According to a Fitch Ratings special report, the historically weak U.S. employment outlook will continue to hinder the process of corporate credit quality improvement in the early stages of the economic recovery. The report, 'Leaning Against the Wind: U.S. Employment Weakness and the Corporate Credit Recovery', goes on to say that the notable weakness of the employment outlook is likely to complicate firms' efforts to boost margins, cash flow generation and liquidity in the early stages of the cyclical expansion.

Across most sectors of the U.S. economy, management teams appear wary of the employment-related headwinds that are likely to influence the character of the demand recovery over the next several quarters. While there are notable exceptions, for example, technology firms, most companies' 2010 outlooks appear to reflect continuing caution regarding the prolonged impact of an historically weak employment situation on demand and pricing. Until firms are more confident about the sustainability of a demand recovery, it appears a sharp reversal in business spending and hiring is unlikely to occur this year.

Unlike the previous cycle, when unemployment peaked at 6.3% (June 2003) and a sharp rebound in consumer spending was fueled by liberal credit conditions and rapidly rising home prices, the current expansion will more likely be characterized by higher household savings rates, tight consumer credit and a still-weak housing market. With high unemployment reinforcing counter-cyclical spending trends, firms in most sectors, especially those heavily dependent upon the U.S. consumer, will be hard-pressed to deliver the type of revenue and cash flow growth rates seen in the last two business cycles.

While a near-term recovery in free cash flow generation will be supported by restraint in the growth of capital spending, the longer-term process of balance sheet repair will be influenced by the financial health of the U.S. consumer and, by extension, the quality of the U.S. jobs recovery. A slow jobs recovery, in all likelihood, will continue to represent a significant obstacle to the pace of improvement in corporate credit fundamentals for many months to come.