Watch the Job Market

03/12/2008 12:00 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of Jim Lowell's Fidelity Investor, says jobs growth-or job losses-are the best barometers to determine the health of the economy and the markets.

The fundamentals increasingly support the case for recession (two consecutive quarters of negative growth); but technically, we're still not there yet. The fundamentals are playing catch-up to what consumer and investor psychology has already suggested: we're in a recession.

No matter where I look, I see an ongoing absence of buyers in most markets-from homes to stocks, and I know that too few dollars chasing too few goods is a classic recessionary pattern. Like you, I'm also seeing food and energy prices remain lofty from not much more than a year ago and on the rise, while consumer confidence and consumer spending continue to slow.

This month we saw both the producer price index and the consumer price index, among the Federal Reserve's most preferred measures of inflation, come in well above the Fed's stated comfort level. The new talking heads' fear is a return to a 1970s-like stagflation: rising prices and rising unemployment.

The minutes from the Fed's March meeting, and [chairman Ben] Bernanke's end-of-month commentary, suggest that the Fed remains increasingly concerned about the inability of the housing market to right itself, as well as the state of the job market and the ongoing credit crisis. As a result, I think that recession-related rate cuts are the odds-on favorite for the Fed's near-term thought and action.

Jobs remain the key to either avoiding or recovering swiftly from a recession here at home and for forestalling a marked slowdown overseas. If we see a measurable increase in unemployment and a measurable decrease in jobs creation, a recession could be inevitable and potentially protracted.

Moreover, we know that jobs relate to consumer spending-especially with regard to housing, but clearly with regard to the health of our overall economy and in relation to the health of overseas economies which rely on the US consumer to purchase their goods en masse. Hence, the state of the jobs market is a clear and constant concern of mine.

Is there a next shoe to drop? More than likely. While all eyes and current solutions remain focused on the credit markets, there's a reef of risks relating to municipal bonds that could sink the hoped-for recovery if not addressed quickly. The decline in home values and the drop off in consumer activity, means municipalities are facing a lowered tax base from which to fund their obligations.

Against this backdrop, could things get much worse from current levels? They could. But I think it's more likely that we're nearing a bottom in terms of how much worse things can get, give or take a further 10% to 15% fall for every market (from home values to stock prices). That means that the tricky part now becomes accounting for how long the current poor conditions could persist, and what kind of toll they could exact.

Subscribe to Jim Lowell's Fidelity Investor here.

Related Articles on MARKETS