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Friday, September 04, 2009

US Unemployment, Briefly

The headlines on this one are bound to be misleading.

On the household survey, total employment dropped by 392,000, the labor force rose by 73,000 (giving a rise in unemployment of 466,000), and the not-in-labor-force count rose by 143,000, resulting in an unemployment rate of 9.7%.

The establishment survey looked better, giving a drop of only 216,000 jobs, however the index of aggregate weekly hours dropped again (-0.3), and total private hours did not rise. In addition, there were negative revisions to June and July:
The change in total nonfarm payroll employment for June was revised from -443,000 to -463,000, and the change for July was revised from-247,000 to -276,000.
Right now we are still in the rapid change mode, so the B/D adjustment on the establishment survey is likely to be off, and the best index is still the household survey. I very much fear that we are seeing the impact on small businesses as duration effects and severe localized conditions start to chip away at what is normally a very stable part of the US job base. ADP's survey, mentioned a few posts below, has shown a gradual trend toward the concentration of job losses in small businesses.

It is hard to look at August trends in initial claims and this survey and yell "Recovery". Things are slowly trying to stabilize, but the duration effects combined with very tight consumer finances seem to be eroding the economy on another level. In recent recessions, the job losses come from the bigger companies and small business employment except for the volatiles (e.g. construction, yard services) has hung in pretty well.

To quote from the household survey commentary:
Since the recession began in December 2007, the number of unemployed persons has risen by 7.4 million, and the unemployment rate has grown by 4.8 percentage points.
The employment-population ratio, at 59.2 percent, edged down over the month and has declined by 3.5 percentage points since the recession began in December 2007. (See table A-1.)

In August, the number of persons working part time for economic reasons was little changed at 9.1 million.
7.4 million more unemployed persons is bad enough, but 9.1 persons forced to part-time work is highly discouraging (if you are a banker wanting your loans repaid). Add to those numbers 2.3 million persons in the "discouraged worker" class - not looking for work right now because they believe it is hopeless - and one can both be thankful that the initial frenzy of job losses is over, and worried about the next six months. The establishment survey is continuing to report government job losses, which is another very large sector of US employment that has historically been somewhat stable through most recessions.

Quoting Rebecca from her post yesterday on consumer stress:
Going forward, it is my very strong belief that the labor market is going to be the key to the re-emergence of consumer spending. This time around, consumer balance sheets are not able to sustain much dissaving (i.e., borrowing from future income). However, consumers can save if income growth comes back. And if the labor market comes back, so too will income growth.
...consumption has been pounded in the last year, and I just don’t know how much further it can fall without driving its own demand.
Yeeeeees. There are still a ton of people working who may have tightened their expenditures but still have money with which to buy, and as things go forward, the cars wear out, etc, and they will be spending more from necessity. But it is not clear that this impulse will be big enough to counterbalance the continued erosion,

And if it's not, then we are really looking to bankruptcies, foreclosures and debt paydowns, which will of course boost spendable income. But only the debt paydown will boost available credit.

Anyway, if we have to wait for the lower debt impulse, we can't expect to get a meaningful bump until sometime in mid 2010, which is why I believe that additional stimulus is needed. And if we now get a rise in production costs, it's going to be difficult indeed, because some of the larger companies will have to cut expenditures and facilities, which implies another round of major layoffs.

I believe that a boost in those costs is built-in (see this article about oil tankers, which claim to be losing money), and that central banks should be watching inflation like a hawk. The effect of rising prices at a time when incomes are stagnating could be really ugly!

Well, here's my personal report. This isn't at all like the tech bust. I guess the folks out of work are not in the tech support field. I just got hired on at Netflix, which is still expanding. I had several jobs to apply for and did a couple of interviews. A co-worker also left recently and she was able to find a job as well. It's not like the tech boom, when they would hire you if you were breathing and mobile.

I am seeing a lot of customers really bargain shopping for service, especially bundling services. I'm also still seeing a lot of movement, with people migrating back towards the cities. I'm not sure what to make of the job market for young adults though. The ones that I know, just out of high school, seem to find work if they have any ambition. They aren't great jobs, but they are something. Some of them just live at home and hang out. It's got to be brutal to be young and have no opportunities.
Teri - oddly enough, during severe recessions cheaper forms of entertainment tend to expand their market. The impression I have is that the bundled TV/FIOS market is growing. People drop their magazine and paper subscriptions, and vacation differently, but make up for some of that with cheaper forms of recreation.

My feeling is that the job market is not as bad as the 80s, but is going to be more intractable. We had a larger share of manufacturing employment during the 80s, which gets hit harder. Now we have more service jobs in the mix overall, and although they decline more slowly, they pick up more slowly also.

The unemployment rate for adult men is 10.1%. The unemployment rate for teens is 25.5%. Those are pretty bad figures, and don't include the involuntary part-timers and discouraged workers.
Also, Teri, according to my figures food companies are dropping some advertising and substituting coupons with more results. It's not good economic weather for newsmagazines, newspapers, TV, etc.
Whether further stimulus helps depends on the type of stimulus. So far, the stimulus has been poorly aimed; meanwhile, other government policy is relentlessly anti-small business. You don't get growth by whacking small business in the vitals half a dozen times ... nor by whacking their customers in the vitals a couple times just for good measure.
Just so! This government is about as anti-business as we've seen since Carter.

How about this? Announce a plan to open up ANWR, and our offshore areas for serious oil and gas exploration. Institute a program to smooth the path for utilities to start building nuclear power plants. Reduce taxes for businesses across the board. Cancel the rest of the porkulus bill spending. Cut capital gains taxes for investors who buy foreclosed homes to turn them into rentals. All the above would signal a business and energy friendly government that would unleash a lot of entrepeneurial spirits - not to mention a lot of investment capital. There are, I'm sure, many other good ideas out there that would spur business activity.

None of the above will be done because this administration and Congress are beholden to environmentalists and opposed to anyone actually making money through business or risk investments. That is why the ballot box is the quickest route to a real recovery from this recession. On to November 2010!
Ronald - The structural economic patterns created by automated manufacturing an the complex financial,marketing and IT costs that follow have been rationalized
by current economic thinking but the impact has been hidden beneath the surface and what I fear is occurring is not another business or credit cycle downdraft but a fundamental economic breakdown that our data centered economic thinkers have missed.

Could you expand on this? More detail?

When I first started working in manufacturing the General Manager told me “we make a profit on every job” this was 1972 and manufacturing had a job shop look and feel but times change and manufacturing along with most other business has become volume driven.
Technological change has been the mantra for business and much of this activity has been directed at adopting automated manufacturing equipment and processes. The government has supported this movement through tax incentives, rapid equipment deprecation and pushing demand with easy credit driven monetary policy carried out by the Central bank and shadow banking system.
While the upside of this transition has been greater manufacturing efficiency and an expanded employment base it has come with significant initial cost for the equipment and its impact on the competitive business landscape within industrial sectors.
Modern manufacturing is capital intensive volume driven that will struggle without volume sales. We are not talking about job shop high margin operations rather very large complex financial driven manufacturing business that is created to operate 24/7. When these business units operate below model projections the numbers go bad quickly and their ability to somehow create new niches, markets etc become life and death given their large operation. What makes the situation direr is that their competitors are in similar condition having gone through the same expansion tech driven cycle.
Over capacity is now rampant demand continues to decline a situation not favorable to an industrial base that has recently gone through a very expensive technological expansion expecting large sales volumes allowing for a real bottom line payoff.
During this technological industrial expansion the financial sector has provided the financing along with the junkyard duties necessary to dismantle the aging and no longer needed companies that have experienced premature equipment obsolescent along with assorted business failures due to rapidly changing business fundamentals. The money necessary for another round of massive consolidations, leveraged buyouts and assorted business dismantling operation may be hard to acquire in the future.
Two questions, MOM:

Anyway, if we have to wait for the lower debt impulse, we can't expect to get a meaningful bump until sometime in mid 2010, which is why I believe that additional stimulus is needed.

First question--why 2010 for a significant write-off of consumer debt? Just wondering, as I can't see a reason to put it in 2010 vs. 2011 or so.

Second question--a new stimulus package would probably help us ride through to next spring or so, but what would be the effects of a fresh, steaming pile of new government debt on the market? Isn't it possible that the resulting weakness in the dollar would greatly raise commodity prices and swamp any stimulus effects?

"It is hard to look at August trends in initial claims and this survey and yell "Recovery". Things are slowly trying to stabilize, but the duration effects combined with very tight consumer finances seem to be eroding the economy on another level."

I just hope a dying patient analogy isn't going to eventually apply here.

Picture a traffic accident. At first the victim bleeds profusely. Over time, the bleeding will begin to slow. At some point, the victim actually dies.

I'm not predicting it. I simply fear it.

We're told that what this country needs is a new wave of productivity miracles. Unfortunately, productivity miracles are not known for their ability to create jobs long-term.

I sense that we're in the sour (not sweet) spot of our long-term economy. We can't allow our debt and/or commodity prices to continue to mushroom yet we can't allow our consumers to simply roll over and die either.

Unfortunately, it's much easier to see problems than offer reasonable solutions. I have no solutions to the hole we've dug for ourselves.
Mark - with a similar analogy - supportive care for a patient who has suffered severe trauma. Of course, success depends on doing enough quickly enough to support all the undamaged systems, and unfortunately this administration did not take this recession seriously enough.
Neil - RE consumer debt, because it takes on average about 3 years for individuals to make serious dents in CC debt, and many people started paying down about 2 years ago, when minimum payments are raised. Those who didn't are now going to have to go BK, because at these rates they have no hope of paying it down.

Regarding stimulus, see John's and Jimmie's comments. A lot of stuff that was included in the stimulus bill was cutsie politically correct gimmickry that has very little effect. If you cancel some of that stupid crap, you can afford to throw about 200 billion into infrastructure, which is about what it will take. It's cheap and effective to mend roads and bridges right now, and the economic throughput would be awesome. Material moving, materials, and it addresses the most hard hit and intractable unemployed.

Jimmie - Congress is beginning to run scared and I think you will see some attitudes changing.

"Mark - with a similar analogy - supportive care for a patient who has suffered severe trauma."

I certainly hope that's the case. However, I get the feeling that the supportive care is a bit of a mirage.

We know the victim is low on blood (Bernanke tells us that credit is the lifeblood of our economy). Can we really just borrow the blood from the victim's left arm and transfuse it into his right arm though?

In other words, how does taking on more debt actually solve a debt crisis long-term?

I can understand that stimulus is needed to jump start a stalled economy (and can be very effective), but I have this sinking suspicion that the economy is more than just stalled. I get the distinct impression (since I turned bearish in 2004) that it requires ongoing and increasing life support and would die at any point if the plug was pulled.

That to me implies that the economy is terminal. It could take a LONG time to play out even if I am right of course. The Roman Empire took centuries to fall.

In fact, I'm counting on it taking a long time to play out. I first started investing in inflation protected treasuries in 2000. That's my long-term plan. If indeed we do continue our decline but it happens too fast, I could easily lose it all. Of course, I probably wouldn't be the first.

Further, the economy is apparently driving down our birth rate. That fits right in line with the Japanese deflation model (and your recent comments on deflation).

Japan is currently toying with the idea of paying $3,400 per child per year as a way to increase their birth rate. Of course, that will require taking on even more debt.

Meanwhile, Detroit's casino business is no longer propping up their city's budget. Seriously.

I posted those stories on my blog should you be interested.

We live in one crazy world and I don't think it is all just cyclical.

With regards to infrastructure, I'd rather see the $200 billion thrown at the dams. We've got literally thousands of deficient dams and it might be nice to fix them before we have another Johnstown flood.

It would have the secondary effect of putting a lot of heavy equipment operators and concrete pouring outfits to work ...
And levees. Yes, you are most certainly right.

I do not expect the current crop of Yale Law school grads to get their minds around it (they think these things just automatically happen), but if we don't dump some serious money into this sort of thing we will be getting a new course in reality.
That’s right. Unemployment is increasing day by day. Though there are job openings but still the case is very worse, since the companies are selective, and depending on the need, they take their time in finding the right candidate.
There should be some changes to be taken effect in the education system.
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