The American economy

Unmired at last

America’s recovery is neither robust nor dramatic. But it is real


Mar 17th 2012 
WASHINGTON, DC


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SINCE Florida’s property market collapsed and its economy tanked, Hillsborough County has endured almost nonstop austerity. In the past five years the government of the county, halfway up the state’s Gulf coast, has eliminated a quarter of its 6,000 positions through attrition and lay-offs. It has scaled back after-school child care. Workers’ pay has been frozen for three years.




.But the fiscal year that begins in October holds the prospect of relief. Property-tax revenue is declining more slowly. Tourism-related taxes have stabilised. Sales-tax revenue is actually up. There is still a deficit to be eliminated, but it is a third of the size it was a year ago; the county thinks it will need no lay-offs next year. Things aren’t getting better, says Tom Fesler, the county’s budget director. It’s more a function of just not getting worse.”



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Some of those impediments have now gone away. Economic and financial indicators released in the past few weeks portray a surprisingly chipper economy. In the three months to the end of February employers added 734,000 jobs, which is the best result since April 2006 if you exclude from past figures workers hired temporarily for the federal census. The unemployment rate has fallen by 0.7 percentage points since September, to 8.3%. And this is not just a matter of discouraged workers giving up the hunt for work. A broader measure of unemployment that includes discouraged and underused workers has fallen even further (see chart)..

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.The Federal Reserve has been toying for months with plans for a new round of “quantitative easing”—the purchase of bonds with newly created money—as a way of stimulating demand. But at its meeting on March 13th it decided it didn’t need the plans yet, and upgraded its outlook for the economy, which in January had been merelymodest”, to “moderate”. That same day the stockmarket jumped to its highest since May 2008. It was helped both by good news on retail sales and by another announcement from the Fed: most major banks passed the stress tests that it had administered (see article).

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All things in moderation


.Voters seem similarly uplifted. Polls show approval for Barack Obama’s handling of the economy growing steadily from August to February before slipping a little, probably on the basis of high petrol prices. In part as a result, he leads all the Republican candidates in most hypothetical match-ups, although that means little eight months before an election.



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This is hardly the unshackling of a Titan. As befits a recovery characterised by such fine gradations as the distinction between modest and moderate, there are a lot of caveats. For one, gross domestic product (GDP) does not look nearly as healthy as the jobs data imply. The drop in unemployment since August is on a scale that would normally be expected only if annualised growth were up to 5%, according to Ben Herzon of Macroeconomic Advisers, a consultancy. In fact GDP grew by only 3% (annualised) in the fourth quarter. It is tracking 1-2% in the current quarter. Most economists still expect growth this year of only about 2-2.5%. That is roughly the rate needed to keep unemployment stable; it is not enough to reduce it further.



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Despite not matching the GDP figures, the recent employment numbers may nevertheless be accurate. It may be that firms simply can’t squeeze more productivity from their workforce and are hiring to meet additional sales. Or it may be that the GDP figures are wrong. Subsequent revisions may show that GDP has been understated in the recovery rather as it was overstated during the recession.


.A more pessimistic explanation is that the mild winter has temporarily boosted employment in construction and other weather-sensitive industries, allowing projects to keep going but not encouraging new ones to start. Goldman Sachs reckons this may explain 100,000 jobs. Another possibility, according to J.P. Morgan, is that the size and timing of the 2007-09 recession threw off the process for ironing out seasonal fluctuations in the data. Either explanation implies some of the current strength will be reversed later this year.


.Even if the unemployment improvement is for real, there’s still the problem of circumstances beyond America’s control. Last year’s green shoots wilted when the loss of Libyan oil production caused prices to spike; Japan’s earthquake and tsunami disrupted supply chains; and Europe’s sovereign-debt crisis worsened for the second year in a row. Though as yet this year has seen no large natural disasters, much of Europe is in recession, and the price of oil has risen to $126 a barrel as a result of disruptions to supply, strengthening global demand and the showdown with Iran.


.Neither factor helps, but the impact does not as yet seem too bad. Europe’s recession is proving to be shallower than expected. The rise in oil prices, which matters more to the American economy than their level, has been smaller than last year—when they were 33% higher than the year before. That is equivalent to prices going up to $145 this year, which is unlikely unless tensions with Iran get much worse.


.The slow grow


.But if adverse events elsewhere explain why GDP grew by only 1.7% last year, they cannot explain why growth has averaged a mere 2.5% since mid-2009. For that, blame the drag that any economy in the aftermath of a financial crisis must suffer: households and businesses are paying down, or defaulting on, old loans, rather than taking out new ones to invest and spend; banks are reluctant to lend because of depressed collateral values or regulatory scrutiny. Monetary and fiscal stimulus can cushion the worst of these impacts, but eventually conventional monetary policy reaches its limits and fiscal stimulus turns, sometimes prematurely, to austerity. Underlying this is the reallocation of capital and labour from sectors that grew too fat in the boom years..

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These sources of drag are now diminishing. A year ago total bank loans were shrinking. Now they are growing. Loans to consumers have risen by 5% in the past year, which has accompanied healthy gains in car sales (see chart). Mortgage lending was still contracting as of late 2011 but although house prices are still edging lower both sales and construction are rising. Ed Brady, a builder in Bloomington, Illinois, has a $225,000 four-bedroom model home that used to go a month or more between showings. During the second weekend of March it had seven or eight, and Mr Brady expects to sell it soon (he has already turned down one lowball offer). Buyers, he says, are being driven by “pent-up demand and a little more optimism that they can sell their current house.”


.State and local governments are no longer as sorely afflicted by falling revenues. It has been something of a winter ritual for budget managers to warn that revenues are below target and spending above, requiring mid-year corrections to avoid a deficit. There, too, a bottom is in sight. At present just four states are reporting mid-year budget gaps, according to the National Conference of State Legislatures; this time last year, 15 did; the year before that, 36. State and local employment, which declined by 655,000 between August 2008 and last December—a fall of 3.3%—has actually edged up since.


.Back to basics

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It could easily fall again; states are not going to be quick to spend the revenues now starting to return. In Texas, where sales-tax revenues are running $1 billion ahead of projections, the governor, Rick Perry, has rejected calls to reverse education cuts. And the real-estate crash will reverberate for years through municipal coffers as property assessments and collections catch up with the collapse in values. Last month Stockton in California suspended paying interest on some bonds; it may become the biggest municipal bankruptcy ever. Meanwhile, federal stimulus is steadily giving way to restraint. More drastic tightening looms at the end of the year if George Bush’s tax cuts, already extended once, expire, and a “sequesterautomatically slashes federal outlays.


.Beneath all this, America’s economy is slowly rebalancing itself. After living beyond its means for more than two decades, America needs to export and invest more. Changes in prices are one of the mechanisms that make that happen. Just as lower property values drive capital and labour away from housing, a lower dollar draws them to exports and industries that compete with imports.


.Years of high oil prices are driving up fuel efficiency. They have also stimulated domestic supply, in particular from unconventional sources like North Dakota’s Bakken formation. As a result America is importing, net, 9m barrels of oil a day, compared with 10m in 2008.



Domestic oil and gas production have played a part in the recovery of manufacturing by spurring related exports. Although a net importer of crude oil, America was last year a net exporter of energy products such as petrol. Cheap shale gas has revived the petrochemical industry, which uses it to make ethylenewhich in turn is used in everything from grocery bags to bottles and tyres. The American Chemistry Council, an industry group, reckons shale gas could generate 17,000 jobs directly in the petrochemical industry, and many more indirectly.


.Manufacturing employment, which declined almost continuously from 1998 through 2009, has since risen by nearly 4%, and the average length of time factories work is as high as at any time since 1945. Since the end of the recession exports have risen by 39%, much faster than overall GDP. Neither is as impressive as it sounds: manufacturing employment remains a smaller share of the private workforce than in 2007, and imports have recently grown even faster than exports as global growth has faltered and the dollar has climbed. Trade, which was a contributor to economic growth in the first years of recovery, has lately been a drag.


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But economic recovery doesn’t have to wait for all of America’s imbalances to be corrected. It only needs the process to advance far enough for the normal cyclical forces of employment, income and spending to take hold. And though their grip may be tenuous, and a shock might yet dislodge it, it now seems that, at last, they have.


Where Will the Jobs Come From?
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By John Mauldin

March 17, 2012



"Six years into our global data collection effort, we may have already found the single most searing, clarifying, helpful, world-altering fact.


"What the whole world wants is a good job.


"This is one of the most important dsicoveries Gallup has ever made. At the very least, it needs to be considered in every policy, every law, every social initiative. All leaderspolicy makers and lawmakers, presidents and prime ministers, parents, judges, priests, pastors, imams, teachers, managers and CEOs need to consider it every day in everything they do.





"That is as simple and as straightforward an explanation of the data as I can give. Whether you and I were walking down the street in Khartoum, Cairo, Berlin, Lima, Los Angeles, Baghdad, or Istanbul, we would discover that the single most dominant thought on most people's minds is about having a job.



"Humans used to desire love, money, food, shelter, safety, peace and freedom more than anything else. The last 30 years have changed us. Now people want to have a good job. This changes everything for world leaders. Everything they do – from waging war to building societies – will need to be in the context of the need for a good job." - From The Coming Jobs War, by Jim Clifton, Chairman and CEO of Gallup



Each month investors and politicians in countries all over the world obsess over the release of the monthly employment numbers. Even though these numbers are likely to be revised significantly from the original release, the markets can't help responding to the variations from the expected number. Why the focus on numbers that are likely to be proven wrong in the coming years? Because the single most important factor in the direction of an economy is employment. Consumer spending, personal income, tax revenue, corporate profits, and a host of other variables all swing on rising and falling employment.




This week we begin a series of letters on employment. I have been researching the topic more than usual for the book I am writing with Bill Dunkelberg (the Chief Economist of the National Federation of Independent Businesses) on the entire employment issue. We will look at why employment is so critical. How are jobs created and what policies can be adopted to help foster more jobs? Should the US try and keep jobs that are going overseas, or develop whole new industries? Who exactly is the competition globally for jobs? We will find that billions of jobs will disappear in the coming decades and even more will be created.


There are today some 1.2 billion good jobs, but 1.8 billion people want them. Over the next 30 years the world economy will double and then almost double again. Where will the new jobs be and who will get them? What should you and your children be doing today to be sure that you have jobs in the future?




In order to try to answer these questions, we will start with a general view of the employment situation in the US. What has it looked like in the past and where is it going? Today, we will look at the direction of employment in the US and then focus on both what employment is likely to be in the next few years as well as the dynamics of the labor market. There is a lot to cover. (This letter might print a little longer, as there will be lots of charts.)

.Getting Back to Full Employment

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The headline unemployment rate is 8.3%, down from 10% only a couple years ago. But ten years ago it was less than half that, and at the beginning of the last decade it was less than 4%. 60 years ago it was less than 3%! Employment is a very volatile number, and as we have seen, it can rise substantially before and during a recession. The first graph we will look at is the unemployment rate, from the FRED database created by the St. Louis Federal Reserve.
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Notice how much unemployment fell after the recession that followed World War II, during the '60s, and then in the Reagan and Clinton years. What kept it from rising in the last decade less than after almost any previous recession, and what caused it to rise more following the recent recession than in any since WWII? We'll look at that later, but for now let's just get the lay of the land.



The last few months have seen good overall employment growth. January was revised up by 61,000 to 284,000 jobs created and February was 227,000. If we could keep that up it would mean 3 million new jobs this year. How likely is that to happen? Let's look back over the last 20 years for evidence. The next table is from the Bureau of Labor Statistics (BLS) web site, a treasure trove of employment data. Then I will sum up the monthly numbers for you in the next table.

                  [Hundreds of thousands of jobs]


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Notice that about half of the time in the 1990s we saw growth in the neighborhood of 3 million annual jobs. We only went above 2 million in three years this last decade, and the rise over 2 million in those years was entirely due to construction jobs, which have since plummeted by 25%. Does anyone expect construction to supply such growth in the next few years?



Then look at employment growth month by month and notice that putting together a long string of 250,000 new jobs a month has not been easy in the last 13 years. You can get 3-4 months with solid job growth which is then followed by a falloff in job growth. For instance, in 2010 the entire year's growth of 1 million jobs came in just three months. And last year two months (February and March) saw almost 500,000 jobs and half the year's growth.


The 1990s were the years of growth in all sorts of technology areas, and a resulting strong economy.



How long will it take us to get back to 4% unemployment? First, let's look at how many jobs we have lost.
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We lost 10 million jobs peak to trough in the last recession. We are still down 7 million jobs from the high-water mark. But it is actually worse than that, because we need 125,000 new jobs each month just to keep up with population growth. That is 1.5 million jobs a year. IF we grew at 3 million jobs a year, it would still take over 4 years (until some time in 2016) to get back to the level of unemployment (4.5%) that we saw in 2007.


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It will be even tougher in coming years, as we are watching government jobs fall steadily by around 15,000 each month, rather than adding 10,000 or so each month. Government jobs are down around 500,000 over the last three years. That is a big swing.

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Who's Participating in Employment?

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The participation rate is the number of people who either have a job or are looking for one, as a percentage of the total population. Students and retirees, for example, are not considered as participating in the labor force. Nor are people on disability payments who are not looking for a job. Some 25% of the people who lost jobs since 2008 have applied for and received government disability checks. As an aside, we normally think of disability as something physical (back pain, etc.), but since 2008 43% of those getting approved for disability cited psychological reasons like stress. A rising percentage of them are white-collar workers. This is now costing us over $200 billion a year, which is almost 10% of total federal revenues. (I get it that individual people get very small checks, but there are now 10 million people on disability. And less than 1% a year either give up or lose their disability payments.).
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The last month saw an increase in the civilian labor force (the people who are counted as either employed or looking for a job) by 476,000, which is a healthy rise. Most saw it as a positive sign that people had better expectations of finding a job and were therefore looking. And that is a good part of the reason. But remember that you have to have been looking for a job within the last four weeks to be counted as unemployed. We are now seeing an increasing number of people coming to the end of their employment benefits, which were extended to 99 weeks. There were over 100,000 more people who were no longer getting benefits in just one week in February. There is clear research and evidence that losing your benefits can be a real motivator to start looking for a job!



And that is one of the reasons (as I have written for years) that bringing the unemployment rate down is harder than merely adding jobs. Those who are not considered to be in the labor force will either be motivated to look for a job because of improved conditions or be forced to look for a job because their benefits run out. Either way, the participation rate rises, which means you need at least as many new jobs as new people entering the labor force, just to keep the unemployment level even.



I point out the mountain we face in getting back to a reasonable unemployment level, not to be negative but to highlight the importance of job creation. The engine of job growth in the US is small business and new business.


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If we want to see rising employment, we need to be figuring out how to create more entrepreneurs. Roadblocks need to be removed. The amount of paperwork (and the cost!) required to hire just one new employee can be daunting for a small business. All those reports don't just magically fill themselves out. It takes time and money away from core business efforts to prepare them.



There are areas where new jobs will be created. The US has the opportunity to become energy self-sufficient by the end of the decade. That effort can create hundreds of thousands of direct jobs, with hundreds of thousands more created to service the people who are doing them. And those are jobs that pay well. We will explore various new industries that can supply jobs in the US (and in other countries as well).

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4 Million New Jobs a Month!


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Now let's turn to something that I find encouraging. If I told you that there were 4 million new jobs created in January, most readers would want to know what I was drinking. But that is the reality we find in another report by the BLS, called the JOLTS report or Job Openings and Labor Turnover Survey. It comes out each month and reports on just what it says.



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In January there were actually 4.1 million new hires in the US, according to the JOLTS report. Of course there were also 3.9 million "separations." Separations can be voluntary (called quits), as in a person leaving a job to either go to or look for another job. Or they can be involuntary, as in layoffs and discharges. The quits rate can serve as a measure of workers' willingness or ability to change jobs. It will surprise no one that quits are down by 1/3 in the last few years as fewer people quit without a job in hand. But layoffs are also down by a third from 2009, which is a clear sign of improvement in the job market.


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And that brings us to the job openings. The good news is that job openings are up 50% from the bottom in 2009, but still off by 1 million jobs from 2007. The bad news is there is still only about 1 job for over 3 people who are looking.



What that says is that the labor market in the US is still very dynamic and fluid, even with the high unemployment level. When 3% of the labor force changes jobs in any one month, that means there are companies hiring somewhere. And while 3% may sound high, the rate has been over 4% in the last ten years. And when 1.5% of the labor force voluntarily quits, that means they are either retiring or expect to find a new job.



The BLS has an item in its monthly labor report (the establishment survey) called the birth-death ratio. This is basically a number they use to estimate the number of net new businesses created each month. In times of rising employment, the survey of businesses misses new businesses (as a new business is obviously not on the call list). In some years, especially after a recession finishes, those new businesses can account for a large part of net new job creation.



But if we go back to the unemployment rate (the first chart in this letter), you have to ask yourself, why are we not creating new jobs like we did in the past? Why has job growth been sluggish for over a decade, especially if you take out the construction jobs in the middle of the last decade? Doing so makes job growth last decade look particularly bad in comparison with other recoveries in the previous 20 years (before 2000).


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In coming letters we will look at what I think might be some of the reasons. But for now we will close with a quote from Jim Clifton, who I quoted at the beginning on the importance of creating jobs. Clifton and the Gallup organization have been surveying people about their jobs for decades, and Jim has been consulting on employment for at least that long. I find his book, The Coming Jobs War, to be very readable (and provocative) and to offer a lot of good ideas. I recommend it.

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Where Will the Jobs Come From?

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I came across this quote from an interview Jim did with Forbes, when he was asked the question, "What obstacles do leaders have when trying to create more jobs?"



"There are no real obstacles. Just wrong thinking, bad assumptions. When you build strategies and policies on wrong assumptions, the more you execute, the worse you make everything, which is what we are doing now. There are three wrong assumptions that cause all the current job creation attempts to not work.



1. "Innovation is not scarce. Entrepreneurship is scarce. We are spending billions and wasting years of conversations on innovation and it isn't paying off. Great business people are more valuable and rarer than great ideas.





2. "America has about six million active businesses. Ninety-nine percent of them are small businesses. An incalculably huge mistake leaders are making now is spending time, money, strategies, and especially policies for those who need 'help' getting a job. A useful way to look at any citizen is this, 'Can she herself create jobs or does she need a job created for her?' We are spending all our time on the cart and doing little or nothing on the horse. We have our assumptions and futurism that backward. 'The horse (small and medium business) stopped, so we fix the cart (jobs).' If we change all our strategies and policies to favor the job creators (small and medium businesses) the horse and cart will get moving again. We have our compassion right, but the logic is staggeringly stupid.




3. "It is wrong thinking to imagine that Washington has solutions. Job creation is a city problem. There is great variation in job creation by city in the United States. San Francisco and the greater Valley keep pumping away while Detroit isn't. Austin's cart works while Albany's doesn't. Cities need to look inwardly and say, 'What can I do to create great economic energy, to bring new customers for all existing companies and start-ups?'"

.We will follow up on those thoughts in coming weeks.

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Have a great week.

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Your thinking about where his kids will work analyst,


John Mauldin John@FrontlineThoughts.com



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Copyright 2012 John Mauldin. All Rights Reserved.