Posted At : August 24, 2009 1:14 PM
Market Update – Optimists stay in control despite the stink
The issues I mention above are important because what is critical for a recovery is for people to have jobs so they can spend money and for people to spend money (consumer spending). What this shows is that the consumer is not spending nor will they. The world seems surprised by this, but in reality the consumer is DEAD. All the things I have been warning about in past issues still ring true. The demographics of the country are pointing to less spending and more savings by Americans. The housing and credit card piggy banks are empty, the retirement and savings accounts are decimated and job security is gone. The consumer accounts for over 70%% of GDP, so without spending, a firm recovery doesn’t have a chance in hell
The unemployment numbers are some of the most seriously revised numbers in all of government data. The first monthly estimate is notoriously imprecise. Why people make investment decisions based on this release is beyond me. As I mention continuously, because of seasonal adjustment factors, the unemployment numbers understate job losses in a recession and also understate job gains in a recovery. About the most we can get from the current data is the broad trend. Admittedly, the trend is getting better, but we are still in a hole and no one has stopped digging.
What we can see is that we are down over 7 million jobs since the beginning of 2008! We have roughly eliminated the job growth of the last five years. And that does not take into account the 150,000 new jobs that are needed each month just to maintain the employment rate because of the increase in population. It took 55 months once the 2001 recession was officially over to get back to the previous employment peak. That is 4.5 years, gentle reader, and we are further down now and faced with massive deleveraging. It is going to take a lot longer this time. By the middle of next year (2010), when we will likely finally hit an unemployment bottom, we will be down close to 8 million jobs, wiping out all the jobs created since the middle of 2004. Unemployment is likely to be more than 10%, unless they keep playing games with the number.
Let’s make the assumption that the part-time workers want to go to full-time (which they say they do). Typically employers will increase the hours of part-time employees before adding new workers. That will be a major drag on potential job growth. It is the equivalent of creating at least 4 million jobs, except that no new jobs are created. Plus, those who want jobs but are not looking will come back into the market if jobs are available. That adds another 2 million. Now we are seeing the need for 23 million new jobs in five years, to get back to the “Old Normal.” That is an increase of 15% total employment from today’s levels over the next five years. That type of jobs growth will only happen with significant economic growth. Normally, you should expect the economy to rebound to at least 3% trend GDP growth. That is what has happened historically.
On average, and VERY roughly, you would think you would need a minimum of 15% real GDP growth over five years to get us back to what we think of as acceptable levels of unemployment. Actually you would need more, as productivity growth lessens the need for more workers. Oh, and add in the Boomer-generation workers who are not going to retire because they now cannot afford to.
In reality we will be lucky to have 10%. Unemployment will be rising for at least another two quarters and probably through the middle of next year. That should not surprise us too much, as unemployment kept rising for almost two years after the last recession, which many dubbed “the jobless recovery.”
The consumer’s sense shear fright is shared across the country including big executives across the nation. Chief Executive Magazine’s CEO Index, the nation’s only monthly CEO Index, dropped to 63 in July, after showing gradual improvement. All components of the index are down, with Employment Confidence taking the largest hit. Pessimism over employment is reaching new heights. The Employment Confidence Index declined 25 percent with 57 percent of CEOs expecting continued decrease in employment next quarter. Over 95 percent rate the current employment environment as bad—the highest level for 2009. Less than 5 percent think employment conditions are normal and virtually no one (0.4 percent) thinks they are good. If people don’t think they’ll have a job, they’re not parting with their paychecks.
This all continues to bring into question the durability of this so called recovery. Just like believing in Santa requires just believing, people believe in this recovery simply because that is what usually happens after a recession. The problem is that few are old enough to recognize that this is a generational cycle, and not the same growth cycle most of us are used to in our lifetime. For most of our lives and therefore memory, the economy has been driven by a hungry baby boomer in peak spending mode. Companies can only cut costs so much to increase profitability. At some point they need top line sales. Sorry those days are gone. There is no way to know what the catalyst will be to bring this into perspective. I have often speculated that it could be the European banking system that is in worse shape than ours. (See my July 22nd edition – http://keithspringer.com/weekly-commentary-072209.htm). Interestingly, both Germany and Japan issued warnings on Wednesday about their respective economic recoveries. They cautioned that the positive GDP growth figures reported for the 2nd quarter (Germany +0.3% and Japan +3.7%) may not be sustainable. Both indicated that stimulus spending prompted the positive economic growth and that in each case their economies may not have the staying power to keep growing. This suggests that a sustained global economic recovery may not be imminent and aggregate demand may remain weak for some time. For now, pray for peace but prepare for war.
Regards – Keith Springer