Mauldin on Jobs
[Another excellent article - key snips below]
The reasons for the jobless recovery are complex. They stem from a structural shift in the US and global economy, capital labor ratios and productivity, among other factors. It's not just job-outsourcing to China and India, the favorite whipping boys of the month.
The Structure of Unemployment
Many economists are looking at historical charts of recoveries and predict that any day now we will see employment rise substantially. That is because in past recoveries, by 18 months after the end of the recession the employment numbers were soaring. Even in 1991, which was the first jobless recovery, the job growth started later than the typical recession cycle, but eventually took off.
To get a clue as to what's so different now, let's go to a study from the New York Federal Reserve entitled "Has Structural Change Contributed to a Jobless Recovery?" by Erica L. Groshen and Simon Potter. newyorkfed.org
"The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change--the permanent relocation of workers from some industries to others--may help explain the stalled growth in jobs."
"While everyone is looking for the answers to this lackluster job market cycle, businesses are actually far from stingy. They are focused on the input that is increasing less costly in the production process, with a focus towards upgrading their tech infrastructure. In fact, real business spending on tech capital expenditures has risen in 7 of the past 8 quarters and at an average annual rate of better than 12%. At the same time, more than 2 million payrolls have been shed and even the household survey shows job creation basically in line with the sluggish upturn in the early 1990s.
"The net effect has been to boost productivity sharply, which is running at a 5.3% year-on-year rate, almost double the pace of two years ago. At the same time, slack in the labor market has helped companies keep a lid on wage growth and as a result we have unit labor costs running at a -2.3% y/y rate. Unit labor costs have the most powerful statistically significant correlation with core consumer inflation, and are a key reason why the Fed can remain accommodative and the primary reason why corporate profit margins have remained wide even in the face of rising raw material prices."
Rosenberg pointed out, it is often cheaper for employers to buy technology than hire new employees. Partially that is because the price of technology is coming down and partly because the cost of borrowing is so cheap.
These two factors are not going away. We are seeing continuing high numbers of lay-offs, much more than one would expect for this point in a recovery. Money is going to be cheap for quite some time. These are headwinds against which rising employment must sail.
When both blue and white collar positions are being eliminated permanently, it simply takes more time for people to find new jobs. This may mean that the average duration of unemployment is now a more important gauge of the labor market than the unemployment rate in influencing consumer sentiment and spending as well as voter attitudes."
The average duration of unemployment is over 21 weeks, and was just barely under the all-time highs of last quarter. (I did not ask Gary if this included those who are no longer classified as unemployed because they are not looking for a job, but I bet it does not, which if they were included would make the number even higher. Next week, we will see if my cynical attitude is correct.)
Now, let's examine some of the implications. First, this underscores several of my long time themes. The Fed is not going to raise rates in this environment. Ultimately, without job growth, the stimulus driven recovery is going to weaken. Third, this is going to weaken consumer spending, contrary to what almost every mainstream economist believes. Simply the loss of benefits will put less money in the hands of consumers.
When and if consumer spending slows down, the stock market is in big trouble.
What can offset this and make consumers spend more? Mortgage rates are once again dropping. This will allow anyone who missed the last round of re-financing to once again hit the piggy bank of increasing home values. The irony is that a weak economy allows for lower rates which allows for increased borrowing and spending. We will have to watch this carefully, as it could be a pre-cursor to another large stimulus.
On the negative side of the ledger, gasoline and energy prices are acting as a huge tax increase. My bet is that the government will soon stop (or at least slow down) topping off the strategic petroleum reserves. They are increasing them quite steadily, and it does put upward pressure on prices. Would Bush open up the reserves to lower prices in the summer as a further stimulus?
On the political front, my bet is that the Bush team argues that Kerry, by raising capital gain taxes, would damage what new business formation there is. Along with the dividend tax cut, it is a large part of the stock market rebound.
The correlation between employment and consumer confidence is quite high. Kerry is going to play upon that uncertainty.
But at least the debate will be as stark and contrasting as any we have seen in years. It will be interesting to see the outcome.
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