Our Take: Happy Days Are Here Again?

Back in April and May, this column reviewed a series of conflicting anecdotes that touched on whether "green shoots" were appearing in the employment market.

Since then, evidence backing the green shoots thesis has mounted. New York career coach Bettina Seidman's latest monthly mailing proclaims "Good News for Job Hunters." "The economy is beginning to show some welcome signs of recovery," Seidman writes. "Consumer confidence is up. Many of my clients have obtained interviews and offers during the past few weeks."

Still, recovery remains a chancey proposition at this point. As always, a meaninful upturn in financial-sector hiring isn't likely until the economy and the financial markets have strengthened enough to make top bank executives confident that profits are on a sustained upward trajectory. With that in mind, we review a number of current developments.

On the real economy, recent evidence is mixed, but more upbeat than not. The pace of job destruction has moderated and there are clear signs the housing market may be on the mend. Even Nouriel Roubini - long the standard-bearer for the bearish camp - declared in a speech Thursday that the worst economic and financial conditions appear to have passed, and "We might be at the bottom or close to the bottom."

Can Profits Continue to Recover?

Banks' second-quarter results are exceeding forecasts for the most part. The biggest institutions got a boost last quarter from stronger capital markets, which aided both proprietary trading profits (a key driver of Goldman Sachs' blowout earnings) and stock and bond issuance. Banks also benefited from a wave of mortgage refinancing. But consumer defaults continue to trend higher, raising the risk of balance-sheet damage in coming quarters. A sickly commercial real estate market is another potential Achilles heel.

The Economist conjectures a less-obvious threat to future Wall Street earnings: a full-fledged market recovery might erase the "windfall" that Goldman and other top-performing banks are reaping from flow trading under current conditions, which remain dysfunctional in many markets. Executing trades for customers was barely profitable in the boom years, the magazine notes. Today, such "agency" business is "a potential goldmine as competition has dwindled and bid-ask spreads (the slice dealers pocket on trades) have ballooned.... Dealer spreads are sure to shrink as markets normalise and those that have retreated return to the fray. This is likely to be offset only partially by a pick-up in businesses tied more closely to economic growth, such as advising on mergers and acquisitions."

What about the financial job market? There's been no hiring surge. Yet here, too, conditions appear calmer than a few months back. At the high end at least, talent recruiting wars seem to be making a comeback - raised eyebrows from lawmakers notwithstanding. Even banks still on a taxpayer-funded lifeline, notably Bank of America and Citigroup, are reportedly extending seven-figure guarantees to top producers they seek to wrest away from rival institutions.

Big Paydays No Longer Look Like Red Meat

I was intrigued to see how politicians responded to this week's news that Goldman Sachs reported $11.4 billion in compensation and benefits expense for the first six months of this year. That's more than the bank had set aside for employees in the first half of either 2006 or 2007, when business and markets were booming.

On Tuesday when Goldman reported 65 percent higher second-quarter net income amid record revenue from trading and stock underwriting, most members of Congress interviewed by Bloomberg News made positive comments - even Democrats. A typical response came from Rep. Paul Kanjorski, D-Penn., who is a member of the House Financial Services Committee: "Is there a law in the United States that you can't make profits? It shows that there will be some capital available to be invested, and that's a good sign for the economy."

This suggests to me that in the hinterlands, confidence about the economy and financial system is on the upswing. If it weren't - if the bulk of the public continued to feel pessimistic - then I think prominent Democratic lawmakers would be less inclined to say "live and let live" when confonted with Goldman's latest compensation numbers. Representatives and senators may be a terrible weathervane for which way the stock market is headed. But they're probably an excellent weathervane for how constitutents feel about their current situations.