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India Calling


Early last week my Dell PC's hard drive failed. And since I have a 3 year Dell support contract, I called the support line and spent several hours over a few days chatting with Ramesh, a friendly young man at a call center in India. During the interminable repair process we talked about the weather in India, where he went to college, what he studied, whether anyone in India actually practices Yoga, his hobbies, about the economy there, etc. He was a good guy, as urbane as any Lower East Side hipster and seemingly more educated than me.

I have seen studies from sell-side economists that suggest that IT workers like Ramesh that staff call centers and other service-oriented jobs cost companies like Dell 15% of what the same worker in the US would cost them. 15%. There are plenty of reasons for this, both structural and cyclical, but the actual cost gap is the remarkable thing, not really the reasons behind it. According to Morgan Stanley data, 2002 Indian-based IT employment (like the Dell call center) was 106K; this year it surged almost 50% to 160K and next year it looks like it will surge another 50%. Of course, India isn't the only place where US corporations are shipping their service-based jobs, but it most typifies the trend.

This trend further buttresses some of the worries I laid out in yesterday's piece. The Fed's attempts to increase aggregate demand among consumers will have particularly bad consequences if employment trends don't turn up soon. The increasing frequency among US corporations to outsource service sector jobs to far-lower cost regions (to say nothing of the decade-long manufacturing outsource trend to China), is an important headwind for the US household balance sheet.

There are other structural factors that are causing the unusual "job-loss" recovery that the US is currently experiencing. For example; corporations are still purging the excessive hiring done in the 90s boom; high non-wage employment costs like healthcare and pension liabilities make labor more costly relative to capital; and the inability of local and state government hiring to fill the private payroll gap thanks to their own fiscal crises, are but a few. But suffice it to say that the Fed's reflationary aggressiveness with respect to household income statements is even more short sighted in light of the structural (read: long term) challenges that face US employees in the global economy.

Since consumer spending is directly associated with employment trends, it is fair to say this: that buying a consumer cyclical stock on any pullback is akin to betting the Fed's liquidity largesse will be a large enough and long enough consumer spending booster to ignite corporate capex, start the inventory replenishment cycle, and thus spark employment growth that is strong enough to overcome the negative headwinds associated with (1) state and local hiring slowdowns, (2) the decade-long export of manufacturing jobs to China, and (3) the emerging trend of exporting service-sector jobs to far off locales as well.

It would be easy to lionize Ramesh and his colleagues as the source of the problem or to castigate US corporations for shipping jobs abroad, but they are simply economic actors playing by the new rules of the global economy. That's fair. Pumping up consumer spending in the face of structural challenges to US employment isn't.
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