I tried to condense that Mauldin article down to the key ideas and bolded the most important of those. It is still long. Here goes. Mish
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In the household survey, "People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons." First, anyone over 16 who works is counted. Your teenage kids working in the summer are counted, which is why the actual numbers shoot up in the summer. Looking at the actual numbers, jobs actually dropped about 800,000 from December to January. But year over year, there is job growth of about 1,000,000 from January of 2003. Without seasonal adjustments, the numbers would look silly from month to month.
So, how do we explain the difference of three millions jobs between the surveys? Much of it is because if you say you are self-employed, then you are employed. Were you laid off and then decided to become a consultant? Working part-time? Decided to start a new business? Welcome to the world of the household survey employed. The Employment Policy Foundation tells us that half the household survey job growth since November 2001 is self-employed jobs.
But my friend Bill King is skeptical of that. He goes to the tax tables at the IRS and notes that self-employed taxes rose only 2.2% for 2002, which is less than GDP and inflation. Further, there is little in other tax receipts to suggest a large boom in self-employment. It is not that there is not in fact a large increase in the number of the self-employed. There is. It is just that there is not a large increase in the profitably self-employed.
Unless the current wave of self-employed is significantly better than their historical forebears, 80% of them will fail within five years. It's the business Law of the Jungle.
Now, several thoughts follow from this. First, there were a larger than usual number of new self-employed and businesses started over the past two years. That means that in the future, there will be a larger than usual number of those people going back into unemployment or needing and finding another job.
Treasury Secretary John Snow staked his reputation on the economy creating 200,000 jobs a month, as an example. Others are even more optimistic that we will soon see massive new job creation and a lower unemployment number.
The Self-Employment Dilemma
Well, maybe not. First, as noted above, there are many "self-employed" and underemployed who will need jobs and take them, leaving the pleasures of being self-employed to others. Further, as the economy improves, those who are so discouraged that they are not even looking for work will once again start the process, adding to the labor pool.
Plus, businesses are reluctant to aggressively hire. John Chambers of Cisco noted "...as soon as we can get another 10-14% on revenue growth, then I will start to hire again." The orders they are seeing are for replacement or productivity. Many other executives echo his sentiments. With outsourcing available, and technology allowing for more productivity, the number of new jobs created will continue to be less than for previous recoveries.
incomes are at risk. Unit labor costs fell 1.7% in the fourth quarter. "All evidence shows employee benefits costs are increasing sharply so either jobs or wages had to be cut, possibly both. And that's not good for the economy." (Bill King.)
Hermann Vohs sums up my thoughts better than I can, so let's go to his note from this week: "So, while the economy is firing on all cylinders, inflation seems under control and the upcoming elections virtually guarantee no nasty surprises from Washington, the stock markets should be doing just fine, right?
"Let me put it this way. Stock markets climb a "Wall of Worry". In other words, no more worries, no more climbing. The worries that this market had to overcome during the last 4 quarters were the Iraq war, capital spending that was virtually non-existent and last but not least the weakness in the labor markets. Any one of these factors were at one time considered to pose the ultimate danger to the economy and the stock market. Now that only the
labor market is left, one might get worried about the future of this market.
"So let's put it this way: Once the last piece of this wall of worry (unemployment) has been conquered, the party will be essentially over. Falling unemployment removes the incentive for Greenspan to keep his (current) boss happy and enables him politically to raise interest rates. Rising interest rates and falling corporate profit margins (even when squared off against rising overall profit levels) might put pressure on stock prices. When will all this doom and gloom begin to occur? My guess is that it will not be a uniform but a gradual development and that we still have a good quarter or two ahead of us. Increasingly, however, we will have to become more and more selective. The good news is: There is always a bull market going on somewhere in this world. The trick is to figure out where and when to get in and out!"
"As real short rates climb from negative to only slightly positive (PIMCO's longstanding forecast), this reversal in trend will be enough to call a halt to the higher and higher productivity of debt in a finance-based economy. Simply put, it means that borrowers will pay more in real terms, affecting consumption, home building and buying, business investing, and government deficits alike. The lower real interest rate "wind" at their backs will instead turn into a mild headwind. The economy will slow. It may falter. The timing is uncertain. For contrary thinking, pessimistic investment managers or economists, "someday" is often frustratingly "out there" like some phantom force in the X-Files. Still, it suggests caution as we move inexorably closer to our High Noon.
Gross has been turning rather bearish of late. But he makes a point in line with my longer term forecast. The economy has been stimulated beyond anything we have ever experienced. And it only produced a mere 600,000 jobs. Growth in personal income is barely keeping up with inflation and certainly not keeping up with the growth in debt or debt service. Debt cannot continue to grow faster than the economy or incomes, and growth in debt is needed to keep the economy growing.
Sustainable growth will require growth in both jobs and income and less reliance on debt. So far, this has not happened. This is still a steroid economy. But it is difficult to see from where the next round of stimulus comes. The markets and the economy are priced for perfection. But things just don't look perfect to me. As I wrote last month, the markets could continue to move sideways to up, but I think we could see this year as a
classic "Sell in May and go away" year. I would have fairy close stops on any trading accounts.
I still think the economy is good to go for at least the first three quarters of the year, and possibly into next year. But unless job growth begins to manifest itself, this economic recovery is not sustainable much over the longer term. |
