Archive for July, 2011

A Sustainable Jobless Recovery

The July 8, 2011 jobs report was shockingly disappointing:  The USA added just 18,000 jobs in June.  For the workforce just to maintain the status quo, we need to add 125,000 jobs every month.

The unemployment rate is 9.2%.  If you add in the number of workers who have stopped looking for work, those whose unemployment benefits have expired, and those who are severely underemployed, the unemployment rate is 16.2%.

There is now a lower percentage of Americans working than at any time since 1983.  The percentage of American adults (16 years and older) who are working has dropped to 58.2%.

So, the US economy is doomed, right?  Not necessarily.  Businesses have downsized and become more efficient.  They have learned how to produce goods and services with fewer employees.  These employees may be overworked compared to their workload three years ago, but they have a steady job, and they are more confident that they will keep the job than they were a couple of years ago.  When you believe you have a stable job, you are more willing to spend.

American business has entered a “new normal.”  In truth, business has never sold much to unemployed people.  So the American worker/customer base has dropped from 94% (6% unemployment is considered “full employment”) to 91%.  American manufacturing and retail businesses are expanding their customer base overseas to the 80% to 95% of foreign workers who are employed.

Due to the expanding international customer base, sales are increasing.  Due to workforce reduction and technology, profits are increasing.  Business is adapting much more quickly to the new economic situation than individuals are.  Let’s face it, most of the lost jobs are not coming back.  Business is moving on.  The economy has changed; as investors we have to change with it.

Bursting the housing bubble is a bigger hurdle to business growth than the unemployment hurdle.  The destruction of home equity has reduced the spending ability of employed Americans.  Gone are the days of using your home as an ATM machine to give you cash to spend.  Working Americans are actually having to learn to “live within their means.”

In the short term, the housing bubble bust has hurt the economy; but in the long term, living in a growth economy rather than a bubble economy will be a good thing.  Industries will shift; spending patterns will change; and priorities will realign.  Get used to it.  The future will not be like the past.  Go ahead and moan and whine and then get over it.

That’s not to say that unemployment won’t have lasting negative political and social effects.  I’m lucky; being retired, I don’t have a job to lose.  I truly feel very sorry for people who have lost their jobs.  I personally know recently-unemployed workers, and I know business owners who have had to close their businesses due to the changing economy.  Politically and socially it’s bad to have too many people unemployed.  It’s much better for society if people are able to earn a living in productive ways.  I don’t know what to do about that.  I try to live with the way things are, rather than the way I would like for them to be.

Providing jobs is not the primary goal of business.  Hiring is needed only when demand for the company’s goods or services is too great to be met by the current number of employees.  The good news is that the recent downsizing has very likely resulted in companies having the minimum number of workers to produce the current sales.  Any increase in business should result in gradually increasing employment.  But there will be a lag.  Businesses are skeptical about demand increasing very quickly, so we will initially see part-time employment increase until the “new normal” is understood.

The stock market will have ample opportunity to grow in the new economy.  In fact, if the US dollar loses value, as I expect it will, all asset values will be inflated.  This means that the dollar-value of assets will increase.  This applies to Gold, Commodities, Stocks and maybe even Real Estate.

Just because things will be different, doesn’t mean that they will be catastrophic.  It also doesn’t mean that things won’t be unsettled for a while.  I expect that it will take about six to twelve months for the “new normal” to be fully accepted and adapted to.  I expect Gold and Commodities to adapt in three to six months and Stocks in six to twelve months.

Real Estate is another story.  You need to have a job to buy a house, and 84% of US workers have steady jobs.  A declining dollar should inflate the values of Real Estate, but Real Estate is a leveraged investment.  Most people have to borrow money to buy Real Estate.  The availability and affordability of borrowed money directly affects the value of Real Estate.  Currently, mortgage rates are low, but mortgages are hard to get.  It takes a very good credit rating to get a mortgage, and larger down-payments are required.  With a declining dollar, interest rates will be higher, but banks will be more willing to lend.  Banks will want to get rid of their declining dollars and earn good interest on loans backed by Real Estate.  Therefore, the recovery of Real Estate is hard to predict.

The important point here is that for growth in Stocks, Gold and Commodities, decreasing unemployment is unnecessary.  From a cold-hearted investment perspective, the Jobless Recovery is sustainable.

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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