The Push-Pull of Unemployment and the Dow

Oct 12, 2010 4:45pm

In the battle for consumer confidence, unemployment is whomping the stock market. Both matter: The Dow Jones Industrial Average and the unemployment rate both correlate closely with consumer sentiment, as measured every week for nearly 25 years in the ABC News Consumer Comfort Index. But lately they’ve been rowing in different directions.  The Dow’s been on a nine-week rally, closing at just above 11,000 last Friday for the first time since May. In the past that’s been a good sign for consumer views; using monthly data from the last 24 years, and controlling for time trend (the fact that, given inflation, the Dow tends to increase as time goes on), the two correlate at a remarkable .82 (with 1 indicating a perfect relationship).   But consumer confidence is closely tied to employment as well, the two correlating at .76. And unemployment, currently 9.6 percent, has been above 9 percent since May 2009. Include people who want but can’t find full-time work and it spikes to 17.1 percent, the most since April. Adding insult to injury, the federal government last week also reported a worse-than-expected loss of 95,000 nonfarm jobs in September.  And the CCI today? Unimpressed by the Dow, it stands at -45 on its scale of -100 to +100, essentially the same as its average for the year, -46, which is very close to its worst annual average on record, -48 last year. Its long-term average, by contrast, is -13. Among the individual components of the index, produced for ABC News by Langer Research Associates, 91 percent of Americans rate the national economy negatively, 72 percent think it’s a bad time to spend money and 55 percent say their personal finances are hurting. These are, respectively, 29, 9 and 11 points more than their 24-year averages. The CCI’s holding positive territory, +7, only among adults with household incomes of $100,000 or more. It may help that those are the folks with the greatest stock holdings, and therefore most likely to benefit from a rising market. For the rest, the CCI is vastly lower – -54 among all under-$100,000 adults, and as far down as -75 in the lowest income group. The CCI’s long-term correlations with the Dow and employment hold not only concurrently, but also on a lagged basis; six months in advance, the index correlates with both at just more than .80. These relationships do vary in intensity at different time periods; but for the long-term correlations to hold, something’s eventually got to give. Analysis by Julie E. Phelan, research analyst, Langer Research Associates. Click here for tables with this week’s CCI data. Follow us on Twitter @LangerResearch

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