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The Mother of All Jobless Recoveries


How likely are businesses to bring back employees if they've found they can produce more with less?

We're clearly starting to get some better data points here and there. But as I pointed out this summer, it's going to be a recovery in the statistics and not in the things that count, such as income and employment. This week we look at the nascent recovery (which could be at 3% this quarter) and try to peer out into the future to see what it means. We look at how recoveries come about, and why I'm concerned that we'll see a double-dip recession.

Thoughts on the Statistical Recovery

In the '50s through the early '80s, recessions were typified by large layoffs at manufacturing businesses, as they'd built up too much inventory. Businesses had increased capacity and often borrowed a little too much. Rising prices in the '70s, along with extremely high interest-rate costs, led to the two severe recessions of the early '80s, which Paul Volcker had to essentially force into existence in order to begin the process of wringing inflation out of the economy.

But -- and this is important -- as the economy improved, inventories were eventually worked through and employees were brought back to work. Things returned to normal. The economy would once again grow at a robust rate. Then, in the last two recessions in the early '90s and early '00s, it took longer for employment to rise. A great part of this was because the manufacturing sector of national employment was becoming an ever-smaller part of the economic pie. We were, and still are, turning into an economy driven by services.

I should note that, on an absolute basis, manufacturing in the US has grown (going back to before this recession started). We just produced more "stuff" with fewer employees. We became more productive. But this means that there are fewer jobs that will be brought "back" to make up for increasing sales than in past recessions. There are estimates out that as many as two million of the eight million jobs lost are permanent job losses.

We know that businesses have made large cuts in numbers of employees in order to address lower sales and to increase their profits. Increasing profits by cutting costs even as the "top-line" sales number is shrinking isn't a growth strategy that can be sustained. It also eats into research and development and postpones growth.

How likely are businesses to bring back employees if they've found they can produce more with less? This is a prescription for the mother of all jobless recoveries. A few weeks back, I went into some detail outlining why employment is likely to be uncomfortably high for a number of years, and that assumes we don't go back into recession. The graph below is the most likely scenario. You can see the entire piece, which goes into detail on this and other scenarios (developed with Mike Shedlock) here.

Quoting from that letter: "In August, I did an interview with CNBC from Leen's Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started." It rather startled some of the hosts -- "Where can we get that many jobs?"

Again, quoting from that letter: "That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the eight million and rising jobs we've lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years."
No positions in stocks mentioned.

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