Cross-Posted at My Left Wing
On one hand, the US economy’s overall statistics are great. GDO has grown over 3% for the last 8 quarters. Unemployment stands at 5%. Inflation is contained. The economy seems to have adjusted to oil’s price increases. The recent earnings season has been a roaring success, with most companies in the S & P 500 meeting or beating expectations. In short, things look good.
However, something is restraining the financial markets. While the overall charts aren’t bad, they aren’t good either. Instead of strong uptrending patterns and movement, there is almost an almost daily fight with the bulls winning – barely. Instead of long candles, the charts are full of up 20 one day, down 12 the next candle patterns. Clearly there is some reservation on behalf of traders. So, what gives?
There are two overall macro reasons. First is oil, which is the source of energy for the economy, is rising. It currently trades in a 57-62 range. In his recent Congressional testimony, Greenspan noted the economy so far has accepted this increase well. The problem is the at some point, the economy may have problems absorbing these costs. We know this point exists; we just don’t know where.
Secondly, interest rates are rising. There is an old Wall Street adage: Don’t fight the Fed. Buy stocks when interest rates are decreasing and sell them when interest rates are decreasing. The cost of money dictates business behavior. This rule has been around for ages and still holds today.
However, these two trends do not explain the whole picture. The US economy is experiencing a fundamental shift in employment not captured by a single statistic, but which is evident from a reading of a group of statistics. Hence, it is beyond the realm of our 30-second sound bite news reporting or most “deny-side” economists. Thankfully, several adept researchers at several Federal Reserve banks have caught the change.
First, according to the Bureau of Economic Analysis, the US has lost 3.4 million high-paying jobs between 2000-2003 (the last year they have statistics). Comprising that total are:
100,000 Information and data processing jobs
200,000 Broadcast and telecommunications jobs,
205,000 Computer System Designer jobs,
2.8 million manufacturing jobs and
121,000 publishing jobs which include software.
The US economy has yet to create a sufficient number of jobs to replace those lost. While the unemployment number is 5%, this number does not capture the whole picture. The unemployment rate only counts people who have looked for work in the last 4 weeks. The number does not count disaffected workers and people who have given-up looking for a job. As a result, the labor participation rate – which measures the percentage of people employed out of the total labor force working – is still low. The labor force participation rate was 67.1% in January 2000. It currently stands at 66%.
Wage growth statistics solves this apparent contradiction in the employment numbers. If unemployment were as low as the unemployment numbers indicated, then wages would be increasing. This is simple supply and demand. Lower or constricted supply increases a commodity’s price. However, wages are not growing. According to the Bureau of Labor Statistics, the average earnings increase from 2000-2004 was 3.86%, 3.22%, 3.12%, 1.71% and 2.39% respectively. However wages have to be compared to inflation to determine the real rate of wage growth. For the same years, annual inflation was 3.4%, 2.8%, 1.6%, 2.3% and 2.7% respectively. When inflation is subtracted from wages, overall wage growth becomes .46%, .42%, 1.52%, -.59% and-.31% respectively for 2000-2004. The fact that wages have not grown indicates the labor participation rate is the correct measure of employment.
Why this drop? Back in 2003, there were several people at the Federal Reserve who wrote and/or talked about the idea of a jobless recovery. Two people – Erica L. Groshen and Simon Potter wrote a paper called Has structural Change Contributed to a Jobless Recovery? This paper provides the missing pieces explaining the overall labor situation.
The paper’s fundamental hypothesis is simple and derives from the basic concept of the business cycle. During a recession, companies lay-off workers. When the economy starts to expand, the business will hire workers to fill demand, but only if the industry is still economically viable. If however the industry is in overall decline, it won’t hire workers, and instead continue to lay-off workers. As an example, suppose we are looking at a company that makes horse carriages at a time when the auto is just starting. During a recession, both companies will lay-off workers. However, when the economy picks-up, the auto manufactures will start hiring because of increased demand, while the carriage company — which is in decline — will not hire workers.
The report concludes that several industry’s have experienced a net decline in employees during the 2001 recession and subsequent expansion. Some of these industries are electronic equipment, securities and commodities brokers, communications and air transportation and transportation services. However, there are fewer distinct winners – industries that hired employees in both the recession and expansion. The largest clear winner is nondepository institutions. However, they are a small percentage of the economy. In addition, several industries that are clear winners have not been hiring en mass. Instead, they are adding workers as needed, most likely extracting as much production from their existing workforce before adding new employees.
While the report was published in August 2003, it’s premise still holds as the labor participation rate has yet to meaningfully increase.
In summation, the US economy is in the process of restructuring. We don’t know yet who the clear winners and losers are. There is no clear dynamic new industry emerging on the horizon. However, this gives the Democrats a great opportunity. We can offer ideas for creating the industries of the 21st century. Several examples would be alternate energy, stem cell research and applications and US infrastructure upgrades. However, he have to act and start to talk about these issues.
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