Myth # 1: Rising unemployment
means growth can’t recover
Whenever there is a downturn this argument
pops up. But if it were true then economies
would never recover from recessions or
slowdowns. But they do. Rather, the boost to
household spending power from lower
mortgage rates and any tax cuts or stimulus
payments during recessions eventually offsets
the fear of unemployment for those still
employed. As a result they start to spend more
which gets the economy going again. In fact, it
is normal for unemployment to keep rising
during the initial phases of an economic
recovery as businesses are slow to start
employing again fearing the recovery won’t
last. Since share markets lead economic
recoveries, the peak in unemployment usually
comes after shares bottom. In Australia, the
average lag from a bottom in shares following
a bear market associated with a recession to a
peak in unemployment has been twelve and a
half months.
Based on All Ords. Source: Bloomberg,
Thomson Financial, AMP Capital
Hence the current cycle where the share
market has gone up despite rising
unemployment and headline news of job
layoffs is not unusual.
Myth #2: Business won’t invest
when capacity utilisation is
low
This one is a bit like the unemployment myth.
The problem is that it ignores the fact that
capacity utilisation is low in a recession simply
because spending is weak. So when demand
turns up, profits rise and this drives higher
business investment which then drives up
capacity utilisation.
Myth #3: Corporate CEOs,
being close to the ground,
should provide a good guide to
where the economy is going
Again this myth sounds like good common
sense. However, senior business people are
often overwhelmingly influenced by their own
current sales but have no particular lead on the
future. Until recently it seemed Australian
building material CEOs saw no
sign of a pick-up in housing
construction even though it was
getting underway. Now it’s
widely accepted. This is not to
say that CEO comments are of
no value – but they should be
seen as telling us where we are
rather than where we are
going.
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