The strangest thing happened on Friday. It was reported that the U.S. economy lost 600,000 jobs in January and the unemployment rate jumped to 7.6%, but the stock market rallied anyway. Partly, this was because the stock market is a forward-looking indicator and employment is a backward-looking indicator. If the economy is near a turning point, the stock market will reflect it well before the employment report.
But there is another explanation — one that is believed by most of the journalistic punditry — and that is that a bad employment report make a stimulus package more likely. As Christina Romer (Chairwoman of the President’s Council of Economic Advisors) said on Friday, “these numbers…reinforce the need for bold fiscal action.” What’s interesting about this is that there is absolutely no long-term economic evidence that higher government spending creates jobs.