Stock Market at New High but Businesses, Workers Do Not Feel the Recovery

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The stock market may be trading at or just a hair below a new high. But a preponderance of evidence shows that small businesses and workers do not feel the economic recovery and in some cases are still in recession mode.

The Small Business Optimism Index, tracked by the National Federation of Independent Business, fell 2.7 points in February to a reading of 91.4. That level historically has been associated with recessions and periods of sub-par growth, the NFIB reported Tuesday.

“The February report on net new jobs was better than expected, but inadequate to the task of reducing the unemployment rate, which rose a tenth of a point,” the NFIB said in a media statement. “As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions six months from now, show that we shouldn’t expect blue skies soon.”

The NFIB’s poll of 792 randomly sampled small businesses in NFIB’s membership conducted throughout February found that small businesses are reluctant to hire, make capital investments or increase inventories.

Twelve percent of owners surveyed said they hired an average of three workers over the past few months. Meanwhile, 10 percent cut employment an average of 2.7 workers, resulting in an overall seasonally-adjusted net increase of 0.11 workers per firm.

Some 16 percent of business owners said weak sales was their primary business problem, which is higher rate than normal. Twenty-one percent of business owners reported stronger sales while 34 percent reported weaker sales. About one in two owners said they do not want to borrow money. One in four owners said they plan to spend money on their business over the next three to six months.

“Overall, this is not an outlook conducive to more capital spending and expansion,” the NFIB stated.

Business owners cut back on inventory owing to declining expectations for sales and said they are not able to raise prices. Fifteen percent said they cut their average selling prices over the past three months while nearly one in five raised prices.

Non-farm payroll employment rose by 175,000 in February while the unemployment rate held at 6.7 percent, according to the U.S. Bureau of Labor Statistics’ report released March 7. However those data are statistically insignificant and other economic data shows no recovery in sight, according to John Williams, publisher of Shadow Government Statistics. Discouraged workers, who quit looking for a job because there are no jobs to be had, are excluded from the BLS data. If they were included, the unemployment rate was 23.2 percent in February, he says.

In February, the number of short-term discouraged workers totaled was 755,000, down from January’s count of 837,000 in January. The number of discouraged workers continues to reflect an increased rollover of short-term discouraged job seekers into the long-term discouraged job seekers category, Williams wrote in a report March 7

Unemployed workers do not feel the economic recovery as small businesses and large alike have not regained all of the jobs lost during the recession. But given that the stock market trades at or near a new high nearly daily, it appears the economy has fully recovered.

The employment level in February is still 666,000 jobs, or 0.5 percent, less than its pre-recession high.  The pre-recession high may likely be achieved in the next four to five months, unless the economy lapses back into another recession, which it appears to be doing, wrote Williams. “The higher the unemployment rate, the weaker will be the economy,” he stated.

The stock market scaled new heights not because of true economic growth but because central banks around the world pumped money into their financial systems, some market watchers say.  The Federal Reserve continues to buy $65 billion in bonds every month, down from $85 billion a month in December. Rock-bottom interest rates since 2009 have flushed corporations with cash. Instead of hiring more workers or investing in expansion, they opted to buy back shares to support their stock price and boost their earnings per share. In addition, low bond rates prompts people to buy stocks because they cannot earn income from bonds.

U.S. and European stock markets have been detached from their respective economies for more than a year, says Andrew Norman, an analyst at Bull and Bear Mash, a stock market forecasting firm in Plano, Texas.

“With little return in bonds, those who can stomach the risk and need the returns remain in equities,” Norman said in an email. “After five years of a coordinated global effort by governments to boost their own economies by injecting currency (into the financial system), there is little to show for it other than an economically-detached and over-valued stock market. Economic macro (indicators) throughout the U.S. and Europe are weak and getting weaker. There has been no recovery, just talk about a recovery.”

Norman added: “No one knows how much longer this five-year bull will last, but with news coming from China, showing their first bond default and collapsing Chinese exports, we would expect the U.S. market to roll over by the end of April.”

Norman recommends buying exchange=traded products that track stock market volatility such as iPath S&P 500 VIX Short-Term Futures ETN (ticker: VXX). The exchange-traded note tends to rise in price when the stock market falls. But positions should be kept small and held for less than 30 days, Norman says.

The stock market, as tracked by the S&P 500, has gained 161 percent over the trailing five-year period. It closed at 1,877 Monday, just a hair below its all-time intraday high of 1,884 from last week. But unfortunately, small businesses and workers do not feel the economic recovery nor the high.

By Quynh Ho

Sources:

Bull And Bear Mash 

Shadow Government Statistics

Trading Economics

StockCharts.com

Morningstar

NFIB

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