In order for the U.S. economy to go roaring right back to the 3%-4% long-term growth the bulls are looking for, consumer spending will have to rebound.
Consumer spending is still 70%+ of the economy, and it’s hard to get a supertanker cruising along at top speed if 70% of its power is removed.
In order for consumer spending to come roaring back, however, one critical thing has to happen:
- Consumers have to be employed
If consumers don’t have jobs, they don’t have much disposable income. They also can’t borrow as easily (because, at least temporarily, banks have decided not to be stupid). And if consumers aren’t employed, companies that sell to them can’t grow as quickly, which affects the other 30% of the economy.
And how is consumer employment going? Badly.
The unemployment rate is now nearing the post-war peak of just over 10%. Yes, the unemployment rate is a lagging indicator–in part because it doesn’t count unemployed people who have given up looking for a job. (As a recovery begins, these folks start looking for jobs, so the ranks of “unemployed” as defined by the BLS suddenly swells). But the rate is high enough that, unless it drops sharply, it’s hard to see where the disposable income necessary to drive strong consumer spending growth (and borrowing capacity) is going to come from.
In the recession of the early 1980s, the unemployment rate dropped quickly in the beginning of the recovery. In the two more recent recessions, however, it did not.
The bulls say we’ll have a sharp recovery this time because the rate of jobs recovery matches the rate of decline: Panicked employers cut too many jobs and now they’ll have to hire them back. Anything is possible, but this bullish argument does not explain how the job market will rapidly absorb the huge amount of slack that is not reflected in the unemployment rate. It also does not explain how companies will rapidly increase their payrolls when they’re selling to consumers that are hunkering down and trying to rebuild savings.
- A record-low work-week suggests that employers have a lot of room to ramp production without hiring new employees (or old ones back). David Rosenberg estimates that just increasing the work-week back to normal levels will be the same as creating 3 million jobs.
- Consumers still have debt coming out of their ears (consumers are customers of most of the companies that need to start hiring)
- Consumers’ wealth has been clobbered, so they need to start saving instead of spending again (ditto)
- Approximately 4 million jobs in finance, construction, and real-estate are gone for good (or at least a while)
- Getting the unemployment rate back to 5% in 5 years would require average monthly job creation of 250,000. The average for the major boom of the 1990s was 150,000. The average for the past 30 years has been about 50,000.
- The number of job openings to unemployed job-seekers has now hit a record high of 1-to-6. So it will be a long time before we get back to normal on this ratio, let alone create a job-seekers’ market.
Peter Goodman of the New York Times takes a close look at the latter problem. His conclusions are presented quickly in the chart at right. Click here to see a bigger version and read the whole article.
During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the labour Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months. [It’s now 6-to-1]
Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses…
Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 per cent in manufacturing, 37 per cent in construction and 22 per cent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 per cent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 per cent this year. (Read the whole thing >)
To understand why it’s unlikely that employment will come roaring right back, it also helps to dig into the unemployment statistics. In his weekly email letter, John Mauldin dissects the job numbers to show what is really going on.
John calculates the number of jobs we’ll need to get back to a 5% unemployment rate (15 million) and asks where those jobs are going to come from. He also observes that, to get to 5% unemployment in 5 years, we’ll need to average 250,000 new jobs every month. The average has never been this high, even in a strong economy.
The average job creation over the past 30 years is 50,000 jobs a month. The average job creation from 1991 to 2000 (a major boom) was 150,000 jobs a month. The average in 2006, the best year in the recent boom, was 232,000.
You can read John’s whole letter, email it to others, and sign up for free delivery here. We’ve included an excerpt below.
John starts with a look back at the recent recessions.
[T]he unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterised as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007…
This headline unemployment number (9.7%) is what we see when we read the paper. What we typically don’t see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a “marginally attached” or “discouraged” worker. Often there are very good reasons for this. You could be sick, dealing with a family emergency, going back to school, or not have transportation.
Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).
And if you add those who are employed part-time for economic reasons (i.e., they can’t get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)
Now, stay with me for the next two tables taken directly from the BLS website. The first is the total number of people in the US civilian work force. Notice how each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last 10 years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.
Next we look at the tables for the actual level of employment. Here we note that we are down almost 8 million jobs sincd the onset of this recession, and that there are almost 15 million people unemployed.
Going back to the part-time workers, there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours. The chart below is from my friend David Rosenberg.
David wrote in a special report today:
“What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 – 150,000 new entrants into the labour market every month. They won’t have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense. Also keep in mind that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this cycle that are likely not coming back. In fact, the number of unemployed who were let go for permanent reasons as opposed to temporary layoff rose by more than five million this cycle. This compares to the 1.2 million increase in the 2001 tech-led recession and in the 1990-91 housing-led recession (when Ross Perot talked about the sucking sound of jobs into Mexico).”
Then there is the matter of average weekly earnings. If you adjust for inflation, workers are making roughly what they did in 1980. The chart is straight from the BLS website.
And What We Don’t See
Those are the facts. Now it’s time to look at what we don’t see, and what you don’t read or hear from the mainstream media.
We saw above that we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.
There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force (see table above).
Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let’s call it 139 million current jobs.
Let’s assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five per cent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labour pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.
But let’s ignore those latter jobs and round it off to 15 million. Let’s hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!
Look at the table below. It is the number of jobs added or lost for the last 10 years. Do you see a year that averaged 250,000? No.
If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the 10 years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best 10 years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.
Want to get back to 4%? Add another 25,000 jobs a month to 2006.
Let’s jump forward to next September. We will need at least 1.5 million jobs to take into account growth in the population. Plus another half million jobs that we are likely to lose before we start to grow again. What is the likelihood of average job growth of 160,000 a month? Anyone want to take the “overs” bet?
Go back to 2003, the year after the end of the last recession. A few hundred thousand jobs were created. Why so slow? Because employers gave more time to those who were already employed and to part-time workers. Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now.
Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%. That would only be an additional 1.8 million jobs (making the most optimistic assumptions) over the new jobs needed for population growth.
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