senior vice president and chief investment strategist at Charles Schwab & Co. Prior to joining Schwab in 2002 she was a managing director at U.S. Trust. She is a regular guest on CNBC as well CBS’s Evening News, ABC’s Good Morning America, Fox News, and Bloomberg TV and radio and is often quoted in The Wall Street Journal, Barron’s, The New York Times, USA Today, and the Financial Times, among others.

H.L.: Do you see another stock market decline like last week's?

L.S.: We’re certainly overdue for a bit of a breather. The consensus has felt that for quite some time, but I don’t see any major correction.

It may be more in time than in price. You have two types of corrections: The price correction tends to be steeper. The corrections in time tend to be flatter and not as severe, and the market doesn’t do much.

H.L.: A disappointing earnings report from Research in Motion (RIMM) as well as the drop in home sales seemed to cause the market to drop last week. And now we’re close to earnings season. What’s your take on earnings?

L.S.: I think generally earnings are going to be good, but not necessarily good across the board. If you look at quarter-over-quarter earnings for the first quarter of this year over the fourth quarter and the second quarter over the first quarter, on an annualized basis they set a record for a recession.

What we know is that companies have established an incredible basis for profitability with cost-cutting and productivity. We’re not getting top-line growth. We’re getting earnings growth because of this focus on productivity and margins, so I think we’re in a transition. One of these days we’re going to see some top-line growth as well, but in general I think the earnings picture looks pretty good.

H.L: The dollar seems to be a big factor in the stock market direction. When the dollar goes up, the market drops. Do you agree?

L.S.: What I think has happened with the dollar in the last year has less to do with things like inflation or debt, and, you know, there’s this desire to pinpoint the fundamental factors that drive the dollar’s direction one way or another. To me, most of the dollar’s movement in the last year has been about either risk-taking or risk aversion. When we were in the worst part of the crisis last fall and early this year, the dollar was quite strong and was rallying most of that time because there was this massive amount of risk aversion and movement towards safe-haven investments. The dollar got a safe-haven bed under it, particularly given the demand for Treasurys. Stocks and commodities were going down.

Now we’re seeing the mirror-image of that as investors are moving away from massive risk aversion and moving out the risk spectrum as they’re looking for more return.

H.L.: What’s ahead for the U.S. economy?

L.S.: I think the economy exited recession in the second quarter — in May or June would be my best guess. I think we’re in at least the early stages of the recovery, and it will be sharper than a lot of people think.

The risk associated with that is that the economy is “too strong” and will cause concern about Federal Reserve policy. But the Fed said on Wednesday that it would keep rates low as far as the eye can see. However, I just think the stronger the recovery, the more pressure that they will be under to take their feet off the accelerator.

H.L.: Fed Governor Kevin Warsh implied that interest rates may have to rise and that there will be a lot of pushback as the Fed unwinds its policy. What do you see?

L.S.: I agree. I think there’s a risk that the Fed is going to have to tap the brakes before a lot of people think they ought to. I was very much a fan of Kevin’s gentle warning.

It would just reset expectations for rates, and that has implications for what Treasurys and what equities do. It pretty much has implications for everything for us as consumers and borrowers. But I don’t think we’re imminently facing a Fed rate hike, although Kevin is right to suggest that at some point the Fed does have to raise rates. And it may seem at that time that it’s too early to do so. I hope they do. I hope they don’t keep the pedal to the metal as far as the eye can see.

With the benefit of hindsight we now know that rates in the last cycle were kept too low for too long. It contributed to the debt bubble that we’re still working our way out of right now.

H.L.: What do you see ahead for housing?

L.S.: Broadly, we’ve bottomed, but I would put the emphasis on “broadly.” The housing market is going back to being a bit of a regional thing. Some areas that had the biggest hit in the downturn are enjoying the biggest rebound now. It’s very natural for that to happen, but we’re certainly not out of the woods yet, as it relates to foreclosures and mortgage rate resets. But broadly and generally I think the worst is over.

H.L.: Do the continuing job losses threaten the recovery?

L.S.: One of the mistakes people make is not understanding the various job indicators. The three primary ones are unemployment claims, payrolls, and then the unemployment rate. In that order they are a leading indicator, a coincidental indicator and a highly lagging indicator.

Starting with the leading indicator, the four-week average of initial unemployment claims is now down by about 100,000 from the peak. We’ve never in history still been in a recession at the point when they’ve dropped that significantly.

Moving to the payroll numbers, the coincident job indicator that moves with the economy, I would put them in the category of improving. They’ve gone from bad to “less bad.” And if the pace of improvement we’ve been seeing in the last several months continues, we could get the first month of a gain — an actual job addition — by year end.

Moving on to the unemployment rate, it’s high and in the last month was still rising, but the unemployment rates has never peaked during a recession. The best it’s ever done is peak the same month a recession has ended, never prior to a recession ending. The average span is six months, rising for six months after a recession is over with. And in the last two recession in 2001 and 1991 the unemployment rate continued to rise for over a year after those recessions were over.

Comments

[Dean M:]

Interesting insight how we've never still been in recession when initial jobless claims have moderated to the degree we've seen. I'd love to see a chart illustrating that. I do find it hard to believe that there's a significant risk of the economy being 'too strong'.

Sep 29 03:30 AM

[Mr. Ed, Jr.:]

Ms. Sonders says that we are "working our way out of" that "debt bubble". Piling on much more debt is hardly part of "working our way out". Indeed, far from working out of the debt, it would appear that we have made matters much worse.

Ms. Sonders is simply taking the usual recession/recovery patterns and applying them to this recession, without understanding that this is not just any debt recession, but the biggest (by far) in the history of the world. The last debt recession was given a name, as you may recall.

Banks are insolvent (as is the USA, now the biggest debtor nation in history), consumer credit is contracting at record pace, and the Fed is apparently involved in so many shenanigans that we may not ever know about all of them. And that is just for starters.

But Ms. Sonders basically just recites that recessions end x months after they start, such-and-such is a "lagging indicator" (How tiresome have those two words become ?), the employment pattern improves x months after something else happens, etcetera, etcetera. And, therefore, we are in the recovery phase, because it is "time" for it.

Ho-hum.

Sep 29 04:26 AM

[Steven Hansen:]

she must have missed reading the John Mauldin article:
seekingalpha.com/artic...

there might be certain segments of the employment market growing by year end. however, all of this must be based on her belief the recession ended in May. that is just ignorant.

Sep 29 05:35 AM

[Tom Armistead:]

The point about profits - that companies cut expenses radically and will be profitable even on reduced revenues - supports the idea that jobs will be added.

Inventory cuts in many cases involved a chain of manufacturers, distributors and customers,and in some cases were excessive.

A profitable company, seeing orders increase as distributors replenish inventory, will very likely add enough employees to meet demand.

Sep 29 06:56 AM

[GotLife:]

We'll see the unemployment rate drop by year end, simply because the long-term unemployed will run out of benefits. Thus, the Feds will no longer count them and unemployment will decrease.

A press conference will be called to announce this improvement in the economy and to trumpet the government's success in combating unemployment. The media will quickly print the headline, consumer confidence will rise, and the Dow will hit new highs. Ruby slippers will be passed out, birds will sing and the US will truly become the Emerald City...

Sep 29 09:58 AM

[Old Trader:]

Tom,

I wish I could agree, but I can't. You seem to have overlooked the fact that many firms have cut hours, rather trhan completely laying off workers. Consequently, there could very well be a rebound in demand, due to inventory restocking, or whatever, that isn't going to translate into higher employment.

Within the last half hour, or so, Bloomberg TV had the results of a survey of CEOs on future hiring, over the next quarter, and just under 70% said it would be flat, to down.


On Sep 29 06:56 AM Tom Armistead wrote:

> The point about profits - that companies cut expenses radically and
> will be profitable even on reduced revenues - supports the idea that
> jobs will be added.
>
> Inventory cuts in many cases involved a chain of manufacturers, distributors
> and customers,and in some cases were excessive.
>
> A profitable company, seeing orders increase as distributors replenish
> inventory, will very likely add enough employees to meet demand.

Sep 29 11:20 AM

[Tom Armistead:]

These ae the same guys that have been selling their stock at a record clip for months. Insiders with a privileged view and understanding of what's going on around them, so on an so forth.

They are the same types who were achieving great things by having their companies borrow money to buy back stock at inflated prices thus inflating their bonuses.

Thye don't understand, it will be possible to make money the old-fashined way, by earning it. They are discouraged because what they are used to doing is not working anymore. Not exactly a visionary crowd...


On Sep 29 11:20 AM Old Trader wrote:

> Tom,
>
> I wish I could agree, but I can't. You seem to have overlooked the
> fact that many firms have cut hours, rather trhan completely laying
> off workers. Consequently, there could very well be a rebound in
> demand, due to inventory restocking, or whatever, that isn't going
> to translate into higher employment.
>
> Within the last half hour, or so, Bloomberg TV had the results of
> a survey of CEOs on future hiring, over the next quarter, and just
> under 70% said it would be flat, to down.

Sep 29 11:43 AM

[jeremiah74:]

i agree with some of the commenters before me

a. read the Mauldin letter, with D.Rosenberg's piece on employment in it

b. she appears regularyl on CNBC, so why am I not surprised that she expects hiring anytime now.. ?

Sep 29 12:00 PM

[Old Trader:]

Tom,

I'm not certain how your reply refutes my comment, regarding employment. Assuming for the moment that ALL CEOs are a bunch of rotten, greedy SOBs, one would think they'd lie, and say things are peachy...they'll be ramping up hiring, etc., in an effort to keep their stock price as high as possible to maximize their profits...or if not flat out lie, make suitably ambiguous statements that could be construed either way, depending if one were a bull, or a bear.


On Sep 29 11:43 AM Tom Armistead wrote:

> These ae the same guys that have been selling their stock at a record
> clip for months. Insiders with a privileged view and understanding
> of what's going on around them, so on an so forth.
>
> They are the same types who were achieving great things by having
> their companies borrow money to buy back stock at inflated prices
> thus inflating their bonuses.
>
> Thye don't understand, it will be possible to make money the old-fashined
> way, by earning it. They are discouraged because what they are used
> to doing is not working anymore. Not exactly a visionary crowd...
>

Sep 29 12:10 PM

[Jeff Miller:]

Old Trader -- I think Tom is correct on this one. I agree with your facts, but not the conclusion.

The response to an improving economy will certainly be reflected in hours worked, but there will also be new hires. It remains to be seen how many of each.

As to the CEO survey, the primary source is even more dramatic, since it reports that 87% say "flat to down." Of course 60% say "flat to up." It is an old trick to lump the flat in with the changes as did the report you saw. If you go to the primary source, www.businesswire.com/p... you will see that the expectations in this survey have improved dramatically since last quarter. More importantly, CEO's don't know what they will be doing in six months. The CEO outlook collapsed after the Lehman fall. It is now improving rapidly. Also, this approach does not capture the behavior of firms that are not a part of their sample -- an important source of new job growth.

A fair conclusion would be that not all companies are the same. Some will lay off more. Some will go out of business. Some will hire. Some will increase hours. Thinking about labor dynamics as a distribution of workers and firms is much more productive than trying to portray complex behavior in terms of a single generalization.


On Sep 29 11:20 AM Old Trader wrote:

> Tom,
>
> I wish I could agree, but I can't. You seem to have overlooked the
> fact that many firms have cut hours, rather trhan completely laying
> off workers. Consequently, there could very well be a rebound in
> demand, due to inventory restocking, or whatever, that isn't going
> to translate into higher employment.
>
> Within the last half hour, or so, Bloomberg TV had the results of
> a survey of CEOs on future hiring, over the next quarter, and just
> under 70% said it would be flat, to down.

Sep 29 12:38 PM

[Tom Armistead:]

That was not my best thinking, although I do beleive I have an accurate understanding of how average management operates.

Jeff just put in something a little more thoughtful.

I have been watching unemployment because according to simple models I am using, an improvement in unemployment, as unexpected as it is, would result in a rapid run up of the stock market.

The last unemployment report - last week - was better than expected, and consumer sentiment likewise. The info got drowned out by concern on existing or was it new home sales.

So, with news coming out more favorable than expected, and noting Ms. Sonders is employed by a large firm and no doubt has professonal help forming her opinion, I am unwilling to discount her information: if the trends they are watching continue, job additions are possible by the end of the year.

Tom


On Sep 29 12:10 PM Old Trader wrote:

> Tom,
>
> I'm not certain how your reply refutes my comment, regarding employment.
> Assuming for the moment that ALL CEOs are a bunch of rotten, greedy
> SOBs, one would think they'd lie, and say things are peachy...they'll
> be ramping up hiring, etc., in an effort to keep their stock price
> as high as possible to maximize their profits...or if not flat out
> lie, make suitably ambiguous statements that could be construed either
> way, depending if one were a bull, or a bear.

Sep 29 01:18 PM

[Donald Ingram:]

Mauldin and Rosenberg have the correct "skinny" on the way the economy is going and will go.

Mizz Liz Sonders is wrong. Well, maybe not ENTIRELY wrong, I'm sure theres a little ray of sunshine in there somewhere! Alltho, still looking for it!

Sep 29 01:41 PM

[Old Trader:]

Jeff,

I agree that the whole "flat to down" vs. "flat to up" thing can be misleading and as I said, one can either view it as "glass half full" vs."glass half empty".

I would also agree a survey's results can be skewed by the sample used, and there's tons of companies/businesses who weren't polled.

From a worm's eye view, I have a small business (industrial supply), and business sucks, and by extension, so does the business of my customers. Btw, I normally spend my days calling on my accounts, so I see the empty customer parking lots, and the empty will call counters, and my customers aren't just blowing smoke. They're hurting BIG TIME!

In summation, yes, some confidence has returned from 11-12 months ago, but there's still an incredibly long way to go.


On Sep 29 12:38 PM Jeff Miller wrote:

> Old Trader -- I think Tom is correct on this one. I agree with your
> facts, but not the conclusion.
>
> The response to an improving economy will certainly be reflected
> in hours worked, but there will also be new hires. It remains to
> be seen how many of each.
>
> As to the CEO survey, the primary source is even more dramatic, since
> it reports that 87% say "flat to down." Of course 60% say "flat to
> up." It is an old trick to lump the flat in with the changes as did
> the report you saw. If you go to the primary source, www.businesswire.com/p...;newsId=20090929005355...
> you will see that the expectations in this survey have improved dramatically
> since last quarter. More importantly, CEO's don't know what they
> will be doing in six months. The CEO outlook collapsed after the
> Lehman fall. It is now improving rapidly. Also, this approach does
> not capture the behavior of firms that are not a part of their sample
> -- an important source of new job growth.
>
> A fair conclusion would be that not all companies are the same. Some
> will lay off more. Some will go out of business. Some will hire.
> Some will increase hours. Thinking about labor dynamics as a distribution
> of workers and firms is much more productive than trying to portray
> complex behavior in terms of a single generalization.

Sep 29 01:56 PM

[billddrummer:]

Excellent article, Mr. Mauldin.

Thank you for providing hard data for what is turning out to be a seemingly intractable problem--how to put enough people to work to pull the economy out of its doldrums, yet not bankrupt the Treasury in the process?

It seems clear that only massive government intervention will make a material difference in the job count, yet no one wants that (including me). I contend that the government is already far too intrusive, and more powers begat more intrusiveness.

But for private industry, the only reason to hire is that the new employee will produce more work than his or her cost to hire. Until profit margins recover, hiring workers will continue to be an expensive proposition.

And without top-line revenue growth, there's little incentive to hire. Yet without expanding employment, top-line growth will languish.

An economic conundrum: Companies won't hire because they see no revenue growth, but unemployed workers can't spend because they aren't working. And that reinforces the companies' stand against hiring.

Again, thank you for the article, and the lively discussion it spawned.

Sep 29 06:50 PM

[billddrummer:]

Excellent article, Mr. Mauldin.

Thank you for providing hard data for what is turning out to be a seemingly intractable problem--how to put enough people to work to pull the economy out of its doldrums, yet not bankrupt the Treasury in the process?

It seems clear that only massive government intervention will make a material difference in the job count, yet no one wants that (including me). I contend that the government is already far too intrusive, and more powers begat more intrusiveness.

But for private industry, the only reason to hire is that the new employee will produce more work than his or her cost to hire. Until profit margins recover, hiring workers will continue to be an expensive proposition.

And without top-line revenue growth, there's little incentive to hire. Yet without expanding employment, top-line growth will languish.

An economic conundrum: Companies won't hire because they see no revenue growth, but unemployed workers can't spend because they aren't working. And that reinforces the companies' stand against hiring.

Again, thank you for the article, and the lively discussion it spawned.

Sep 29 06:50 PM

[Schweizer:]

Don't trust anyone who's job it is to take money from you. Sonders is no exception. I wonder what will become of these types as the SPX tumbles to new lows over the next year.

No one is hiring
Few people are spending
Debt is a 4-letter word

Enough said.

Sep 30 03:04 AM