The government's ugly report this week on June employment showed that U.S. companies still are cutting jobs at a fast pace.
But even as stocks stumbled over the news Thursday, many economists were reminding their Wall Street clients of what history tells us about the job picture: It's one of the last things to improve as the nation emerges from a recession.
And there are reasons why that may be even more true this time around. The global economy has changed dramatically since the last severe recession in the early 1980s. The rise of China and the rest of the developing world has siphoned employment away from the U.S. while also creating new growth opportunities for American firms.
What's more, many of the high-paying U.S. jobs lost over the last year in finance, real estate, media and other industries simply aren't coming back. That is likely to translate into an elevated unemployment rate for years to come.
Extrapolating that to mean a dismal investment landscape ahead might seem intuitive. But there's a cold reality here for both the survivors of this recession and its victims: The stock market isn't very good at sympathy or mourning. It cares about earnings growth. And restoring that growth is exactly what has been motivating so many companies to hack their labor costs despite the heavy human toll.
If history is a guide, a credible scenario for the rest of this year is that the unemployment rate will continue to rise from June's 9.5% while Wall Street builds (in fits and starts) on its spring rebound -- betting that the economy, and earnings, will soon be growing again.
"This is the weakest labor market in a generation, and we shouldn't sugarcoat it," said Michael Darda, chief economist at investment firm MKM Partners in Greenwich, Conn. "But the labor market is not going to lead the economy."
Although the net loss of 467,000 jobs in June was well above expectations, Darda and other optimists believe they have plenty of other evidence that things are bottoming or already turning up from the depths.
The Conference Board's index of leading economic indicators, for example, jumped 1.2% in May, the second straight monthly rise and the biggest advance since 2004.
The manufacturing-sector index tracked by the Institute for Supply Management rose in June to its highest level since August. Although the index is still signaling a contraction in manufacturing activity, it has been rebounding for six months.
Even car sales appear to be carving out a bottom. U.S. June sales were down 28% from a year earlier, but that was the smallest drop of 2009.
Perhaps more important, financial market conditions have improved markedly since December. One key sign of that is the surge in corporate bond issuance as long-term interest rates have declined. Companies raised a record $741 billion selling bonds in the first half, up 26% from a year earlier, according to Bloomberg News data.
Credit remains tight for many borrowers, but a recovery in the bond market was critical to restoring big companies' confidence in making long-term business plans.
The stock market's rebound from 12-year lows in March also fed business confidence, of course. And even though many investors are expecting a sharp pullback this summer, the market so far hasn't given much ground. The Standard & Poor's 500 index, which fell 2.9% on Thursday after the jobs report, is down a modest 5.3% from its spring high reached June 12.
The index is up 32.5% since March 9 -- and off 43% from its record high set in 2007.
A big test for the bulls looms in second-quarter earnings reports, but investors know that the recovery they want to see on the bottom line won't be showing up this soon.
Total operating earnings of the S&P 500 companies are expected to be down 35.5% from a year earlier, according to analyst estimates compiled by Thomson Reuters. What will matter most is whether companies sound confident about an improving trend in the second half.
Analysts now expect third-quarter S&P earnings to be down 21% from a year earlier. The fourth quarter is when the big profit turn is expected: The current projection is for a 183% surge in S&P earnings in the final period of the year compared with the disastrous results of fourth-quarter 2008.
You can take all of these specific estimates with more than the usual dose of salt, but the assumption that a profit turnaround is coming is, once again, rooted in the historical record: The drastic cost cuts that companies make in recessions -- particularly in slashing jobs -- leave them with great earnings leverage once demand for their goods or services begins to rise again. Any increase in sales may flow directly to the bottom line.
Could this time be different? One bearish argument is that U.S. consumers' spending power has been badly sapped by the credit crisis, the housing bust and the downward pressure on wages from the dismal employment picture.
That is almost certain to be a drag on U.S. growth. But for investors, it's also important to keep in mind that most major American companies don't rely solely on domestic consumers for sales. Globalization has meant more opportunities overseas, and increasingly in the developing world. That means more potential sources of profit leverage if the global economy, too, is poised for recovery.
Jim Stack, a veteran money manager who writes the InvesTech Market Analyst newsletter from Whitefish, Mont., is a great student of market history. He says nearly every critical economic and stock indicator he follows is pointing up in classic fashion.
Investors have good reasons to be worried about the U.S. economy's long-term challenges, he says. But in the near term, with an earnings rebound seeming much more likely than not, Stack says he can't ignore the appeal of "very established companies selling at valuation levels we haven't seen in 10 or 20 years."