Grim employment numbers stoke investor fears of double dip recession

This morning's report that unemployment has hit 9.8 percent makes it clear that even if we are coming out of a recession, the economy is not creating new jobs. Economists expected that the number of jobs lost in September would total 180,000, and at at 263,000 the actual number was 46 percent higher. As I wrote earlier, an economic recovery could be threatened by rising unemployment, and it looks like investors are beginning to react to that threat.

First, a quick look at how the stock market has behaved in the last few days suggests that investors are taking money off the table to lock in profits. Since the Dow peaked near 9,900 on September 23, it has lost almost four percent of its value. And yesterday's 200-plus point tumble was pretty stomach-churning. I don't know why the market moves up and down from day to day, but lately a growing fear of a double dip recession could be a contributing factor.

And while government stimulus spending is helping keep the economy from falling further, it has yet to jump start the private sector. One dramatic example of this is the rapid decline in vehicle sales after the cash-for-clunkers auto program ended. A third of August's 1.3 percent rise in consumer spending was due to that program -- and when it ended, car sales fell back. To wit, General Motors and Chrysler sales fell over 40 percent in September.

When does a recession end? The Fed thinks it's when private sector economists forecast GDP growth. But the National Bureau of Economic Research (NBER) views it as when employment starts to grow. And the NBER says the recession started in December 2007, when jobs started falling. This makes sense to me, since 70 percent of GDP growth comes from consumer spending -- something you don't expect to grow when more people are losing jobs.

So when will jobs start to grow? The short answer is when companies start hiring. And with capital for small businesses and individuals declining rapidly, companies won't have the cash to pay new workers until that trend reverses. According to Meredith Whitney, the numbers are unappealing -- small-business credit has declined very rapidly in the last year and credit-card lines, which are used to finance small business, tumbled 25 percent since last year.

These small businesses play a huge role in creating new jobs, and hence in getting us out of a recession. In the U.S., small businesses give jobs to half the workforce and contribute 38 percent to GDP. But credit-card lines have been cut by over $1.25 trillion. During the same time, 10 percent of all credit-card accounts have been canceled. And Whitney expects another $1.5 trillion to disappear by the end of 2010.

Obviously, credit card lines are not the sole source of capital for creating jobs. A much better one is cash from Initial Public Offerings (IPOs) of technology-based businesses. This is why I was so excited to see the success of a recent green technology IPO.

But until such IPOs become a regular feature of the business landscape, it will be hard to create enough new jobs to get us out of a recession. And without an increase in government stimulus spending, there will be no other game in town which can justify investor optimism.

Update. Today's job loss numbers bring the total number of unemployed to 15.1 million. But thanks to an error in government statistics -- based on the so-called birth/death model which adds jobs based on an estimate of the number of new businesses created -- an additional 824,000 will likely be added to the unemployment total early in 2010.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter.

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