Recovery reality check: Not so fast...
The May jobs report was better than expected and is further proof that the worst of the economy is over. Still, that doesn't mean a massive recovery is imminent.
NEW YORK (CNNMoney.com) -- The May jobs report, which showed the lowest level of cuts since September, sent stocks slightly higher Friday on more hopes that the economy may soon be on the upswing.
It's encouraging though that investors didn't treat the news as a reason for yet another euphoric rally. This jobs report was not an excuse for that. Hip hip hooray for the diminishing rate of decline?
Yes, it is starting to look like the worst is over. And if that's true it is great news. But don't mistake what might be the initial sprouting of those proverbial economic green shoots for some genetically engineered frankenfood.
Let's put things in perspective. Employers still cut 345,000 jobs last month.
In case that didn't sink in, I'll repeat it. Employers still cut 345,000 jobs last month. That's a big number. But in some of the media's coverage of the jobs report, journalists had the unmitigated gall to say that only 345,000 jobs were lost.
Only? It is downright insulting to the average American to use such a modifier.
Yes, the job market is a lagging indicator. That means it may be the last part of the economy to recover.
Talkback: Can the economy really recover while people are still losing jobs? Leave your comments at the bottom of this story.
But with unemployment now at a 26-year high, it's hard to imagine how there can be a robust rebound until companies actually feel comfortable to start hiring again. Still, some analysts have declared in reports I've read this morning that the jobs report is proof that we've reached an end to the recession.
Really? That's premature. All that the May jobs report confirms is what we've known since March, that the economy is not in as bad shape is it was a few months ago and is not going to get as bad as the overly pessimistic Depression II scaremongers thought it would get.
That doesn't mean the economy is now clicking again.
"There are reasons for some optimism. But we're still going down," said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida in Orlando. "It just feels like an economic parachute has been deployed and we're falling at a slower pace. That's good news but it's not justification to declare the recession's over."
Many economists like to use letters of the alphabet to describe what the economy does coming out of a recession.
Along those lines, the big debate now seems to be whether this will be a V-shaped recovery -- i.e. the bounceback is as sharp as the decline was -- or a U-shaped recovery, meaning that the economy bounces on the bottom for a while before heading back up.
But neither of those letters seem apt. Scott Armiger, a portfolio manager with Christiana Bank & Trust, in Greenville, Del., said he'd use the twenty-third letter of the alphabet instead of the tweny-first or twenty-second to describe the recovery.
"I'm confident the economy will recover. But it will be W-shaped with lots of fits and starts," he said.
Snaith also thinks that people are fooling themselves if they think that the economy will bounce back quickly. Instead of using a letter to describe the economy, he said a recovery will look more like a gravy boat.
By that he means that the climb back up will not be steep, but long and slanted like a gravy boat's spout. "The recovery is not going to be as sharp as the decline was," Snaith said.
So why are investors suddenly so willing to declare the glass is half-full instead of half-empty?
Barry Ritholtz, CEO and director of equity research at Fusion IQ, said he thinks Wall Street's recent enthusiasm is more due to the fact that people are no longer pricing in another Depression as opposed to legitimate belief that the recession is over.
"We've gone from thinking it's a 100-year flood to this now being a regular run of the mill recession," he said. "The economy still stinks but it's better than the past two quarters."
Armiger adds that he thinks 2009 is a year of economic healing and that a true recovery won't begin until the middle of next year. So he's not buying into the broad market rally just yet.
"The market has come too far too fast from the March lows. We've had almost three to four years worth of normal returns in three months," he said.
Instead, Armiger said it's still time to look at more defensive stocks, such as consumer staples firms. As long as people are still losing jobs -- even if the pace of the losses is slowing -- Armiger said consumers are going to focus more on buying what they need and not necessarily what they want.
For that reason, he said some of his top holdings are in more stodgy consumer companies such as Wal-Mart Stores (WMT, Fortune 500), PepsiCo (PEP, Fortune 500), Procter & Gamble (PG, Fortune 500) and Colgate-Palmolive (CL, Fortune 500).
Now this may seem overly gloomy. But it's not a case of being pessimistic as opposed to optimistic. It's just realistic.
The economy does appear to be getting better, but a lot of that could be due to massive amounts of liquidity injected into it during the past year or so. Government assistance can't go on forever. And stimulus creates its own risks, namely inflation.
"If the government wasn't propping things up, the numbers would be much worse. The economy is still very fragile," Ritholtz said.
Add all that up and it means that hopes for a massive recovery appear misguided.
"The labor market will be ugly scar to remind us of what we've been through and it will take years to fade away," Snaith said. "Companies are going to be cautious coming out of this and won't be in a rush to hire."
Talkback: Can the economy really recover while people are still losing jobs?