Thoughts from the Frontline

What Happened to the Jobs?

July 8, 2011

Choose your language

The US jobs report came out this morning, and it was simply dismal. This week we look at not only the jobs report but also “what-if” proffers for the US and global economies. There’s a lot to cover, so let’s jump in.

First, there were only 18,000 jobs created in June, the lowest since September 2010. While private employment rose by 57,000, government workers dropped by 39,000, continuing a trend as governments at all levels work to cut their budgets. Long-time readers know I think it is important to look at the direction of the revisions, and we got no help. May was revised down by 29,000 jobs and April a further down 15,000.

I saw some headlines and talking heads in the mainstream media saying the poor number was due to “seasonals,” and I just shook my head. If you are that reflexively bullish when presented with what was clearly a bad report, how can you be taken seriously? You know who you are. And then Philippa Dunne of the Liscio Report sent the following note. She is one of the best data mavens there is on jobs and employment.

“After the release, some bulls turned to that old reliable excuse – bad seasonals. According to one analysis making the rounds, had the BLS used last year's factor – computed, of course, using exactly the same concurrent technique as this year's factor – the gain would have been 221,000! (Whoever did this made a mistake by comparing the NSA and SA levels for the two months – you have to compare the over-the-month changes.) Still, if you're going to play this game, you should be consistent, and apply last year's seasonals to several months, not just one. If you do that, May's gain of 25,000 would turn into a loss of 19,000, and June's gain would be a mere 73,000, all total payrolls. In any case, why should you do that? The seasonals are recomputed every month based on recent experience and calendar quirks, and should be more aggressive in a recovery. (Hope we won't be using the trend set in the depth of the recession as the bar going forward.) Also, there is no adjustment to the headline number – the sectors are adjusted separately (96 different industries at the 3-digit NAICS level, to be precise) and the total is the sum of those components. The whole argument is bogus.”

The household survey was even worse. Total employment fell by 445,000. Full-time employment is down by 0.5% in the last year, while part-time is up 3%. David Rosenberg calls this the just-in-time labor market. The total number of unemployed rose to over 14 million. If you count the discouraged workers not in the official unemployed, the total number rises to 20.6 million, up 483,000 last month. This put the unemployment rate back up to 9.2%.

So How’s That Stimulus Thing Working Out?

We were told that the stimulus would have us down to 6.5% unemployment by now. The team at e21 has the real story:

“Back in January 2009, Christina Romer and Jared Bernstein of the Obama adminstration produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan. The estimates, along with real unemployment rates, are posted below:

If you update the graph for today’s report, you find that there is another red dot higher than the last one. The last three months have seen the unemployment rate rise (chart from e21). They further note:

“For example, there is new research that suggests that the stimulus may actually have resulted in a net loss of jobs. Regardless of the exact number of jobs lost or created, however, the fact that some economists are even arguing that it had a negative impact tells you that the stimulus may very well have been a wash overall.

“Larry Lindsey offered his own review of the stimulus this week, arguing that it failed what’s colloquially known as the Sharp Pencil Test. As he explains, ‘if you sit down and do a back of the envelope calculation of the [stimulus] program’s costs and benefits, there is no way to conjure up numbers that allow it to make sense.’ Here is more on how Lindsey applies this test to the stimulus:

“ ‘[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.’

“At minimum, the public now deserves a response from policymakers about what they have learned from 2009 and 2010 – about what actually does and does not help get the economy growing and producing more jobs.”

The small businesses that are the real drivers of employment are not participating the way they do in a normal recovery. Bill Dunkelberg, fishing buddy and the chief economist for the National Federation of Independent Business, writes me this afternoon:

“Writing about our current weak economy (Philadelphia Inquirer Currents, June 26), Mark Zandi argued that employment will improve because ‘…U.S. companies are in great financial shape’. Dr. Zandi must be referring to companies like GE which just posted profits of $17 billion (and paid no income taxes) and whose CEO is the head of President Obama’s job creation committee. This is the view in Washington and Wall Street that only thinks in terms of the “biggies” (that make large donations to re-election committees). For perspective, GE employs about 150,000 people in the U.S. Last week, over 400,000 people filed initial claims for unemployment (e.g. lost their jobs). There are 6 million firms in the U.S. that employ 1 or more workers. This includes GE, but 90% of them have fewer than 20 employees. These firms are not ‘in great financial shape’ as Dr. Zandi asserts. In a recent survey of a sample of 350,000 of them, 46% reported that profits were still falling two years into the ‘recovery’ compared to 18% reporting that earnings were improving. Firms like GE might hire more due to their good fortune, but there aren’t many of them and they don’t employ many workers anyway. It’s the small businesses that Treasury Secretary Geithner said must be taxed more to support government that provide the needed jobs, not ‘tax-free’ GE. Regulations such as the new mandatory sick leave passed by City Council are detrimental to the job creation needed by making labor more expensive to hire, a bad idea.

“Dr. Zandi also suggests that state and local governments be given more funding to prevent the predicted loss of 250,000 public sector jobs over the next 12 months, funded I guess by more debt, since the Federal government is a bit short of cash (like $1.5 trillion in deficit). ‘Ending this job loss would go a long way to lifting the job market,’ he asserts. My math says that would reduce job loss by about 5,000 per week. With monthly job loss over 400,000, this hardly makes a difference. Government employment has become bloated because governments don’t have to worry about profitability. When faced with budget problems, politicians tend to make cuts in services like libraries or police protection that hurt voters to show taxpayers why the government can’t live with less instead of cutting patronage jobs and the like whose efforts would not be missed. Government can’t create jobs, but it can create a lot of policies and taxes that prevent jobs from being created.”

I wrote last year about the studies that show that on a net job-creation basis, large businesses reduced their employment over the last two decades. Of course, there are exceptions; but on average, large businesses are not where you get new jobs.

And many of the jobs we got this last month, as few as they were, were not of the high-paying variety. Leisure and hospitality were up 34,000. The average work week was down, and earnings dropped a penny an hour. After inflation, workers are behind, year over year.

By the way, I get the unemployment thing. Today we found out that my daughter Amanda has lost her job. Sales at the place she worked were down a lot. Another two of my kids can’t get enough hours. At 17, Trey is looking for a job, but so far no luck. It’s tough out there. Let’s look at a few charts from David Rosenberg. First is the average duration of unemployment, which has risen to an all-time high.

Even worse, 44% of those unemployed have been so for at least six months, again close to an all-time high.

OK, I have to use just one more chart, which shows how bad things really are.

This Time Is Different

I have quoted at length in past letters from Ken Rogoff and Carmen Reinhart’s masterful work, This Time is Different. While the market may have been surprised by such a low jobs number, it is PRECISELY what is typical following a credit crisis, as they demonstrate in their book.

And now the Fed is done with QE2 (except that they will take the mortgage roll-off from their portfolio and use it to buy treasuries), and the fiscal authorities are going to put the brakes on government spending, or at least slow things down.

Everything is very fluid, but the headlines in today’s Wall Street Journal suggest a deal on the order of $4 trillion in on the table. I assume it will be back-loaded, but it is a start. But assume that the first year sees real spending cuts of $200 billion. That is a reduction of 1.5% in GDP. It’s that pesky old equation I keep using:

GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports

Now, the literature suggests that the effect on the economy from a reduction in G should be over within about 4 quarters, on average. But then we reduce “G” again the next year. Maybe not by as much overall, but at least by another $50-100 billion. This is going to put a real headwind in the face of economic growth for years, but we simply have to do it or we become Greece.

The economy will already be slowing down. A recession in 2012 is a real possibility if there is any type of shock coming from Europe, and what will happen there is anyone’s guess. I think most European leaders are basing their thinking more on hope than on reality. When Greece defaults there will be a domino effect; you can count on it. And you could actually see a banking crisis before we get actual sovereign defaults.

Gentle reader, you need to understand that the market does not get it. Neither in Europe nor in the US. When someone says the market has already priced in a default, go back and ask them how well the market priced in a crisis in the spring of 2008. The market doesn’t know jack.

I got a lot of internet buzz from a throwaway line in an interview on CNBC in London. I said that if the market knew what Bernanke and the leadership of the central banks talked about after their third glass of wine, the market would wet its pants. That is not to suggest I don’t think Bernanke or Trichet can hold their liquor. It means that they get the problem more than they let on in public and are simply trying to stem as much damage as they can.

Banking crises are followed by credit crises by 2-3 years. It is getting close to that time. We need 3-3.5% GDP growth in the US to really make a dent in jobs. We are not going to get it. There is nothing we can do other than Muddle Through as best we can. Prepare accordingly.

Vancouver, New York, and Maine

I am home for a few weeks. In late July I head for Vancouver to speak at the Agora Wealth Symposium. Then the next week I go to New York for a few days, before heading up with my youngest son, Trey, to Maine for the annual Shadow Fed fish fest organized by David Kotok. It is one of the highlights of my year. So many friends are there. More on that in coming weeks.

In New York I’ll be meeting with Barry Habib. We will soon be announcing a joint venture that we are both excited about. Barry launched the Mortgage Market Guide and sold it a few years ago and is ready for a new venture. As an aside, Barry is the producer of Rock of Ages, a major Broadway hit that is now being done as a movie with Tom Cruise, Catherine Zeta-Jones, Paul Giamatti, Russell Brand, and a lot of other stars. (Barry, how do I get invited to the set?)

If you want Barry’s take on housing and mortgages, he was on CNBC this morning for an in-depth interview. I am proud to be his friend and look forward to working with him. You can see it at http://video.cnbc.com/gallery/?video=3000031675 .

That’s it for this week. I have to say, this has been one of the roughest weeks emotionally and personally for me in a very long time. Nothing that is world-ending, but sometimes being Dad is tough. This is the first week in many years that I did not get my usual 30-40 hours of reading and research in. I am so far behind, but I will catch up.

And a huge thanks to Louis and Kelli Gave, who let 14 of us invade their vacation lake home in Oklahoma with 6 of my kids and their families and friends. It was a great 4th of July. And to see some of the tornado damage up close was amazing. We are so fragile; we have no idea.

Have a great week. Enjoy your friends and families this summer.

Your thinking more about the important things in life analyst,

John Mauldin

Discuss This

23 comments

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Stephen Decruz

July 17, 2011, 9:37 p.m.

To suggest that the stimulus has not created jobs defies the facts. There is an aggregate demand shortfall and the small business will not be hiring in this scenario. Small business can avoid paying higher taxes simply by setting up their business as corporations or reinvesting their profits. Tax increase for the rich is not job-killing but to address the imbalance. Why are the working and middle class paying more in taxes proportionately while the rich continues to enjoy the benefits of a civil society without paying their fair share?

Peter J Taylor

July 16, 2011, 2:56 p.m.

Thank you, David Rosenstock, for your reply to my question on July 10. I accept your answer to my example of a hypothetical transfer of school transport costs from the government to parents: i.e. that the fall in government spending will be balanced by the rise in private expenditure (synonymous with consumption), so GDP will remain the same. And the third change, the reduction in taxation, is (therefore correctly) not part of the equation. So, overall, people will be neither worse nor better off. In practice, poor parents with lots of children would feel financially squeezed, whilst people with no children would be more affluent.

Jeff Little

July 13, 2011, 4:57 p.m.

The graphs concerning unemployment duration are very interesting.  Thanks for posting them.  I think that the big reason you see the recent aberation is this is the only period of unwinding from an asset bubble.  If you look at other economies with low tax rates combined with high long-term average P/E rates, I think that you will see similar ostrich neck graphs.

The problem with the Ohio state paper is it assumes a causal relationship based on things happening at the same time.  The deficit from the previous year minus the stimulus is correlated with job growth and they reach the conclusion that low stimulus states had more growth and this was causative.

“On the other hand, employment in HELP services is 772 thousand persons lower because of
the Act. This is consistent with the raw data represented visually in Figure 5. States with weak
budget positions, after including ARRA aid, tended to have greater employment growth in the
HELP service sector.”

It would be just as easy to conclude, for example, that high HELP growth states were not as effective at getting ARRA aid.  Or there might be some other comonality between the states that would cause both effects.

To get results you can be confident of, you need a more random sample, and preferably studies in which short term results match long term trends.  There is far too much wierd stuff that can happen if you only look at the short term.

Robert Kenagy

July 12, 2011, 9:46 a.m.

John,

In this article, you appear to embrace the “Republican” position of no increase in taxes.  Virtually all economists think there should be both spending cuts and tax increases.  80% of Americans think there should be both (See David Brooks in NY Times on 7/12).  The Canadians did both in the 90’s.  Their situation was worse than ours is now.  They cut spending and raised taxes.  Why do you not support this?

Robert Kenagy

Mike Lehner

July 11, 2011, 12:42 p.m.

Like a few others, I am disappointed at your QA of Larry Lindsey’s quote.  You must have been in a rush.  He created a false comparison of the “cost” of a stimulus job by ignoring the fact that there was actual infrastructure created by the stimulus (though not as much as there should have been) rather than just being spent on salaries.

Also, if your argument against raising taxes is that it would harm the economy, then the corollary would be that lowering taxes would help the economy.  You didn’t present any discussion of the economic benefit from the stimulus tax cuts. 

I recall you state a 3:1 economic benefit of tax cuts vs a 1:1 (or less) for government spending.  So, where’s the almost $1 trillion boost to our economy from the stimulus tax cuts that we’re due? 

I have to disagree with you about raising taxes on “small business owners” who make more than $250k in taxable income per year.  With all of the deductions available in the tax code, if you can show me a struggling small business owner who has $250k in TAXABLE income, I’ll show you a small business owner who needs a new tax accountant and attorney.  The fact that is lots in this discussion is that the $250k is not gross revenue or gross income, it’s taxable income!

Anyways, I hope this is a better week for you.  It’s tough for us kids right now.

david rosenstock

July 10, 2011, 10:43 p.m.

Peter, good post.  I think in your example the government provided bus transport (G) would shift to consumption (C)—so GDP would in fact be unchanged.  Make sense?

David Rosenstock

Jeff Martin

July 10, 2011, 6:42 p.m.

The jobs are lost forever and will never come back. They needed to go. You were correct in pointing out that most of the jobs are hourly wage unskilled jobs in healthcare and services. We have become a nation of hourly workers and salesmen frantically trying to sell each other things we don’t need to make a profit and survive.  This is what deregulated capitalism has created.  We have had at least three major banking crises since Reagan deregulated the financial industry. Each time, the taxpayers have bailed them out and they have returned even more powerful, having direct influence on domestic fiscal policy. Bankers are now calling the shots and banks do not need very many humans to make money.  As movie watchers, we watched with interest at Gordon Gekko in Wall St.  Ladies and gentlemen…he was real. He and his ilk created the M&A frenzy that eliminated competition and called it productivity.  I remember being on Wall St in the early 80’s.  There was Shearson, Lehman Bros, Salomon Bros, Bear Stearns, E.F.Hutton, Dean Witter, DLJ…remember? They are all gone in the name of “efficiency”.  I worked at Shearson which became Shearson Lehman, which became Shearson Lehman Hutton and finally…Shearson Lehman Hutton, an American Express company.  Redundant employees were eliminated and then later automated or outsourced. Traders on stock and commodity exchanges have been replaced with machines that don’t need health benefits and pensions.  The passage of NAFTA and the repeal of Glass-Steagal let Pandora out of the box and created a new class of Americans…the consumers.  John, American jobs will never return because Americans are too costly and underskilled…and the powers that be like it that way.  The noise coming out of Washington from either side is just lip service.  Tax cuts do not create jobs, nor does government spending.  Competition and innovation supported by capital creates jobs. The “jobs creating” proposal to tax offshore deposits 5% if they are brought back to America is ludicrous.  The corporations will just use the funds for dividends.  We have eliminated domestic competition in all the major industries and now have 5 banks controlling 70% of all the deposits in America. A handful of health care companies control how much our health care costs. Hedge funds are running raw materials prices at the expense of the public.  Why, if corporate profits are soaring without American employees, would any company want to hire Americans? Chinese, Indonesians, Mexicans, Salvadorans and Indian workers cost far less and there are far fewer regulations in those countries.  Americans are truly unnecessary to the bottom line, and that’s what matters most of all…right?. 

Jeff Martin

Peter J Taylor

July 10, 2011, 4:24 p.m.

Dear John,
I have for a long time been puzzled by the equation GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports. Surely taxation should appear as an offset to government spending. Or does G mean NET government spending, i.e. the excess of spending over taxation?
Suppose the government changes (either up or down) the amount it spends, but changes taxation by the same amount. Why should only the change in spending have a direct effect on GDP, and the change in taxation have no effect?
To give an example, suppose the government decides to reduce its spending by making parents pay for whatever school bus transportation has hitherto been free. And they lower taxation by an equivalent amount. Government spending is reduced, but according to your equation, GDP is also reduced. Why should that be? Surely the school bus service costs the population just the same, and the children receive just the same service.
Kind regards, Peter J Taylor, UK

Don Moulton

July 10, 2011, 2:02 p.m.

Hi John,

Insightful article, but flawed on a few levels.

First, a significant part of the stimulus was tax cuts.

Second, as your charts show, most of the job losses came under Pres. Bush. Pres. Obama hasn’t been able to right the ship, but let’s separate cause from effect.

Finally, tax cuts, despite the often repeated rehtoric, does not create jobs - especially tax cuts for the wealthiest 1%.

No one hires, based on a higher or lower tax rate; we hire based on demand and don’t hire or even lay off workers based on lack of demand.

Pres. Bush had the worst 8 year job creation record of any 8 year President since WWII despite also having the lowest tax rates since WWII.

Pres. Obama, with the help of GOP strong arming, has simply followed the same game plan, with again, no job creation to speak of.

Job costs (salaries, etc.) are PRE-TAX, not post-tax. Lower taxes do not create an incentive to hire, period.

Richard Kellogg

July 10, 2011, 12:26 p.m.

The e21 Team cite a study by Conley and Dupor that claims the spending part of the 2009 stimulus actually resulted in a net loss of jobs.  People who think stimuli are a waste of money are certainly entitled to their opinion, but the suggestion that stimuli are actually destructive stretches credulity beyond all comprehension.  Citizens are not yet marching in the streets carrying torches and pitchforks and demanding more austerity.

Mark Zandi writes “Itâ??s the small businesses that Treasury Secretary Geithner said must be taxed more to support government that provide the needed jobs…”.  I was puzzled by this too until I looked closer.  Geithner was repeating the president’s desire to raise rates on those making over $250k per year, which includes about 3% of small business.

I side with Mauldin’s earlier statements that the country cannot reach sustainability with austerity alone.  It must [regrettably] include new revenues.

All-in-all this edition of “Thoughts” was a big disappointment.  It was too full of petty partisanship nonsense to be of any real value.

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