|Now the Bad News: Those August Jobs Were Rented|
Despite what some on Wall Street say, the August jobs report shows little hope for recovery.
Hard upon the release of Friday morning’s non-farm payrolls, the Wall Street Journal’s online headline proclaimed “Private Sector Adds 67,000 Jobs.” In fact, 40,000 of the 60,000 non-Census jobs gained in August were in the HES Complex (health, education, and social services) and Core Government Operations (excluding the post office). These jobs are overwhelmingly funded out of the public exchequer, not private resources. And in today’s red-ink-ridden world this means these incremental payroll slots were, in fact, deficit financed. So last month -- just like since the beginning of the alleged jobs recovery in December -- the American economy didn’t actually “create” many new jobs; it just rented some from our grandchildren.
Moreover, the remainder of the reported 60,000 non-Census job gain was accounted for by the leisure and hospitality sector (+16,000). The fact that more bellhops are drawing paychecks is a good thing. But these positions clock only 26 hours per week, or about 70% of the average, and they pay $13 per hour compared to the private-sector average of about $23 per hour. Consequently, average weekly pay in the leisure and hospitality sector is $339, or just 43% of the $775 figure for the private sector as a whole. So call these (not quite) half jobs.
The larger point is that paint-by-the-numbers Wall Street bulls are completely ignoring the quality, composition, and sustainability dimension of even the anemic headline job gains being reported. Consequently, they fail to see that “fiscally dependent” job gains -- which account for a high share of the uptick since December, and, more importantly, all of the American economy’s job growth for the entire last decade -- will soon dry up. We're fast approaching a limit that might be called Peak Debt.
At the same time, jobs in the heart of the private economy -- goods producing and core private business services -- have hardly rebounded at all, and have been shrinking relentlessly since January 2000. Way back then, the Bureau of Labor Statistics reported 76.8 million of these better-paying and more skilled jobs in manufacturing, construction, retail/wholesale, information/media, and professional and business services. By August 2010, however, this figure had shrunk by 11% to only 68.3 million jobs.
Here’s what happened along the way, and it's a tale of profound weakness in the nation’s economic fundamentals. These realities make a mockery of last week’s specious good-news chatter about the headline uptick in the August numbers.
Start with the peak-to-peak result during the Greenspan Credit Bubble -- from January 2000 to December 2007. Notwithstanding the robust boom in housing and consumer spending from home ATM machines during this seven-year period, we actually had a net loss of 500,000 jobs in these high-value categories. Moreover, this growth-free segment of the national economy had accounted for nearly 60%, or 77 million, of the 131 million non-farm payrolls reported in January 2000.
Next came the two years of severe job losses during the Great Recession beginning in December 2007. By the time we hit bottom in December 2009 -- if we actually did -- nearly 8 million (11%) goods-producing and core private-business-service jobs had been wiped out. This amounted to a loss of 330,000 jobs per month from categories that account for upwards of 75% of the American economy’s payroll dollars. There was a time last winter when the stock market touts who appear on CNBC -- frequently disguised as Wall Street “economists” -- argued this jobs crash was all a giant mistake. They claimed that following Wall Street’s heart attack in September 2008, Main Street had panicked -- indulging in an orgy of unnecessary firings. But medicated by the Fed’s unprecedented regimen of experimental drugs -- $1.6 trillion of quantitative easing and 18 straight months of the zero-interest-rate policy (ZIRP) -- the animal spirits had been tranquilized, paving the way for a surge of compensatory re-hiring.
Well, the medication has had no such effect during the eight months since December. We've regained only 1.5% of the 8 million jobs lost during the prior two years in the goods-producing and core private-business-services segment of the economy. Stated differently, the rate of gain has been essentially a rounding error -- a pick-up of 15,000 jobs per month compared to the 330,000 per month loss rate during the Great Recession.
At the last eight months’ growth rate it would take 44 years to recover the jobs lost in these segments since December 2007, and more than a half century to retake the employment level first reported when Bill Clinton was president.
It will be argued, of course, that job growth in these categories will soon accelerate, thereby drastically foreshortening this mind-boggling delay in the recovery scenario. But why? The national economy is self-evidently defaulting to stall speed. After an inventory-fueled rebound of 5.0% in the fourth quarter of 2009, GDP growth rapidly cooled to 3.7% in this year’s first quarter and 1.6% in the second quarter. And after the recent big downward revision of June construction spending, last quarter’s figure is going to get even slimmer.
At the same time, already reported results for July and August on key drivers like core CapEx, residential construction, inventories, and foreign trade virtually guarantee that the GDP expansion rate will be close to zero in the third quarter. Not surprisingly, the latest bullish mantra is that this stall is merely the pause that refreshes, and that the big rebound is -- yet again -- just around the corner. But an examination of the specific headwinds facing the “fiscally dependent” segments of the job market, as well as those economic precincts that produce goods and core private services, suggests that any such turning point lies years into the future, at best.
First, the nation’s unsustainable reliance on fiscally dependent job growth can't be gainsaid. During the seven-year boom ending in December 2007, total non-farm payroll growth averaged about 86,000 per month. About 22,000 per month of this growth was attributable to “half-job” gains in the leisure and hospitality segment. Beyond that, the remaining 62,000 new jobs each month were entirely sourced out of the nation’s public exchequer. Specifically, the HES complex (including state and local education) generated 57,000 new jobs per month and Core Government Operations (federal, state, and local government outside of education) added a further 10,000 monthly. That was it. Those vast stretches of GDP that host what's otherwise known as the “private sector” gave birth to lots of puts and takes among various job categories within, but generated zero job growth as a whole during the greatest boom in post-war history. Secondly, the nation’s fiscally dependent jobs growth machine is now beginning to falter. To be sure, the HES Complex appears to be the gift that keeps on giving jobs. Unlike the rest of the economy, it did continue to reliably expand payrolls after December 2007.
However, there's been a pronounced slowing of the pace of job gains, which unmistakably betrays the growing fiscal pressures. Thus, during the two years of recession ending in December 2009, the HES job-growth rate dropped to 35,000 per month -- a 40% retrenchment from the 2000-2007 boom period. And during this year’s economic rebound, it's decelerated again -- averaging only 28,000 jobs per month.
In the case of Core Government Operations, the 11.3 million jobs currently reported for local, state, and federal payrolls outside of education already reflect a contraction mode. After growing by nearly 200,000 jobs during the two years of recession, government payrolls are now definitely shrinking -- contracting at a 10,000 monthly pace since last December.
Thus, the fiscally dependent job sectors have downshifted markedly. After creating upwards of 70,000 jobs per month during the seven-year boom, the combined HES Complex and Core Government Operations sectors have struggled to produce 20,000 new jobs per month since last December. Moreover, the headwinds owing to both Peak Debt and Obama Care will make it difficult to sustain even this pace during the medium-term future.
Peak Debt is a profound new condition of the nation’s political economy. Expressed in the metrics of finance, the nation’s public debt is now approaching what professors Rogoff and Reinhart have documented to be the tipping point of the crisis. Already, the sum of publicly held federal debt plus municipal bonds totals $12 trillion, and it will inexorably reach $16 trillion, or 100% of GDP, before the next president can even send Congress a remediation plan in the spring of 2013.
But in the realm of politics, the limits of discretionary deficit finance have already been reached. Uneducated in the specious math of the Keynesian economics guild, the tea party insurgency is fomenting a powerful anti-deficit backlash. Accordingly, the Obama light brigade already made its last charge up the aisles of Capitol Hill when it recently enacted a $26 billion one-year gift to the teachers’ unions and Medicaid providers. After the upcoming rout of congressional Democrats in November, however, Washington will descend into a vicious partisan deadlock, bringing a halt to the fiscal-transfer gravy train for the foreseeable future.
This prospective development means that the really big bust in state and local budgets and employment will arrive with a vengeance in 2011-2012. At that point, the real reason the Obama stimulus has had so little impact will become apparent -- perhaps even to the Wall Street cheerleaders. The fact is, the largest single component of the $800 billion stimulus plan was an ill-disguised bailout of state and local governments -- a transfer that saved some existing payrolls, but funded no re-hiring whatsoever. Since this huge fiscal bailout was temporary and is largely slated to expire at the end of this year, it just kicked the can down the road. States and localities are still mired in the deep structural deficits incurred during the last decade's housing and home ATM-based consumption boom. The latter resulted in massively inflated revenues from property appreciation, sales taxes, and bonus-swollen taxable incomes -- every dime of which was absorbed by huge increases in permanent spending.
Now these bubble-era revenues are gone, leaving a yawning fiscal gap. To be sure, the resulting gross violation of state constitutional strictures against budgetary red ink has thus far been papered over by Washington’s “stimulus” infusion -- along with emergency state/local budget cuts, deferrals, and gimmicks. But these temporizing arrangements will be overwhelmed during the next two years as state and local receipts drop by upwards of $150 billion when temporary stimulus programs roll off.
Some of this true state and local fiscal gap will be covered by additional tax increases -- measures that, in turn, will subtract from disposable household incomes. But much of the structural fiscal gap will have to be closed by means of further, sharp retrenchment of services and payrolls. This is especially the case because the easy non-payroll cost savings have already been harvested and because legally binding funding requirements for pension and other retirement programs are soaring.
At a fully loaded cost of $75,000 per employee, for example, it will take upwards of a 10% cut -- or about a 1 million reduction in state and local jobs -- to compensate for the expiration of federal stimulus transfers. Stated differently, we're about to see a real Warren Buffett scenario as it becomes evident that the state and local budget beach is populated almost entirely by naked swimmers!
The nation’s fiscal predicament will bear just as heavily on the 30 million jobs reported for the HES Complex in the August release. In the first place, about 13.5 million (45%) of this total is accounted for by education -- which is almost entirely a ward of the state. In addition to the 10.4 million education employees on state and local payrolls, there are another 3.1 million jobs on purportedly “private” education payrolls. But the dominant share of these jobs is attributable to higher education institutions -- both conventional private schools and also for-profit colleges and technical training programs.
Both rely heavily on federal student aid, but the booming for-profit education sector is especially dependent. The latter institutions typically obtain 80%-90% of their revenues from federal student grants and loans -- and currently constitute one of the most egregious scams in the entire federal budget. Indeed, after skyrocketing from a few billion annually to more than $20 billion at present, flagrant abuses of federal aid at tuition-harvesting machines like Phoenix University and Strayer Education (STRA) has caught the attention of even the spendthrift Obama administration. Consequently, pending restrictive regulations are likely to cut off this most recent avenue of rapid education job growth, as well.
Another 2.7 million of the HES Complex jobs are in day care and other social services. These payrolls have always exhibited acute fiscal dependency, but even here the days of generous budget increases are clearly over. So that leaves the 13.8 million jobs reported in August for the various health segments of the HES Complex. Yes, government programs including Medicare, Medicaid, and health research still account for well less than 50% of total health-care funding -- meaning that this sector isn't entirely dependent on the public exchequer. But now we have Obama Care -- and that will most assuredly curtail any remaining upward momentum in the trillion dollars of funding that passes through employer health plans and private medical insurance.
To be sure, Republican orators have wasted no words describing Obama Care as a budget-busting calamity, owing to the expansion of coverage to 40 million more Americans. But the overwhelming evidence from state-run European systems -- where health spending is about 10% of GDP versus our 17% -- is that the primary impact of heavy-handed bureaucratic management is redistribution and rationing of health-care resources, not endless American-style expansion.
Moreover, the Obama legislation delayed much of the coverage expansion and mandates until 2014 in order to make the numbers look better. But this budgetary legerdemain will leave existing employer health plans in a state of limbo. Such plans will be exempted from the act’s “minimum essential coverage” mandate, but this grandfathered protection will be valid only so long as current plans aren't materially “changed” before the 2014 effective date. Thus, while waiting for the several thousand pages of regulations defining the new federal coverage standards and explicating what constitutes an impermissible “change” in existing plans, it's likely that employers will either freeze current plans or eliminate them entirely.
The curtailment of employer-plan funding growth has been underway for several years. Now the massive uncertainties owing to the next four years of complex rule-making and court challenges due to Obama Care can only function to intensify this slowdown.
In fact, a sharp retrenchment of private-sector reimbursement growth is already evident in the interstices of health-care payroll trends. The categories that have the highest mix of employer-versus-government funding are physicians’ offices, outpatient care, and hospitals. There are presently 7.6 million jobs in these categories, but the receding rate of growth is now unmistakable. During the seven-year boom, these categories added about 14,000 jobs per month. The figure then dropped to 9,500 per month during the Great Recession, and has averaged only 7,000 per month since last December.
By contrast, home health and other ambulatory services, along with nursing and residential care, rank high on the scale of fiscal dependency. There are now 6.2 million jobs reported for these categories, but the growth rate of 13,000 jobs per month since last December isn't appreciably different than the 12,000 to 14,000 per month rate that has been reported continuously since the turn of the century.
Needless to say, the bullish economists and strategists who apparently read just the headlines might be chagrined to discover that the only “evergreen” source of jobs left in the HES Complex consists of work changing bedpans and providing home companionship for the infirm. And even these gains will soon come up against the realities of Peak Debt. In the final analysis, the data show that the fiscally dependent jobs machine that was the source of America’s faux prosperity during the past decade is now grinding to a halt And there isn't yet a shred of evidence that the long-standing job drought in goods production and core private-business services is about to end.
During the eight months of headline growth in the jobs count since December, nearly every significant component of the 68 million job interior of the US labor market has been static or still in decline. Thus, the 5.6 million job construction sector has shed 11,000 jobs per month since last December. This trend obviously has little prospect of reversing any time soon -- given current conditions in residential and commercial real estate.
Likewise, there's been no gain in the 4.5 million jobs in durable goods manufacturing. There's also been a further 100,000 loss from the 14 million jobs reported for transportation and warehousing, media and information, and FIRE (finance, insurance, and real estate). And there has there been no net gain in the professions and management categories. There were 9.24 million lawyers, accountants, engineers, architects, business managers, and consultants reported for August compared tot 9.25 million last December.
In truth, most of the 15,000-per-month pick-up for the entire goods-producing and core private-business-services sector has been in a handful of narrow categories that were hit especially hard by the sharp inventory correction that accompanied the economic downturn in late 2008. These inventory-sensitive categories include auto production and dealers, primary and fabricated metals, clothing and accessory retailers, and department stores. On a combined basis, they account for less than 8 million of the 68 million jobs in the economy’s high-value interior but nearly all of the gain since December. Now with inventories replenished -- or potentially over-replenished -- there's no reason to expect a continued jobs rebound in even these narrow precincts
At the end of the day, the real mystery is why presumably numerate Wall Street economists and strategists have taken any comfort at all from the modest blip in the headline job count since last December. An economy that shed more than 8 million jobs during the two-year recession has now recovered the grand sum of 425,000 positions outside of the HES Complex, Core Government Operations, and the soon-to-be completed 2010 Census.
Among this miniscule total, there were 160,000 half jobs in the leisure and hospitality sector, and 200,000 jobs at temporary employment agencies. These are the lowest paying, least stable jobs in the entire economy, and can't conceivably serve as a foundation for the recovery of private incomes and spending.
Indeed, nominal private incomes are still a staggering $465 billion, or 5.2%, below the level reached on the eve of the Wall Street heart attack in September 2008. The August jobs report provides no evidence whatsoever that this fundamental obstacle to recovery will be ameliorated any time soon.
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