Hi, I’m Rand Westlund, and today’s topic is a part of The Quest for Normalcy; the idea that the economy is trying to head back toward normal conditions. The question is, of course, what is normal. Everyone struggles to answer that question. What we can say: we had two decades of really, really good times, which is abnormal. Most people don’t think of it that way. They want the too-good times to be normal, and only see bad times as abnormal, because we always think of abnormal as a negative term. But, having such a good experience for such a long period of time is abnormal. Now we have gone through the extraordinary stress of the last couple of years, which is also abnormal, and find ourselves in this quest for normalcy. I believe we went through a panic that started in the Fall of 2008, and we only came out of it in the late Spring into Summer, so now maybe we’re stable. It’s not that everything is great or that everything is fixed; but perhaps more positive, rather than just “less-worse,” things are in store.

I have two charts to share with you today, offering a high level view of the economic trends, to provide context and, hopefully, insight into where we are, and where we are headed…...

If you were to go to the headlines today, what needs to be fixed for the recession to be over? What would you say is the number one thing everybody talks about that needs to be fixed? Unemployment, right? That’s the #1 issue on everyone’s mind—until we fix this, the recession is not over. A review of the last nine recessions would argue that’s wrong. You say, really? Just consider one chart for perspective. This chart, featuring 1973-1975, is relatively similar to the present, covering monthly data points from 18 months before to 18 months after the market bottom during the recession (whose beginning and end is shown as red vertical lines). The black arrow marks the market bottom on the blue line, which traces the S&P500 Stock Index. The market bottom represents 100 on the left scale. So, in 73-75, you can see that the market falls from about 175 to 100, down over 40% in the 18 month before-period. The market recovers in the 18 month after-period, with a very strong move beginning before the recession ends. The gray line, using the right scale, traces unemployment. Note that unemployment starts below 5% (sound familiar?) and begins to rise during the recession. About two-thirds of the way through the recession, the market bottoms and starts its upward move as recovery is anticipated, even as unemployment explodes upward, not peaking until after the recession.

Now look at a chart of today, same monthly data, same left and right scales, same markings. The recession starts in November 2007, with the S&P500 above 200 and unemployment below 5%. At the market bottom, the S&P 500 was down over 50%. In March, the S&P500 bottoms and starts its upward move as recovery is anticipated, even as unemployment explodes upward.

Now, if Fed Chairman Bernanke is correct, the recession ended in June or July at the dotted red line. So, you ask: “Is it possible that the S&P 500 and the unemployment rates are the wrong things to use to gauge economic progress?”

And my answer is: “Only if you can argue that the market no longer anticipates conditions and that unemployment no longer follows the realization of conditions, and it’s hard to make that case. If we look at history and see what happened before, we can see the similarities today. We haven’t seen a recession this deep and hard in a long while, so a part of the problem is that one can review a fifty year history of recessions within a few minutes, but a few minutes from now this one hasn’t changed yet. Still, history tells us that this progression always happens. In recession, the market looks ahead to improving conditions and a return to earnings growth, i.e. recovery, but job creation comes later. We have to deal with how we feel right now—this is not easy, since unemployment carries such a personal, emotional quality—but remember: at this stage in 1975 they felt the same way –it’s never going to get better, in fact it’s getting worse. And it was at that point beginning to get better. Some elements of their conditions were different, but the basic trends were the same…

So, what’s my point? The headlines tell you that without job creation, recovery cannot come. But this conclusion reverses historical precedent. What caused the rise in unemployment? The recession. Why? Corporate managers cut costs, they cut people, when conditions force them to do so. Why? To protect profitability. Why were they forced to protect profitability? To protect survivability. The recovery works in reverse, ultimately producing jobs to meet the expanding needs. In other words, jobs are the result of recovery.

Another thing to consider: if you go back to 2006 or early 2007, before everything began to unravel, there was an estimate based on the baby boom population and demographic trends suggesting that by about 2014 we were going to be at least 4 million workers short of what would be needed to keep the economy growing normally. Then, we went into this high level of distress and job loss, and everybody concluded that it appears that we don’t need those people ever again. It’s the “ever again” part that poses the problem. We may not need those people right now, but what about later? When we get 3 years down the road from here, is that number still 4 million, or is it higher? Keep in mind, that estimate was made with all the people who have lost their jobs still being employed—we needed that many more. If the same basic global demographic trends are in place, and I believe they are, then we are going to have to re-employ people and add more to take care of our population, let alone the expansion that’s happening in the rest of the world.

So, while I believe it is abnormal to be near 10% unemployment, it was also abnormal to be at 4.5% unemployment. Normal is somewhere in between. Yes, the recovery will take time and there are nagging issues yet to clear up, but the market is anticipating improvements and jobs will follow…

A favorite quote of mine starts with “History is not a random sequence of events…” What’s happening now is the outcome of what has happened before; what is happening now will produce effects from now on. In time, for example, someone may be able to tell us whether the government -led cures that have been administered over the last several quarters were the right ones or not. Only time will tell whether they actually worked or not…

But, that is another topic for another day. Thanks for listening in, and have a great day!