|The Mother of All Jobless Recoveries|
By John Mauldin DEC 14, 2009 8:20 AM
How likely are businesses to bring back employees if they've found they can produce more with less?
As it turns out, Princeton Professor Paul Krugman agrees. On December 11, he wrote in the New York Times:
I don’t think many people grasp just how much job creation we need to climb out of the hole we’re in. You can’t just look at the eight million jobs that America has lost since the recession began, because the nation needs to keep adding jobs -- more than 100,000 a month -- to keep up with a growing population. And that means that we need really big job gains, month after month, if we want to see America return to anything that feels like full employment. How big? My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 a month. This puts last week’s employment report, which showed job losses of “only” 11,000 in November, in perspective. It was basically a terrible report, which was reported as good news only because we’ve been down so long that it looks like up to the financial press.
It was reported that the unemployment rate dropped to 10% from 10.2%. To get that number, they had to shrink the number of people looking for work by 98,000. Basically, if you haven’t looked for work in the last four weeks, you’re said to be “discouraged” and are taken out of the unemployment statistics. If you add back in the discouraged workers, the rate goes up to 10.5%. And it’s worse than that. If you haven’t looked for a job in 12 months, you’re taken off the rolls altogether.
That just goes to show you that I’m an optimist. His back-of-the-napkin number is 20% larger. He’s probably right, as he has a Nobel Prize and I don’t, and I didn’t actually use a napkin. I did the math in my head on camera while we were getting ready to go fishing.
Krugman uses this to suggest the Fed should double their balance sheet by another $2 trillion (seriously). That wouldn’t be very helpful to the dollar, in my opinion.
(Aside: We’re in a balance-sheet recession. We overleveraged our banks and consumers. Now they’re having to retrench. We’re watching consumer and business loans fall. Putting $2 trillion more into the system isn’t going to make consumers want to borrow more. I can’t quite see where you deal with the problem of too much leverage by trying to create more leverage somewhere else. But that’s a topic for another day.)
And just to demonstrate that I’m not being too pessimistic, you can go to a study the Bureau of Labor Statistics put out yesterday. They estimate that the economy will create 15.3 million more jobs in the next 10 years, which is an average of about 1.5 million a year, or 125,000 a month. That’s not a robust number, and suggests that the continued high unemployment projected in the graph above may not be far off target, as the employment assumptions aren’t that dissimilar. If you have no social life, you can read it yourself here.
The Problem of Seasonal Adjustments
Recently we were told that initial unemployment claims were up slightly to 474,000 on a seasonally adjusted basis. That’s down 78,000 from the same week last year. The four-week moving average is almost exactly the same. On a four-week-average basis, initial claims are down about 10% from last year.
Let’s look under the hood. The non-seasonally adjusted number (NSA) is 665,000, down almost 95,000 from last year, which is good, but still a very large number. The actual average had been over 550,000 for the last three weeks.
Everywhere, the headlines said continuing claims are plunging. And they did. But what really happened is that the drop wasn’t from people getting jobs but from people rolling over to the extended-benefits programs. The states, by and large, pay for the first 26 weeks, and that’s where we get the continuing-claim reported number from. (In some parts of the US however, you can get unemployment insurance for up to 99 months, paid for by the federal government.
There are 5.16 million on the continuing-claim rolls. But when you add in the extended benefits rolls, it increases to over 10 million. Average length of unemployment is now over 26 weeks, and the median length is over 33 weeks!
However, as Dunkelberg points out:
In November small business owners reported a decline in average employment per firm of 0.58 workers reported during the prior three months, a big improvement from May’s record loss of 1.26 workers per firm -- but still a loss of jobs. Nine percent of the owners increased employment by an average of 2.3 workers per firm, but 21% reduced employment an average of 4.2 workers per firm (seasonally adjusted). The “job generating machine” is still in reverse. Sales are not picking up, so survival requires continuous attention to costs -- and labor costs loom large. But, job reductions are fading and job creation could cross the “0” line by the end of the year.
Owner optimism remains stuck at recession levels. The proximate cause is very weak consumer spending, better than a year ago, but that was pretty bad. Fifteen (15) percent reported gains, while 43% reported weakness. With weak consumer spending, there is little need to invest in inventory (and borrow money to support inventory investment). Inventory investment plans are at historically very low levels. Similarly capital spending is on hold, with actual outlays and planned outlays at record low levels along with the demand for loans to finance the outlays. More firms still plan on reducing employment than plan on adding to their payrolls. Inventory reductions are still widespread, eight percent reported accumulation, 33% reported reductions. This sets the stage for new orders in future periods, but does not help much now.
The survey kept highlighting the concerns and uncertainty about government plans for new taxes and regulations. It’s hard to make plans to expand when you’re not certain what your costs will be for health care, taxes, cap and trade, etc.
This is a survey we need to watch, because when it turns up we can start to feel confident about the recovery (which is still stimulus-driven). We’ll look back at it in a few months.
A Double-Dip Recession?
Finally, this highlights my concern about a double-dip recession. I think we could see one in 2011 as a result of the massive increases in taxes as the Bush tax cuts expire and the Pelosi-Reid-Obama crowd want to raise taxes on the “rich.” Their assumption is that if we could grow quite well in the Clinton years with higher taxes, then we can do it again.
First, if there are no changes to the proposed tax increases, this will be a massive middle-class tax hike. Make no mistake, the Bush tax cuts resulted in a huge cut in the taxes of the middle class. The data clearly shows the wealthiest 20% are paying significantly more of the total taxes paid.
If you combine a large middle-class tax increase with an even larger new wealth tax (75% of which will affect the very small businesses we just highlighted), it will be a one-two punch to the economic body, when unemployment is already at 10%. You can’t take out well over 2% (and maybe 3%) of GDP from the consumer without it having significant consequences.
Obama mentioned minor tax credits for small businesses in his plan, but then proposes to raise their taxes and health-care costs. It doesn’t work that way.