Labor’s Dwindling Share of the Economy and the Crisis of Advanced Capitalism

By Guest Author

Charles Hugh Smith publishes Foreclosure Crisis Weekly, dedicated to documenting the often-amazing foreclosure crisis.

All attempts to reform the Status Quo of advanced finance-based Capitalism will fail, as its historically inevitable crisis is finally at hand.It is self-evident that conventional economics has failed, completely, utterly and totally. The two competing cargo cults of tax cuts/trickle-down and borrow-and-spend stimulus coupled with monetary manipulation have failed to restore advanced Capitalism’s vigor, not just in America, but everywhere.

Conventional econometrics is clueless about the root causes of advanced finance-based Capitalism’s ills. To really understand what’s going on beneath the surface, we must return to “discredited” non-quant models of economics: for example, Marx’s critique of monopoly/cartel, finance-dominated advanced Capitalism. (“Capitalism” is capitalized here to distinguish it from “primitive capitalism.”)

All those fancy equation-based econometrics that supposedly model human behavior have failed because they are fundamentally and purposefully superficial: they are incapable of understanding deeper dynamics that don’t fit the ruling political-economy conventions.

Marx predicted a crisis of advanced Capitalism based on the rising imbalance of capital and labor in finance-dominated Capitalism. The basic Marxist context is history, not morality, and so the Marxist critique is light on blaming the rich for Capitalism’s core ills and heavy on the inevitability of larger historic forces.

In other words, what’s wrong with advanced Capitalism cannot be fixed by taxing the super-wealthy at the same rate we self-employed pay (40% basic Federal rate), though that would certainly be a fair and just step in the right direction. Advanced Capitalism’s ills run much deeper than superficial “class warfare” models in which the “solution” is to redistribute wealth from the top down the pyramid.

This redistributive “socialist” flavor of advanced Capitalism has bought time–the crisis of the 1930s was staved off for 70 years–but now redistribution as a saving strategy has reached its limits.

The other political-economic strategy that has been used to stave off the crisis is consumer credit: as labor’s share of the economy shrank, the middle class workforce was given massive quantities of credit, based on their earnings and on the equity of the family home.

The credit model of boosting consumption has also run its course, though the Keynesian cargo cult is still busily painting radio dials on rocks and hectoring the Economic Gods to unleash their magic “animal spirits.”

The third strategy to stave off advanced Capitalism’s crisis was to greatly expand the workforce to compensate for labor’s dwindling share of the economy. Simply put, Mom, Aunty and Sis entered the workforce en masse in the 1970s, and their earning power boosted household income enough to maintain consumption.

That gambit has run out of steam as the labor force is now shrinking for structural reasons. Though the system is eager to put Grandpa to work as a Wal-Mart greeter and Grandma to work as a retail clerk, the total number of jobs is declining, and so older workers are simply displacing younger workers. The gambit of expanding the workforce to keep finance-based Capitalism going has entered the final end-game. Moving the pawns of tax rates and fiscal stimulus around may be distracting, but neither will fix advanced finance-based Capitalism’s basic ills.

The fourth and final strategy was to exploit speculation’s ability to create phantom wealth. By unleashing the dogs of speculation via a vast expansion of credit, leverage and proxies for actual capital, i.e. derivatives, advanced finance-based Capitalism enabled the expansion of serial speculative bubbles, each of whcih created the illusion of systemically rising wealth, and each of which led to a rise in consumption as the “winners” in the speculative game spent some of their gains.

This strategy has also run its course, as the public at last grasps that bubbles must burst and the aftermath damages everyone, not just those who gambled and lost.

Two other essential conditions have also peaked: cheap energy and globalization, which opened vast new markets for both cheap labor and new consumption. As inflation explodes in China and its speculative credit-based bubbles burst, and as oil exporters increasingly consume their resources domestically, those drivers are now reversing.

Advanced Capitalism is broken for reasons conventional economics cannot dare recognize, because it would spell the end of its intellectual dominance and the end of the entire post-war political-economic paradigm that feeds it.

Let’s look at some charts to see what conventional economists must deny to keep their jobs.

Take a look at this chart. What reality does it reflect? A failure to cut taxes enough? A failure to print enough money or extend enough credit? No. What it reflects is labor’s dwindling share of the economy.

The structural reality is that employment is declining:

Meanwhile, after-tax corporate profits have steadily climbed to nearly 10% of the entire national income:

Note the recent rise of finance-based profits:

This chart leaves no doubt that the engines of the past 30 years “growth” and “prosperity” have been credit and credit-fueled speculation:

If we look at disposable income, we find that direct government transfers have masked the systemic erosion of labor’s earnings and employment:

By at least some measures, the top 1% are paying a greater share of total taxes than they were 20 years ago, which suggests that “tax the rich will solve everything” stopgaps have limited purchase on the deeper structural ills of advanced finance-based Capitalism.

Marx identified two critical drivers of advanced Capitalism’s final crisis:

1. Global Capital has the means and incentive to keep labor in surplus and capital scarce, which means that capital has pricing power and labor has none. The inevitable result of this is that wages, as measured in purchasing power, fall while the returns earned on capital rise.

This establishes a self-reinforcing, inevitably destructive dynamic: once labor’s share of the national income falls below a critical threshold, labor can no longer consume enough or borrow enough to keep the economy afloat with its cash and credit-based consumption.

We are at that point, but massive Federal borrowing and transfers are masking that reality for the time being.

2. The dual forces of competition and technology inevitably drive down the labor component of all manufactured goods and technology-based services. Mechanization, robotics and software have lowered the labor component of everything from running shoes to computer chips from $20 per item to $2 per item, and that process cannot be reversed. While the wage paid to the workforce designing and manufacturing the products and providing the services may actually rise, the slice of revenues given over to all labor continues shrinking.

This is what I have constantly referred to (using Jeremy Rifkin’s excellent phrase) as “the end of work.”

Put another way: the return on capital invested in techology greatly exceeds the return on labor. Industries and enterprises which fail to leverage capital invested in technology that lowers the labor component of their good/service eventually undergo rapid and inevitable creative destruction.

We are about to witness this creative destruction in the labor-heavy industries of government, education and healthcare.

Marx’s genius was to recognize the historical inevitability of these internal forces within advanced Capitalism. He also recognized the inevitability of finance-capital’s dominance of industrial capital–something we have witnessed in full flower over the past 30 years.

Finance capital now dominates not just industrial capital but the machinery of governance, rendering real reform impossible. Instead, the Status Quo delivers up simulacrum “reform” which change nothing but the packaging of the Central State/Cartel Capitalism’s exploitation and predation.

Add all this up and you have to conclude the final crisis of finance-based advanced Capitalism is finally at hand. All the “fixes” that extended its run over the past 70 years have run their course. Life will go on, of course, after the Status Quo devolves, and in my view, ridding the globe of financial predation and parasitism will be a positive step forward.

The real solution is to understand advanced finance-based global Capitalism will unravel as a result of the internal dynamics described above, and be replaced with an economic and political Localism that I describe in my new book An Unconventional Guide to Investing in Troubled Times.I don’t claim these ideas are unique to me; many others have described the same dynamics and historical trends.

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The American Employment Dream

by Guest Author John Mauldin

I wrote about a year ago about how difficult it was going to be to really bring unemployment down. Rather than go back and replay that piece, I am going to pass on a note that my friend Barry Habib sent me today, which is quite sobering, and then add my thoughts. Quoting:

“A healthy employment market is the key to a strong economy. The housing market, along with many other important sectors of our economy, is highly dependent on people feeling confident in their ability to find work. But with the rate of unemployment above 9% and the economy sputtering to recover, everyone is asking how and when will the employment situation improve? This economic lynchpin is a very hot topic, which is also a critical element of many political, economic proposals. But while promising or estimating a decline in the unemployment rate may sound good, when the actual numbers are looked at more closely, realistically, and held to the light of historical performance, the forecasted declines may be far more difficult to achieve.
“For almost 40 years, the average rate of unemployment was below 6%. But the latest recession has pushed the rate far above what had been considered “normal”. So will we get back to the “normal” levels we have been accustomed to? I don’t see that happening for at least a long while. Let’s look at some data.

“There are about 311 Million people in the US. Our natural population growth rate, which compares births to deaths, is 0.6% per year. Our overall growth rate, which adds in migration, is 0.9% per year. There is currently a little less than half of the total population in the workforce, or about 153 Million people. So a 10% rate of unemployment would amount to about 15.3 million people wanting to find work. These factors create the need for job creations that will keep pace with the growing workforce so that the rate of unemployment can at least remain stable. How many jobs need to be created to absorb the growing workforce? About 115,000 per month. This calculation takes the current work force and overall growth rate into account. Therefore, the US must create 115,000 jobs each month just to keep pace!

“These numbers also tell us that if we want to reduce the rate of unemployment by 1%, there must be about 1.53 million jobs created. But remember that our population is also growing. That means young men and women are entering the workforce every day. And the positive migration causes more people seeking employment. During the last decade, there have been two stock market tumbles and a housing crash. This has adversely changed many previous plans to retire, and causing individuals to remain in the workforce longer than they may have originally planned. And if we want to see a reduction in the unemployment rate, we will need to see job creations over and above 115,000 per month. Therefore, targeting or projecting a 1% decline in the rate of unemployment requires 1.53 million jobs created plus 115,000 jobs per month for as long as it takes to achieve the target.

“In order to calculate this correctly, we need to factor in the time frame that this target is being projected over. For example, if the target is one year, then the 1.53 million jobs would be divided by 12 months, or about 125,000 per month. We then add this to the 115,000 needed to keep pace, which brings the total to a lofty 240,000 jobs per month for 12 months average. If the target is for a drop in unemployment by 2% in three years, the total jobs needed to be created are 3.06 Million, divided by 36 months – or about 85,000 jobs per month, plus the 115,000 needed to keep pace with population growth. This means we would have to add and average of 200,000 jobs per month for 3 years. And when we start to look at historical performance, we begin to see just how hard it is to accomplish this.

“For the record, I understand that demographics from 50 years ago are different, as well as different circumstances and moving targets. It’s true we can’t create an exact duplicate set of conditions. And I also understand that as the population grows, the 115,000 jobs needed each month will compound over time. That said, I am keeping it a bit simple so we can illustrate the concept.

“I went back 50-years on the BLS site and found some very interesting data. The best year for job gains was 1978, when the US added an average of 356,000 per month. Best decade was the 1990’s, with 181,000 average monthly gains During the past 50-years the average gains per month were only 124,000. The worst decade was the 2000’s, which actually saw monthly job losses that averaged 10,000 per month.

“We often hear projections on reaching a lower level of unemployment within a certain time frame. Let’s look at a chart to see how many jobs it would take to reduce the current 9.2% rate to a lower level over some different periods of time.

“The colors on the chart help us see how likely this scenario may be. For example, the numbers in the red boxes indicate that this has never been done before during the time frame desired. Green boxes indicate that this is close to a historical average. Blue boxes are an optimistic, but achievable goal. Grey boxes have numbers that have been reached in the past, but very rarely. The yellow box indicates that this has happened only once before – and that is over 50 years of data…meaning a very slim 2% chance.

“We often hear of a return to a 6% unemployment rate. Well if the goal is to do this in 4 years, then the US would need to create just under 250,000 jobs per month on average during this period. There are 47 rolling 4 year periods during the past 50 years. For example 1961 – 1964 is one. Then 1962 – 1965 is the next, and so on. During this time, a level above 250,000 jobs per month average for a 4 year rolling period only happened three times. There were a few more times when the numbers were close, but the chance of this happening was less than 10%. If history is a guide, the promises and projections we have been hearing, will have a very low probability of becoming a reality.

“History tells us that bringing unemployment down to 8% over 4 years is just about 50/50. This is very worrisome. And back to our earlier example of bringing the rate down 2% in 3 years – The 200,000 monthly job gains needed during a 3 year period of time has about a one in three chance of happening, according to the historic data.

“Let’s look at the total needed to get to 7% unemployment in 5 years, or about 171,000 jobs per month average. There are 46 rolling 5 year periods during the past 50 years. There were 17 times where the creations were above the number needed to reach the goal. That is just a little better than a one in three chance. Not very good odds, and worse – this is what many projections are based upon.

“Job creations need to be the central focus of our leaders. Small Businesses create so many of these jobs and should be given the tools to help them do this.”

OK, John here. The times Barry talks about, of large job creation, were during periods of either high innovation or significant home and infrastructure building and increasing leverage. That is just not in the cards now. It requires an economy rocking and rolling north of 4% GDP growth. We are barely at 2%. In May, total state payrolls (the data came out today) were down 64,000; in June they were up 65,200, averaging out to +1,200 for the two months combined.

We keep hearing about what the government should do to create jobs. And the reality is that it can do precious little. Private businesses create jobs, and nearly all net new jobs for the last two decades have come from start-up businesses. What government can do is create an environment that encourages new businesses, get rid of red tape (especially in biotech, where the FDA is mired in the 1980s!), stop creating even more rules that make it costly for new businesses to hire, and so on. I could go on, but the fact is, we are in for a rather long period of higher-than-comfortable unemployment. And that means lower tax revenues and a more difficult economy.

Employment is a key element in the American Dream. What we find ourselves in is more like a nightmare.

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2 Million 99ers Scream Hard Recovery for The Jobless

By EconMatters

Scanning the news headlines, the hits seem to just keep on coming on the jobs front. The nationwide unemployment rate increase to 9.2% from 9.1% over the month. The unemployment rate also increased in 28 out of 50 states in June. California, Florida and Nevada — the three states that were hit hard by the housing bubble — all had unemployment rates still well over 10%.

The New 99ers

The more disturbing numbers are coming from the long-term unemployment. Nationally, the average duration of jobless in America shot up to 39.9 weeks as of June, or about 10 months, which is a record high since the BLS started tracking the data in 1948.

Chart Source: Center on Budget and Policy Priorities

A year after the official end of the recession, the percentage of the long term unemployed (out of work for 27 weeks or more) now stood at 44.4% (or 6.3 million people) of the total jobless, up from the 43.1% level last June. Those out of work for a year or longer jumped to around 4.4 million, or 30.3% of all unemployed.

Moreover, more than two million (2,039,000) Americans (over 14% of the unemployed, up from 9% in 2010) have been out of work for 99 weeks or longer. Huffing Post reported that this is the first time since the 99 week statistic has been tracked by the BLS that it has exceeded the two million mark.

Low Odds Landing a Job

A recent BLS study noted that the chance that a person who had been unemployed for less than 5 weeks would become employed within a month was about 30% in 2010. For those unemployed 27 weeks or more, that probability dropped drastically to only 10%. Furthermore, 11% of the job seekers took a year or more to land another job in 2010, a huge leap from 3% in 2007.

Chart Source: WSJ.com

Nearly 5 Job Seekers For Every Opening

The elevated long-term unemployment could be partly attributed to the fact that there are 4.7 unemployed workers in May for every job available, i.e. 13.9 million jobless competing for 3.0 million job openings. The ratio was the same as in April and has never risen above 4-to-1 for nearly 2.5 years, whereas in the 2001 recession, the ratio never exceeded 2.8-to-1, according to the Economic Policy Institute.

How Many New Jobs Does the U.S. Need?

Brooking Institute estimates the June “job gap” is at 12.3 million jobs, up 150,000 jobs from May. (Job gap represents the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while absorbing the 125,000 people who enter the labor force each month.)

Based on that job gap estimate and historical trend in previous recession-to-recovery cycles, assuming 208,000 new jobs per month (best average rate in the 2000’s), it will take 12 years or until October 2023 to close the job gap.

Chart Source: Brooking Institute

A separate estimate done by McKinsey says in a high-growth scenario, 21 million total new jobs or 187,000 jobs per month are needed for U.S. unemployment rate to fall to 5% by 2020.

Over the next year, if the labor participation rate remains at 64.1% (which is at almost 27-year low), then 95,000 new jobs per month will be needed just to keep the unemployment rate constant, based on the estimate by Calculated Risk.

New Jobs - Trending in the Wrong Direction

However, the economy has fallen far short of even these conservative estimates. In the first half of 2011, US employers added an average of 126,100 jobs per month, well below the rate of past recessionary cycles, while the month-on-month trend is going downwards with only 18,000 new jobs added in June, followed by 25,000 created in May.

Chart Source: Center on Budget and Policy Priorities


Chart Source: Center on Budget and Policy Priorities

A Self-fulfilling & Perpetuating Cycle

With the current pace of job creations, the long-term unemployment is likely to remain elevated thus becoming a self-fulfilling perpetuating cycle, since the longer a worker is out of the workforce, the more his/her skills and knowledge start to deteriorate and eventually become obsolete.

Some call the long-term unemployment the newest form of workforce discrimination as employers tend to favor job candidates already have a job. So, the reality is that the likelihood of those out of a job for a long period of time becoming employable again tends to diminish over time when competing with plenty of other candidates albeit not as experienced, but with more up-to-date skills, and on a lower pay scale.

Eventually this troubling trend could result in one or more of the following:

• A prolonged and elevated unemployment rate
• Mismatch of jobs and skill when they are forced to take jobs for which they are overqualified
• Permanent productivity loss due to labor under-utilization
• Higher government expenses if jobless workers turn to Social Security disability or other welfare programs to supplement income.

Benefit System Not The Whole Picture

Some economists have argued the existing benefit system is too generous and makes Americans too dependent on social services. However, considering the loss of self-esteem and the stress involved, it seems unlikely that there are that many working people who would purposely stay jobless just to stretch out the unemployment benefit.

Also it is reasonable that some Middle Americans, after years of paying a third of every penny earned into the social security, and other related programs, are counting on the safety net to bridge the income gap during the harder times such as losing a job or retirement.

No Amount of QE Could Fix This

The current unemployment situation is a structural rather than a cyclical issue, which means no amount of Fed’s QE could make much of a difference.

It will take a concentrated effort from the policy makers to ensure clear and business-friendly regulations, investment incentives and education programs to keep the nation’s workforce internationally competitive, while reducing the potential imbalance of the skill gap.

Meanwhile, 'shortcuts' into the jobless and senior benefit programs will not address the root cause that has got the nation to the current state of debt and deficit in the first place.

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Number of the Week: 5% Unemployment Could Be Over a Decade Away

By Justin Lahart

162: Number of months it would take at this year’s pace of job growth for unemployment rate to fall to 5%.

U.S. employers have added 757,000 jobs to their payrolls in the first half of this year. That actually wouldn’t be so bad if there weren’t so many people out of work. The June unemployment rate of 9.2% was well above the 5% it logged in December 2007, when the recession got under way.

What would it take to get the unemployment rate back down to 5%? Much stronger growth in jobs — or a whole lot of time. Here’s a back-of-the-envelope calculation:

The unemployment rate, based on a Labor Department survey of households, is the share of the work force (people with jobs plus people seeking jobs) who are unemployed. Out of a workforce of 153.4 million people, there were 14.1 million unemployed in June.

The Labor Department’s payroll figures are based on a separate “establishment” survey of employers that doesn’t include some workers, like farmhands, included in the household tally. To get around this, assume employment in the household survey increases at the same rate as employment in the employer survey did in the first half of 2011. That implies a gain of 1.2%, or about 1.6 million employed, over the next year.

Next, we have to factor in labor force growth. If we assume that it grows at the same pace as the Census projects the working age population – people aged 16 and over – will increase by about 1.4 million people next year. With employment growing just a smidge faster than the labor force, then, the unemployment rate would still be a disappointingly high 8.9% in June 2012. The October 2012 unemployment rate — the last one we’ll see before Election Day — it would edge down to 8.8%. And it wouldn’t reach 5% until December 2024.

There are caveats on our envelope. We only have a rough sense of how fast the population is going to grow. We don’t know how much of the population will want to work — plenty of people who dropped out of the labor force during the recession will probably come back as things improve, but an aging population is also pushing more people out of the job market. History says there will be at least one recession sometime in the next 10 years, which will knock employment lower.

But while it’s possible to fudge the calculation in one direction or the other, there’s no way to make this year’s jobs growth look anywhere close to adequate.

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June's Abysmal Jobs Report is Just the Beginning

By Kerri Shannon

The June jobs report was abysmal - bud sadly it's just the beginning.

After just a few months of modest, stimulus-induced improvement the jobs market is again sliding backwards into a "new normal" characterized by even higher rates of unemployment.

"Unfortunately, I expect chronic high unemployment to be with us for years, and to borrow a phrase from Bill Gross of PIMCO, that's the real ‘new normal,'" said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

The dismal job growth boosted the unemployment rate to 9.2% in June from 9.1% the month prior. The labor force declined by 270,000, and the total amount of people out of work, including those who have stopped looking, is up to 16.2%, from 15.8% the month before.

"It is about as bad as anyone could imagine," Nigel Gault, chief U.S. economist for IHS Global Insight, told MarketWatch. "On face value it does suggest we are grinding to a halt," he said.

Indeed, the meager 18,000 jobs added in June actually led some analysts to question the report's accuracy.

"At first, when I heard it, I thought maybe they had announced the wrong numbers, they were so bad," Robert Brusca of Fact and Opinion Economics told CNN.

Economists had expected an increase of 125,000 jobs, just enough the economy needs to compensate for population growth.

Worse yet, May and April job numbers were revised to show results that were even worse than previously reported. The May gain of 54,000 jobs was lowered to 25,000, and the number of jobs added in April fell to 217,000 from 232,000.

"You look at the charts for private sector growth and you could see we were building a nice, steady crescendo," Brusca said. "All of a sudden the bottom fell out!"

The total number of unemployed workers who are actively looking for work is now 14.1 million, with 6.3 million out of work for six months or more.

Some economists had high hopes for the June jobs report, since alternate measures of employment statistics had shown promise. The ADP payrolls report last Thursday showed 157,000 private-sector jobs had been added.

But according to the Labor Department the private sector added just 54,000 jobs, and that gain was offset by a loss of 39,000 government jobs.

No More Jobs to Give

Private-sector employees account for 70% of the workforce. And as more government jobs are cut, private employment won't be able to bolster job numbers since it's experiencing a long-term slowdown of its own.

The new problem facing the workforce is not that U.S. companies don't have money to hire, it's that they don't need as many workers. Businesses are learning to survive with fewer employees, relying more on increased productivity and efficiency. When companies do have enough cash to spend, they put it toward new technology or M&A activity instead of hiring.

Companies have been regaining profitability, but the increase is not mirrored in the labor market, widening the gap between capital spending and employment.

"Today companies are producing more goods and services than ever before," said Bernard Baumohl, chief global economist at The Economic Outlook Group. "The GDP now is bigger than it ever has been before. And the economy is able to do that with 7 million fewer workers. If we can do so much with so much less, where is the incentive to hire?"

A Bank of America Merrill Lynch report released in March stated inventory rebuilding, low borrowing costs and equipment tax breaks had encouraged companies to spend - not hire.

And the companies that are hiring aren't doing so in the United States. They're looking elsewhere.

"America's stubbornly high unemployment rate is not likely to drop much in the future because - among other reasons - the biggest employers in this country have been exporting jobs overseas," said Money Morning Contributing Editor Shah Gilani. "General Electric Co. (NYSE: GE), Caterpillar Inc. (NYSE: CAT), and Cisco Systems Inc. (Nasdaq: CSCO), are just a few of the U.S. stalwarts that in the past decade have expanded their overseas operations at the expense of U.S. employment."

Jeffrey Immelt, GE's chief executive, told The Wall Street Journal that this shift doesn't reflect a relentless search for the lowest wages, but instead a search for active consumers.

"We've globalized around markets, not cheap labor," said Immelt. "The era of globalization around cheap labor is over," he said in a speech in Washington this spring. "Today we go to Brazil, we go to China, we go to India, because that's where the customers are."

What Investors Need to Watch

As the U.S. job market continues to disappoint, and U.S. companies shift their business focus to overseas markets, investors need to watch where the money goes.

"It doesn't take more than a quick glance to see that the capital flowing out of the United States and into other countries has been very beneficial for a lot of corporations," said Gilani. "Those are the corporations whose shares you should be buying."

Some of the companies with the best opportunities are those that invest in foreign consumer growth, as the United States continues to struggle with high unemployment and a rocky recovery. Netflix Inc. (Nasdaq: NFLX) is one of the latest companies to charge into emerging markets, announcing last week it will start service in 43 countries in Latin America and the Caribbean.

"Continue to buy global growth and global income because the U.S. is holding things back even as other markets with adult supervision charge ahead," said Money Morning's Fitz-Gerald.

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What Happened to the Jobs?

By John Mauldin

So How’s That Stimulus Thing Working Out?
This Time Is Different
Vancouver, New York, and Maine

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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 4^th 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.

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Unemployment: It’s More Than A “Soft Patch”

By Jeff Harding

The fear brought about by today’s employment report is almost palpable. Reports express “surprise,” ”shock,” and “disappointment” at the news that employers only added a net 18,000 jobs in June, the slowest pace in nine months, and that the unemployment rate increased to 9.2%, the highest level since December 2010.

This is not a surprise to Daily Capitalist readers as we have been beating the stagnation-inflation drum for quite a while now. Our conclusion is that this economic slowdown as measured by current data is not a “soft patch” but rather a systemic decline of economic activity due to fundamental weaknesses. We are surprised that others can’t see what we see.

But first, the numbers.

The private sector added only 57,000 jobs after a 73,000 advance in May. Offsetting the private gains were a loss of 39,000 government jobs (along with the gnashing of economists’ teeth). The April and May, 2011 report revisions were also negative, shaving off another 44,000 jobs from prior gains.

Here are the highlights from the BLS report:

Within professional and business services, employment in professional and technical services increased in June (+24,000). This industry has added 245,000 jobs since a recent low in March 2010. Employment in temporary help services changed little over the month and has shown little movement on net so far this year.

Health care employment continued to trend up in June (+14,000), with the largest gain in ambulatory health care services. Over the prior 12 months, health care had added an average of 24,000 jobs per month.

In June, employment in mining rose by 8,000, with most of the gain occurring in support activities for mining. Employment in mining has increased by 128,000 since a recent low in October 2009.

Employment in leisure and hospitality edged up (+34,000) in June and has grown by 279,000 since a recent low in January 2010. …

Manufacturing employment changed little in June. Following gains totaling 164,000 between November 2010 and April 2011, employment in this industry has been flat for the past 2 months. In June, job gains in fabricated metal products (+8,000) were partially offset by a loss in wood products (-5,000).

Construction employment was essentially unchanged in June. After having fallen sharply during the 2007-09 period, employment in construction has shown little movement on net since early 2010.

Wages and work week hours fell as well; especially disappointing was the manufacturing sector:

The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour to 34.3 hours in June. The manufacturing workweek for all employees decreased by 0.3 hour to 40.3 hours over the month; factory overtime edged down by 0.1 hour to 3.1 hours.
In June, average hourly earnings for all employees on private nonfarm payrolls decreased by 1 cent to $22.99. Over the past 12 months, average hourly earnings have increased by 1.9 percent.

There are 14.1 million Americans who can’t get a job. Part-time workers wanting full-time jobs was unchanged at 8.6 million. The number of discouraged worker was 982,000. Since March an additional 545,000 unemployed workers have been added. The number of long-term unemployed (those jobless for 27 weeks and over) was essentially unchanged over the month at 6.3 million, or 44.4 percent of the unemployed. I also noticed in the report that part-time employment has flattened out as well. This fits in with the National Federation of Independent Business’s reports on employer negativity. If there was any hiring it would be part-timers.

Here is the U-6 chart, the broadest index of unemployment:

Warren Buffet says we have nothing to worry about. “How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.” It is interesting how Buffet has positioned himself as everyone’s favorite uncle, always urging us to not worry. Despite his soothing palliative, I see negative indicators, and I worry.

The further flattening-to-declining employment trend is consistent with our belief that we are in a stagflationary economy, where growth will be flat-to-negative until the real estate excesses and its related debt and credit issues have been resolved. 

It also tips the odds more in favor of another round of quantitative easing that we are projecting to occur well before the November, 2012 elections. As long as unemployment remains high and economic activity remains no better than flat there will be pressure on the Fed to meet its full employment mandate. QE is the only trick left in their bag. That will lead to further price inflation, a shot in the arm for the financial markets, but it will not lead to a boom in industrial activity and the estimated 250,000 new jobs a month that must be created over the next five years to create “full employment.”

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The Real Unemployment Scandal?

by Leo Kolivakis

Via Pension Pulse.

Discussing the latest US jobs report, Greg Ip of The Economist comments on jobless agonistes:

Hopes had risen in the past week that America’s economic soft patch was ending. They have just been doused with a bucket of cold water. The job market showed further deterioration in June from May, the government reported today. The number of non-farm jobs rose a meager 18,000, lower even than May’s 25,000 number (itself revised down from the original estimate). The two months together mark a dramatic deceleration from the previous three when payroll growth averaged 215,000 per month.

The unemployment rate, meanwhile, rose for the fourth consecutive month to 9.2%, from 9.1% in May. It was 8.8% in March. The economic recovery celebrated (if you could call it that) its second anniversary on July 1st, and in that time the unemployment rate has moved a lot while ending up almost exactly where it began. America has made almost no progress closing the output gap opened up by the recession. The U-6 unemployment rate, which includes people who have given up looking for jobs and part timers who want full time work, shot up to 16.2% from 15.8% and the average duration of unemployment hit a new high of 39.9 weeks. More women than men lost jobs. Indeed, since the recovery began, women have fared worse than men, a reversal of the pattern during the recession, as a new Pew study documents. Still, the male unemployment rate rose more last month than the female rate.

Digging deeper, the details grow worse. Hourly wages failed to rise and the average work week shrank slightly—bad news for income and thus purchasing power. The survey of households, from which the unemployment rate is drawn, shows a much bigger plunge in employment, at 445,000, than the payroll survey. The household survey is less reliable but is still a useful check. It tells us the payroll report is not understating the strength of the job market.

There is no good news in this report; in the category of "could have been worse," private sector job growth was better than the overall total, at 57,000 last month. Public employment fell, for the eighth consecutive month, led by more layoffs by state and local governments.

The best explanation for the sharp slowdown in the jobs market is the confluence of bad luck that hit the economy this spring: a sharp increase in petrol prices, a series of natural disasters, and the Japanese tsunami and earthquake that interrupted supply chains in electronics, automobiles and other industries. Most of these temporary restraints have begun to lift. The weather is back to normal, petrol prices are down 10% (nearly 40 cents per gallon) from their peak, and Japan’s disruptions are ending. Automobile production schedules are ramping up and the Institute of Supply Management found that factory activity improved from May to June.

Manufacturing employment rose last month, albeit by only 6,000. Even Greece seems, yet again, to have muddled through its latest confidence crisis (but keep your eyes on much bigger Italy).

In all likelihood, the employment data will improve in coming months as consumer purchasing power and business spirits recover from the fuel price surge. Yet as we argue in an article in this week’s issue of The Economist, there is more to the disappointing trajectory of the recovery than these temporary restraints. America has only just begun to deleverage and a McKinsey study has found that comparable episodes in history have been accompanied by anemic growth and often a return to recession. While America probably won’t fall back into recession absent some new shock, its workers should get used to stop-start growth punctuated with disappointments and soft patches. Americans are not alone in this; Britain has experienced similar disappointments and Spain’s outlook is even more anemic. Both share America’s pre-existing condition of vastly overstretched household balance sheets and the opportunistic infection of exploding government debt.

While most of Europe is ahead of America in implementing plans to arrest the rise in government debt as a share of GDP, America is just beginning. In Washington, the mood surrounding negotiations over an increase in the statutory debt limit took a turn for the better this week as Republicans signaled flexibility on taxes and the Democrats did likewise on entitlements. This may be good news politically but it is ambiguous, and possibly bad, economically, if the final deal front-loads, rather than back-loads, the pain. The steady bleed of public sector jobs shows state and local government austerity is already weighing heavily. Federal fiscal policy is scheduled to tighten in January when a temporary investment tax credit and payroll tax cut expire. Layering on more austerity would pummel an economy still struggling to achieve a virtuous circle of jobs, income and spending. Mr Obama is reportedly pushing to extend the payroll tax cut for another year. That would be good, but that would not represent new stimulus, merely a softening of the fiscal restraint already in train.

And what about the Federal Reserve? Its second round of quantitative easing (QE) was completed at the end of June. The consensus is that it would have to see deflation looming to implement more. I think the bar is lower than that. Ben Bernanke, the Fed chairman, has always worried that rising unemployment could spark a pernicious cycle of declining confidence and spending. If its recent rise continues into the third quarter, expect to see Wall Street raise the odds on QE3. It’s too soon to write the recovery off, but not too soon for contingency planning.

I'd say the odds of another QE3 were slim prior to the latest jobs report and they now stand at 50-50. If employment growth doesn't pick up significantly over the next few months, QE3 is a done deal, and Wall Street will celebrate by bidding up risk assets.

The real structural problem in the US labor market is that there are really two economies since the early 80s: the financial economy made up of bankers, traders and money managers on Wall Street and the real economy made of manufacturers but mostly of small businesses. The latter are struggling while the former keep enjoying record bonuses. Nothing is trickling down, and even if it is, it's so minute that it doesn't make a difference. Even cash rich corporations are in no hurry to hire because they're producing more with less and they've got no confidence that this is a sustainable recovery. 

And as TomDispatch associate editor Andy Kroll points out, for all the verbiage about jobs that will be coming your way, there’s one part of the American jobs crisis deserving screaming headlines that the politicians won’t be talking about, the 60-year unemployment scandal:

Live in Washington long enough and you'll hear someone mention "east of the river." That's D.C.'s version of "the other side of the tracks," the place friends warn against visiting late at night or on your own. It's home to District Wards 7 and 8, neighborhoods with a long, rich history. Once known as Uniontown, Anacostia was one of the District's first suburbs; Frederick Douglass, nicknamed the "Sage of Anacostia," once lived there, as did the poet Ezra Pound and singer Marvin Gaye. Today the area's unemployment rate is officially nearly 20%. District-wide, it’s 9.8%, a figure that drops as low as 3.6% in the whiter, more affluent northwestern suburbs.

D.C.'s divide is America's writ large. Nationwide, the unemployment rate for black workers at 16.2% is almost double the 9.1% rate for the rest of the population. And it's twice the 8% white jobless rate.

The size of those numbers can, in part, be chalked up to the current jobs crisis in which black workers are being decimated. According to Duke University public policy expert William Darity, that means blacks are "the last to be hired in a good economy, and when there's a downturn, they're the first to be released."

That may account for the soaring numbers of unemployed African Americans, but not the yawning chasm between the black and white employment rates, which is no artifact of the present moment. It's a problem that spans generations, goes remarkably unnoticed, and condemns millions of black Americans to a life of scraping by. That unerring, unchanging gap between white and black employment figures goes back at least 60 years. It should be a scandal, but whether on Capitol Hill or in the media it gets remarkably little attention. Ever.

Indeed, nobody wants to talk about the shockingly high unemployment rate among black Americans because they've been largely written off. I'll tell you about another scandal that nobody talks about, the unemployment rate of disabled persons which is closer to 85%, and that's being generous.

I take the rights of disabled people very seriously partly because I have MS and it makes me extremely angry at how prejudiced employers are towards disabled persons. One trader recently sent me an email telling me the following:

no offense, but that MS will likely be the preventing factor to your being hired (large orgs fear large disability expense, small orgs can ill afford any absence) - I know two guys with health issues (a guy who is a cancer survivor with diabetes, another had a liver transplant) and group benefits/life-insurance are a factor in them staying in sub-optimal jobs....plus they save/invest like fiends since they are parents with abbreviated life/mortality expectations

I wasn't offended at all and told him he's right, most organizations -- private corporations, federally charted banks and even government Crown corporations and government departments -- will treat people with a serious preexisting condition as a liability (one day, I will expose these organizations and their discriminatory practices). This is why I decided to teach myself to be completely self-sufficient, focusing on trading stocks, consulting and business ventures where I control my own destiny. No more sucking up to anyone for a job! If you don't want to hire me because I have MS, that's your problem and I don't want to work for you!

Importantly, my MS doesn't control me; I am feeling better than ever and will beat this bloody disease because I'm the toughest SOB you'll ever meet. MS or no MS, I'll take on the world! But that's not the case of many who are much worse off than I am and can't fend for themselves. Many disabled are stuck collecting disability insurance, living in utter poverty, all because they are ostracized from a shallow society who only sees them as a liability. That's the real unemployment scandal and anyone who thinks otherwise is an utter fool who's never walked in their shoes and felt the stinging pain of blatant discrimination.

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