What Unemployment Figures Can Tell You About the Dow's Future

The Dow Jones Industrial Average doesn't strictly reflect unemployment rates like my weight-loss progress does my donut consumption (curse you, Bavarian cream!). The economy is a complex beast with many moving parts, all of which can raise or lower stock prices at any given time. But low unemployment certainly does tend to reflect rising Dow values, and vice versa. Here's how the two market metrics have interacted over the last 15 years:

US Unemployment Rate Chart

US Unemployment Rate data by YCharts.

From this perspective, the American economy seems to be on track for a complete recovery. The Dow is stutter-stepping to new all-time highs on a monthly basis recently, and the jobs lost in the 2008 meltdown keep trickling back. The day-to-day progress isn't always impressive, but jobless rates are undeniably sinking closer to the 7% threshold.

Based on the recent history and projected future of American unemployment rates, I would argue that our economy is set up to thrive for the foreseeable future.

Crazy, right? I must not have gotten the memo about debt ceilings, sequestrations, TARP tapering, and a gazillion other potential economy-killers. I assure you, I've heard about all these threats and acknowledge that they might trip up America's recovery efforts if handled incorrectly.

But I refuse to use worst-case scenarios as an economic baseline. And if we do get caught in one or more of these bear traps, even the worst disasters don't last forever. In the long run, the Dow also rises.

People far smarter than I seem to agree. The International Monetary Fund sees American unemployment rates plunging for several more years. By 2018, we should be back to jobless rates not seen since late 2007. Let me show you the numbers, with a few other major economies thrown in for a sense of scale:

European scapegoats Spain and Greece would sell their olive farms for single-digit unemployment rates. Among more stable economies, we took the 2008 crisis harder than the U.K. but have already crossed below the British unemployment rate.

You could see Japan as a role model here, but do keep in mind that the low Japanese joblessness is a matter of national pride. When Japan hit a 5.7% unemployment rate in 2011, it was the highest figure since World War II. These ultra-low figures are a nice ideal, but the government will make almost any sacrifice -- low economic growth, extreme interest rates, you name it -- to keep it that way. This approach isn't likely to fly in America, or in most Western nations, for that matter.

Back to the U.S. again. The 30 stalwarts on the Dow are pulling their weight for the recovery, as the elite market-leaders should. In the deepest, darkest part of the recession, the current Dow members cut only 1.4% of their full-time payrolls between their 2008 and 2009 fiscal years. And since then, they've expanded their headcounts by 8.7%. That's 520,000 jobs just between these 30 companies.

Let me point out a couple of particular heavyweights. Home Depot cut 10% of its workforce when the crisis hit but has bounced back strongly. All told, the home improvement chain now has a 54% longer payroll than it did before the cuts in 2008.

Have you considered what the pending Obamacare policies mean for unemployed health-insurance analysts? That's right: Untold millions of Americans will need back-end insurance support, and the exchanges require some brainpower as well. UnitedHealth added 34,000 jobs last year alone, expanding its payroll by one-third. Since 2009, the employee count has soared 77%.

So long as the Dow royalty keeps leading by example, I don't see why the IMF's rosy unemployment projections would be wrong. In fact, the most recent 7.2% reading is already stronger than the IMF's 7.4% forecast for the end of 2013.

I expect the good job-creation times to keep rolling (with the occasional short-term hiccup along the way), and the Dow to follow suit. Lower jobless claims generally mean higher Dow levels, and that's exactly where we're headed today.

What should I buy now if the global economy really is coming back stronger?
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

The article What Unemployment Figures Can Tell You About the Dow's Future originally appeared on Fool.com.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.Motley Fool newsletter services have recommended buying shares of UnitedHealth Group and Home Depot. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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