The September drop in the unemployment report does not preclude a coming US recession

The equity and credit markets mistakenly responded to the October 5 report of September employment as if the US economy is firmly entrenched on a strengthening recovery track. Nothing could be further from realty. The US economy continues to struggle with stall speed-real GDP growth of only 1.3% in the third quarter, even slower than the 2.0% growth in the second quarter. This near recession in US growth is certainly understandable with the contagion of a deepening recession in Europe, and weakening growth in China and elsewhere in Asia. And with the fiscal cliff of an up to 4% real GDP depressant from mandated Federal spending cuts and tax increases starting in January next year,and perhaps partially foreshadowed in the final quarter this year, a US recession has to be viewed as a likely prospect, even if admittedly not yet a certainty. The credit and equity markets are making a fundamental error in judgement in assuming that there will be a last minute compromise before year-end to avoid the fiscal cliff. There are too many reasons to believe otherwise, regardless of who wins the Presidency. With either winner it will take time to craft a reasonable two-party compromise. If Mitt Romney is the winner, he is likely follow the tradition for a new Presidential administration to take an impending recession early in its first term. And with the intransigence of Republicans in Congress to compromise, it is understandable that President Obama is reported to be inclined to accept a first quarter 2013 recession in order to strengthen his hand in forging a reasonable compromise with Congressional Republicans. There are two basic surveys in the monthly employment report. One of them, the non-farm payroll survey reported a rise of a mere 114,000 in September. This pace is not even adequate to create enough jobs for new graduates and other entrants to the labor force. It is certainly not a sufficient pace to rehire the massive net loss of over 4 million workers that employers shed in the recession. Many of these continuing unemployed, at least for the time being, have given up looking for work, and as a consequence are no longer technically considered included in the labor force. That realty makes it all the more inexplicable that the other employment report, the household survey, included an unbelievable drop in the September unemployment rate to 7.8% from 8.1% in August. This was due to a reported 873,000 September rise in employment in that survey. But most of that reported rise in this report was due to a rise in part-time work. Moreover, a number of analysts characterized this rise in employment and the resultant drop in the unemployment report as spurious. Though I doubt it, Jack Welsh,former head of GE, has implied that it is even possible that the drop in the unemployment rate was a put up job for political reasons. The equity market was boosted by the false inference from the unemployment report drop that the economy is strengthening. And that erroneously assumed economic strengthening was misinterpreted as raising the risk of inflation and an earlier end to Fed ease, which contributed to a temporary sell-off in US Treasury bond prices. But, not all the markets are moving in tandem. The corporate and municipal bond markets are continuing to improve in price and decline yield as the these markets respond to fears of a rise in marginal income tax rates and the intense search for yield. Philip Braverman,President Braverman Economic and Financial Consulting One Hewitt Square #249 East Northport, New York 11731