Employment Markets and Recovery Plans 1-8-2009

IT’S ALL ABOUT JOBS

Today’s announcement that the economy lost 524,000 jobs in December was significantly better than expected, but still enough to push the unemployment rate to 7.2%. The ADP report suggested that December job losses could exceed 700,000. Even with a better-than-expected December figure, 2008 still ends up as the worst year since 1945 for the US employment market. Forecasts suggest that January will likely represent another massive employment decline, but that February and beyond will see significantly smaller jobs reductions as most of the blood-letting may then be behind us. Economic consensus now suggests that the US labor market will bottom early in the 3rd Quarter 2009 with a national unemployment rate of over 8%, perhaps even as high as 9% to 9.2%. As recessions go, these figures, though painful for those out of a job and looking for work, are mild and we need only look back to the early 1980’s to see higher overall unemployment, which period exceeded 10%.

We are in the early stages of a major shift in our economy, from a nation of net spenders to a nation of net savers. We have seen four major economic bubbles in the last ten years: the dot com bubble of the later 1990’s; the housing bubble of the early to mid 2000’s; the commodities and energy bubble of 2007-2008; and though less obvious to most, a consumer spending bubble which spanned the majority of the last decade, perhaps longer. It is expected that we will move from being net spenders, spending 2-4% more than we make, to a national savings rate of almost 3%.

These may seem like small movements, but they can represent GDP declines of 5-7% as the economy adjusts. Such GDP figures can equate to lower earnings ratios for US corporations, depressed stock values, and can put pressure on both the commodities markets as well as the US dollar.

As the media uses terms such as ‘deleveraging’, what they really mean is a shift towards greater fiscal conservancy. During which time, money that had previously floated across the economy via spending begins to find its way into savings and investment and debt reduction. Given our massive consumer and collateralized debt, we need to make this shift, but it is painful. It is the same type of shift that helped prolong the depression of the 1930’s and 1940’s; the difference being that the federal government became more confiscatory at the beginning of the depression, as opposed to flooding the capital markets as the Federal Reserve and US Treasury have done over the last several months. Such action should counteract some of the pain of a deleveraging marketplace, but can have its own long-term difficulties.

Arguably, the Fed and Treasury’s actions may fuel inflation over the next 1-3 years, but given the deflation trend we are now experiencing, it is hard to tell if this will simply offset otherwise decreasing price levels, or usher in 1980’s like inflation rates. Either effect is good for job creation and can help bring stability to the housing market, but long-term inflation is not to be taken lightly.

Surprising to most, President Jimmy Carter ranks #2 in average annual job creation, having presided over our economy during a time of high inflation, but average annual jobs growth of 2.6 million. Only Bill Clinton exceeds Carter’s jobs record with average annual jobs increases of 2.8 million, but Clinton did so with low inflation. In terms of economic activity, Clinton is often heralded as ‘Reagan II’, a label that undoubtedly makes liberals and conservatives alike shudder. Though Reagan still reigns in terms of inflation-adjusted increases in personal incomes, Clinton’s record trails by only small margins.

The Obama administration may rival that of Carter, Reagan, and Clinton on the jobs and personal income front as Obama will take the helm after massive jobs losses and nearly unprecedented declines in investment and real estate markets. Almost regardless of the coming administration’s economic expertise, the next four to eight years are likely to be seen as progressive and stimulating in terms of energy, monetary, and employment policies and outcomes.


OERSP

The Obama Economic Recovery and Stimulus Plan continues to be vetted through the press, even before the House and Senate are able to convene and actually do anything about it. This represents very smart politicking on the part of Obama’s economic team. Get the plan out there, allow it to build great support, and then put it the legislature’s hands – house and senate members will then be hard pressed to do anything other than smile and say ‘aye’. For those who have followed its evolution, it is evident that its architects are listening, responding, and listening some more. It even appears to be counter-acting House Speaker Pelosi’s anti-tax cut rhetoric, and that is no small victory.

Though still weeks away from being voted on, the plan is gathering broad support and appears to be well founded, expertly structured, and inclusive of some of the most important elements needed to help our economy – it also horrendously expensive – now estimated at over $800 billion. It may be the best example of progressive consensus decision strategy in recent memory; it clearly represents deft political prowess.

When economic theorists as widely disparate as Larry Kudlow, Ben Bernanke, and Tom Friedman each offer supportive commentary regarding a piece of economic and fiscal legislation, it is important; it means something. It may be that the need for the legislation is extraordinary, or it might represent that the articles and statutes are well designed, or, as in this case, it likely means both.

At present, the plan calls for a mix of tax cuts and capital investments, designed to provide relief for consumers as well as motivation for businesses to create jobs – critical elements in our road to economic recovery. In addition, Obama’s advisors, including David Axelrod, are now suggesting that the Bush tax cuts will remain in place well beyond 2010 and that the majority of the remaining $350 billion available TARP funds will be used to stem foreclosures in the housing markets. This is a tall order, and largely contrary to Obama’s campaign rhetoric, but it is reflective of a pragmatic politician who is willing to listen and learn. One can only hope.

Signature Update is offered by Richard Haskell, Managing Director, Signature Wealth Management