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Best Prediction of the Stock Market and Economy – Unemployment Rate

Posted on | March 17, 2009 | 4 Comments

new-housing-supplyWhen looking at the recent history of the United States economy and stock market, one thing stands out to be a great predictor – Unemployment rate.  Any time the unemployment rate is stagnant or declining, the stock market trends upward.  The lower the unemployment rate falls, the higher and more drastic of an uptrend in the overall stock market.  The same holds true for the opposite situation.  The higher unemployment goes, the more money that is invested in the stock market and overall economy is lost.  This makes perfect sense in a Capitalist country.  Private and publically held corporations need employees to produce greater profits.

It is easy to see why the unemployment rate often determines the strengh of the stock market and the overall economy.  We will use the company Subprime Blogger as an example.  If Subprime Blogger has done very well financially over the last year, they are going to want to expand.  By expanding, the current workforce is going to be put under much greater stress as they will have the same amount of time to do many more jobs.  To reduce this problem, Subprime Blogger is likely to invest in more employees.

If there were 500 hours of work to be done before expansion with 10 employees, those employees were expected to do 50 hours each.  After expanding, there is now 750 hours of work but revenue is expected to rise 100%.  Is it possible to get 75 hours of quality labor out of the same 10 employees?  Yes, it is definitely possible, but their abilities will be greatly hindered because they will have less time outside of work and will be asked to do more with less.  To alleviate the workload of the current staff, Subprime Blogger will likely hire at least five new employees.  If five employees are hired, they will work the same 50 hours as the current staff and 15 employees will do 750 hours of work.

With this move, Subprime Blogger will increase revenue by 100% by only increasing their workforce by 50%.  Sounds like a great deal, right?  Of course!  The company is making more money while not over extending their payroll.  If we fast forward six months and see the Subprime Blogger has in fact increased revenue by 100% one would think that the stock of the company would follow suit.  The more money a company makes, the higher the stock price, all things considered.

By looking at this example on a national scale, you realize that when MANY companies are expanding, more workers are being hired to increase productivity and ultimately revenue.  When 5000 companies increase revenue, the overall economy continues to grow and stock prices increase.  This is what happened in the 1990’s and again from 2002 through 2006.  The unemployment rate was steadily decreasing during these times as companies were looking to expand and grow their profits and revenue.

The problem with the previous situation was that many of the jobs were created in the housing and real estate markets.  Construction was booming; the economy would never faulter, right?  Unfortunately that is not the case.  The level of supply in the housing market grew over eight months of supply and the housing bubble popped.  There were way too many houses being built which caused there to be a supply/demand imbalance.

With too many houses being on the market at one time, there was a subsequent decline in housing prices.  When the economy started to turn even slightly sour and home sales started to dry up, many constrution and housing jobs were cut.  This started the downward spiral we are currently in.  When those jobs were cut, the workers that once made more than enough to make mortgage payment were now broke.  How were they going to pay a $1400 a month mortgage payment without a job?  They didn’t.

After several months of slumping home sales, job cuts continued to increase in the construction and real estate industry.  While these job cuts didn’t put a huge dent in the overall unemployment rate, it was the underpinning of the overall economy.  The value of home prices falling ultimately lead to the greatest financial crisis in the history of the United States.  The snowball effect took place when housing prices fell over 10% from the peak.  Home builders stop building homes – more job losses.  Real estate offices needed less brokers – more job losses.  Construction companies no longer needed to clear land – more job losses.  The amount of concrete, lumber and home building supplies greatly decreased – more job losses.

As you can see, the trickle down effect of falling home prices is quite drastic in the United States.  It can easily been seen that as home prices fall, unemployment rises.  Many will argue that it is almost impossible to guess when the unemployment rate will turn around and start falling again which would be a great time to invest in the stock market.  Well, that may be true, but one thing is certain.  If current housing supply remains at the highest it has ever been in the history of the United States, there is no way that the unemployment rate will fall!  Until some of the excess inventory is sold, housing prices will continue to fall which in turn will cause unemployment to rise.

When will housing prices bottom?  We are in a VERY though situation in the United States of America right now.  If individuals do not have jobs, how are they going to afford to buy up some of the excess housing inventory?  They are not!  Until home builders figure out that they cannot build another home in many areas, the value of homes are going to continue to fall.  The only way the housing market will get better is time.  As college graduates and young professionals start making money, houses will start being bought.  In time, enough educated professionals will start buying homes which will bring the months of supply back down to reasonable levels.

How low should new housing supply be before we start to see a bottom?  This is a very though question as we are in an unprecedented time in our history.  United States history shows that when current housing supply goes over 10 months, a bottom in the housing market is near.  This is not the case today as home owners are in so much trouble financially that they are defaulting on their mortgage loans consistently.  So the problem compounds itself by putting even more homes on the market!  If we see new housing supply under 8 or 9 months of supply, we are definitely headed to a road of recovery.

So until new housing supply starts to decline, the unemployment rate will continue to increase?  Exactly!  You can find the new housing supply chart here to track the current data.  I will warn you ahead of time, the chart is VERY scary when you realize just how bad things could get.  Not even the Obama Mortgage Plan can solve this problem.

Category: New Housing Supply

Comments

4 Responses to “Best Prediction of the Stock Market and Economy – Unemployment Rate”

  1. Job Losses Hit U.K. Pound in FX Trading | Genuine Forex Trading
    March 19th, 2009 @ 10:13 am

    [...] Learn More About Unemployment and the EconomyEconomic indicators can point to directions in FX trading [...]

  2. Subprime Blogger / Mortgage Rate Predictions - March 19th - Mortgage Rates Go Under 5% as Predicted
    March 19th, 2009 @ 11:06 am

    [...] The problem remains that lenders are having great difficulty finding capital to loan for these mortgages.  The number of mortgage applications will skyrocket over the next few weeks as everyone who considered a refi in the past is sure to do it now, possibly causing a refi boom.  There will also be an influx of interest from new home buyers.  Ultimately, the interest from the new home buyers will hit a wall due to the unemployment rate. [...]

  3. Job Losses Hit U.K. Pound in FX Trading | Forex Trading Data For Forex Brokers
    March 19th, 2009 @ 10:34 pm

    [...] Learn More About Unemployment and the EconomyEconomic indicators can point to directions in FX trading [...]

  4. david
    May 6th, 2009 @ 4:16 am

    I agree with you up to a point. You are not taking into account the less money people have during unemployment causing people to NOT invest or cash out.

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