Thursday, March 25, 2010

Jobs are Job One

A few weeks ago the government announced the details of its great, new, “jobs” bill that is designed to generate jobs and lower unemployment. Two days later, the government announced that the unemployment rate would basically stay the same the rest of the year.

This means you are admitting that your plan isn’t going to work before you even implement it. Can you image doing this is the private sector? “Hey boss I’m going to spend big bucks on our new campaign, but I don’t expect sales to increase at all.” And they don’t understand why people have a problem with this. Brew some tea.

However, the $17.5 billion “jobs” bill enacted last week is a huge improvement over the original $150 billion version. Why? The original cost $150 billion to provide few jobs, but the new bill costs $132.5 billion less to do almost the same thing. It’s a bargain!

In reality, the government cannot do much to create jobs in the short-term. If it could, we would have full employment all the time. The private sector has to create the jobs and the government’s role is to create an environment that promotes job growth while maintaining the general well being of the people. But the people demand that the government do something, so you get expensive programs that don’t accomplish much.

Unemployment is expected to improve very slowly in this recovery. Most forecasts have unemployment just above 9% by the end of 2010 and still around 8% for 2011. The government’s forecasts are actually now more pessimistic that most economist. I believe they are trying to lower expectations after woefully failing to meet expectations in 2009.

Two Types of Unemployment

There are two types of unemployment (sounds like a Vytorin commercial) impacting the job market right now. Cyclical unemployment is the unemployment that results due to the periodic drops in the business cycle, commonly referred to as recessions. When the business cycle rises, companies start hiring, and unemployment drops. There was considerable cyclical unemployment during this recession and most of the current job openings are the result of improvements in the business cycle.

Structural unemployment is much more complicated and has a much greater impact. Structural unemployment results from a mismatch between the sufficiently skilled workers seeking employment and demand in the labor market (Wikipedia). There was a huge, unexpected, impact of structural employment during this recession. To understand why, we need to review the economy of the aughts (00’s).

A Tale of Two Bubbles

The dot com bubble was created by people overestimating the growth potential of the Internet. Too much money flowed into the sector, pushing up stock prices and propping up weaker companies. When the bubble burst, the excess capital left the sector. But some good things came out of this. We were left with a strong Internet- related industry that was right-sized and ready for future growth.

In a free market economy, capital flows to where there is the greatest return on investment. After the dot com bubble burst, the capital ran straight into the housing market. You could make great money building, buying, and selling houses. Because housing is related to so many other industries, money flowed into these places also. The companies offering the highest returns on their bonds and preferred stock were all connected to housing since they could take the capital and get a high return on investment. (I still own some awful bonds from GMAC. I thought they were only financing cars!).

Of course we now know the bubble was created using risking mortgages and toxic assets. When this one popped, the result is huge inventory of empty houses, a damaged financial system, huge government debt and much of the “false” wealth the bubble created evaporated. Worse yet, the repercussions rippled through the economy crippling industries and resulting in our current unemployment situation. Because this bubble was based on falsehoods, there are no positive results.

And it is even worse than that. Because during the aught’s capital was flowing into the housing market and related industries, it was not flowing into true growth industries and small start-up companies that provide long-term economic growth. Instead of money being available in 2005 for the new company “Growth Industries Inc.” which would have employed 100 people today, it went to “Skipper the house flipper”. Think about it, what is the macro-economic benefit of flipping houses? Now he’s known as “Skipper the burger flipper”.

So there are many skilled, unemployed, people looking for work, but there are few jobs available that require their skills. This is the reason the under-employed numbers are so high. The WSJ economic panel estimates that 2.1 million jobs lost during this recession will not return. The scope of the “structural” unemployment problem also is impacting the business cycle (and thus cyclical unemployment) by limiting consumer spending.

Even if the government cannot create jobs in the short-term, it does need to create a better environment so the private sector can create more jobs. Because housing made things appear so good before the recession, the government neglected some issues that are restraining job growth today.

Issues to Address:

1. Develop a national business strategy

There needs to be a strategy of assisting the small, high-tech industries that will create the jobs of the future. An education strategy needs to compliment this to provide the workers needed for these jobs. China has a business strategy and I hear that it just may be working for them.

2. Develop an energy policy based on economic factors

Energy is considered too much to be just an environmental issue. It is primarily an economic issue with national security implications. If all the solar panels and wind turbines are produced in China, what have we really accomplished? It is a great strategy to promote the conversion to electric powered automobiles. This would generate innovation and jobs in the battery industry and create the need for many nuclear power plants to be built throughout the country. We create jobs, decrease pollution, and improve national security at the same time.

3. Develop “fairer” trade policies.

“Exporting” jobs may have worked when housing was propelling the economy, but it doesn’t work now. We have to export more products and fewer jobs.

4. Enforce the immigration law

There may been an economic reason to ignore illegal immigration when unemployment was at 5%, but can you really continue to do this with unemployment at 10%?

5. Increase market competition

The trend has been to promote business consolidation to create greater efficiencies. If you go too far, you reduce competition and limit job growth. It causes other problems also (Hey, how about them giant banks!). Again the strategy worked when housing was strong, but we went too far. It is time to strengthen the anti-trust laws and deconsolidate where needed. The increased competition will result in new companies, new technologies, and new jobs.

Thursday, March 18, 2010

The Economics of Underwear

In December I listed men’s underwear sales as an unusual economic indicator. This indicator was first developed by former Fed head Alan Greenspan in the 1970’s. My initial thought was that the men’s underwear market is much more complex now and so I questioned if this was still a valid indicator.

I couldn’t find an update on men’s underwear sales, so I started thinking about my own underwear purchases over the last three years:

2008 – The economy was still strong and I had plenty of disposable income. I purchased six pair of underwear. It was the most expensive underwear I have ever purchased in my life. It was underwear that is sold on individual hangers, not in packages. It was colorful, it was flashy, and it was totally unnecessary. My wife is not going to be impressed by my choice of underwear after nearly 30 years of marriage. I don’t have a hot, young, girlfriend. And the underwear looks “slightly” out of place on my aging, baby-boomer, body.

So why did I buy it? Because I could. My underwear selection is representative of the wild conspicuous consumption, over- the- top spending, that characterized the years prior to the Great Recession.

2009 – The Great Recession was in full gear. My disposable income was gone due to job loss. I bought no underwear, even though the pair I was wearing when they told me I was downsized had to be destroyed.

2010 – The recession has ended and a subdued recovery has begun. My disposable income is still low; however underwear is still a necessity even in these times. I do not recommend “going commando” to save money and it is certainly not acceptable attire for job interviews. I agree with Kramer on this one, “my boys need a house”.

However after a year of no underwear purchases, some existing inventory is wearing thin. So I recently have made my first underwear purchase in almost two years. But did I buy the fancy, high-priced, stuff on the hangers? Of course not, but I was able to purchase very good underwear at a close-out store. This underwear cost 70% less than the ones I bought in 2008. Why was it sold at close-out? Because the maker of this formally expensive underwear went out of business when the recession hit. His sales were dependent on people having significant disposable income to spend on “high-end” (not tight end) underwear.

And that’s why this recovery will be subdued. People are not going back to their previous uninhibited buying habits either by necessity or choice. This recovery is being led by cheap underwear!

Unusual Economic Indicator Check-Up

It’s time to check to see what some of the unusual economic indicators that were identified in December are telling us now.

Baltic Dry Index (measures international shipping) – A slow, uneven, climb upward.

Scrap Metal Prices – Very positive increases across the board.

Coal Futures – Very positive. Prices expected to be 17% higher a year from now.

Men’s Ties – The big trend now is subdued pastels. This would be consistent with the start of a subdued recovery. Maybe this indicator has more credibility than you think.

The Hot Waitress Index – I have not seen any hot waitresses lately, so maybe they have all found better jobs. So this would be a positive indicator.

Some Other Indicators

Woman’s clothing – Sales are down. This is a negative because women control the disposable income in most households. If women are not spending money on clothing, they probably aren’t spending much money on other things either. Men’s clothing by the way (which includes underwear) was up 5.7% in the last report.

Beer Sales – Were down 2.2% for all of 2009, but increased 1% in Q4. This is great news. If only there was some appropriate way to celebrate this occasion.

Coca-Cola Sales – Expected to be flat in 2010. Don’t you just hate it when Coke goes flat?

Mc Donald’s Sales – Up 1% in December after two months of decline. Mc Hopeful.

Charitable Giving – Initial indications are that donations are lower than last year, a negative.

Short Skirting the Issue

Several readers pointed out to me that I did not include the “hemline” index in my December analysis. This states that women’s hemlines rise in good economic times and fall when things get tough. This index actually was first developed in the 1920’s and was very logical. Women raised their hemlines to show off their silk stockings which were a both a status symbol and an attention getter. When bad economic times hit, women could no longer afford the silk stockings and lowered their hemlines to hide the fact they weren’t wearing any. When things improved, hemlines went up to reveal the new stocking purchases.

This indicator is still cited, but the original logic behind it is no longer valid. Regardless, short skirts are a very hot fashion item for this spring.

What It Means: short skirts are back in fashion just as all the hot waitresses are going back to other jobs. I absolutely hate this economy!

Thursday, March 11, 2010

Hyperventilating Unemployment

(Cue Maroon 5)

“When it gets cold outside and you got nobody to love”

The Cold, Hard, February Facts

- The unemployment rate was 9.7%, unchanged from January. 14.9 million people were unemployed and a net 36,000 jobs were lost.

- The underemployment rate was 19.8%, down from 19.9% in January (Gallup). Approximately 8 million people are working part-time for economic reasons.

- 6.13 million workers were unemployed for more than 26 weeks, down from 6.3 million in January (Gallup)

- The unemployment rate for people with a bachelor’s degree or higher was 4% and appeared to have just peaked. (The highpoint during the last recession was around 3%).

- There have been 8.4 million jobs lost during this recession. In addition, 2.7 million jobs that should have been created during the time period were not. Therefore, there is a current deficit of 11.1 million jobs. (NY Times).

What it Means

Once again the pundits on both sides tried to politicize the data. It is not great news, but it not alarming news either.

Back in October, I wrote that the experts were forecasting job growth to begin sometime between February and May of this year and unemployment to peak between 10-11%. Job growth should begin in March and unemployment may have topped out at 10.1% in October. So the forecasts appear to be very accurate and we are doing somewhat better than expectations.

The good news is that the employment situation appears to be bottoming out and is not getting any worse. There was an increase in job openings in January and layoffs were significantly lower. In addition, demand for temporary workers (leads demand for permanent workers by about four months) has been increasing for several months.

The bad news is that hirings have not increased. Companies are conserving cash and trying to squeeze more productivity out of current workers even as sales increase. Business confidence remains low.

A December Head Fake

The government reported a small net job gain in December. I also previously reported that two good friends received job offers in December after looking for over a year. In addition, there was an increase in people getting job offers in the job seeker groups that I belong to. All this positive data coming in the traditional worst month for hiring, led me to conclude that the job market was getting considerably better.

But it was just a “head fake”. My theory now is that many companies had job openings in 2009 that they delayed filling due to the struggling economy. They could afford to wait because there were many available applicants and the economy was recovering slowly. These job requisitions were set to expire at the end of the year, so many companies finally pulled the trigger in December. Job listings for larger companies have increased some so far this year, but hiring remains slow.

This is Not Your Father’s Recession

During previous recessions (before 2001), if your father was laid-off from the factory he collected unemployment until orders improved. He then went back to work at the same company, doing the same job.

This time, millions of degreed professionals have been downsized and will not be returning to their previous jobs. Many of these people have a bachelor’s degree or better, years of experience, and have been unemployed more than six months.

Commentators and analysts continue to write articles about the unemployment situation using historical data to reach their conclusions. But their conclusions are usually faulty because this recession is very different. The old rules no longer apply.

Most people don’t understand how difficult it is to get a job in the current market, although that is changing. A recent cartoon went like this:

Woman: “So what do you do for a living?”
Man: “I’m between jobs”
Woman: “Oh, so you’re optimistic?”

If you are a “good” candidate, it is taking about 8 to 14 months to find a new position (my analysis). This of course this can vary depending on personal factors, expertise and geography.

“How dare you say that my behavior is unacceptable
So condescending, unnecessarily critical”.

Some commentators have stated that the unemployment rate remains so high because extended unemployment benefits are acting as a disincentive for people to go back to work. While this may have been true at times in previous recessions, is not true in this one. The people in my job seeking groups are trying hard to find jobs, but there too few openings for professionals available.

“I have the tendency of getting very physical
So watch your step cause if you do you’ll need a miracle”

If you said to my job-seeking buddy Craig, “Hey why don’t you get off of unemployment and go find a job?” you had better be ready to either duck or run. Likewise, my friend Lori, who is a very pleasant soccer mom, might be tempted to split your goalposts.

The Forecast

Expect the job growth number in March to turn positive. Any impact of the February snow blast will be gone and there may even be some carry over. Construction jobs should also improve due to the weather. Economic growth should continue to add some jobs. Census jobs will add to the total (while some commentators are dismissing census jobs as special circumstances, I say thank God they are happening at a time people desperately need work).

Economists from IHS Global Insight and RBS Securities Inc. expect job growth of 100,000 to 200,000 a month to start soon and then increase to around 300,000 to 400,000 in Q4. While this is good news, the unemployment rate is still expected to be in the 9.0% - 9.5% range at the end of the year.

We’re still on a slow road to recovery.

“When it gets cold outside and you got nobody to love
You’ll understand what I mean when I say
There’s no way we’re gonna give up
And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there, cause it’s getting harder and harder to breathe”

Thursday, March 4, 2010

Cat Bounce Fever

Noted author and financial analyst Robert Kiyosaki recently predicted that the Dow could sink to 5,000 (the S&P 500 equivalent is 540) in 2010. Kiyosaki is probably using a sophisticated formula using strange mathematics sometimes referred to as “calculus” to get his number. I use a much simpler model and a spreadsheet, often referred to as “Excel”, to get the Model “T” number, which remains at 580.

Kiyosaki describes the recent jump in the market as just a “dead cat bounce”. “The term "dead cat bounce" is derived from the idea that "even a dead cat will bounce if it falls from a great height"(Wikipedia). In investing, it means even a bad stock will increase some after it hits bottom.

What I want to know is who goes around dropping dead cats from the top of buildings. It is not hygienic to be handling dead cats and to drop them off of buildings is just sick. Interestingly, it is one of the few things that PETA and Larry the Cable Guy would agree on. One would call it “a heinous abuse of a corpse”; the other would say “that ain’t right”.

But I think the 3,800 point jump in the Dow is more than a dead cat. If you coated the dead cat in latex and heaved it off of a skyscraper, it wouldn’t even bounce that high. While PETA would still object to this, Larry would say, “Hey, that looks like fun. Can I chuck the next one?”

At the beginning of the year, I wrote about how wide the forecasts were for the stock market in 2010. After more than two months, this has not changed. Some very prominent experts are predicting the Dow could reach 12,000 or more, while Kiyosaki and others are forecasting something near or below the previous low of 6,547.

Checking The Model “T”

I have a dual axis graph of the Model “T” value and the S&P 500 index for the past 20 years. Even in periods when the Model “T” was not as accurate, the two lines were still relatively close together on the graph. The gap between the lines is currently more than double than the previous maximum. The divergence began in March 2009 when the current stock market rally started, but the Model T continued to fall.

When examining the graph, you would conclude that some major, positive, factor that is outside the Model “T” occurred in March 2009 that spurred the stock market jump. What was it? I have no clue. Something is wrong.

If the current gap between the two lines on the graph is too wide, you would expect something to happen soon to bring the lines back into their historic relationship. Of course this can happen in one of two ways:

Scenario One: The commercial transportation market takes off faster than a rocket with freight demand and equipment usage increasing at a tremendous rate. At this point the people still fortunate to have jobs in commercial transportation are laughing because this is so far from reality. The two expert firms in the field, ACT Research and FTR Associates, are both forecasting a very dismal 2010. The industry will improve over 2009, but remain at historically bleak levels.

Scenario Two: The stock market plunges to below the previous S&P 500 bottom of 666 (was God sending us a message?).

Which one of these would you bet on?

A Live Cat Bubble

Instead of a dead cat bounce, I think we have a “live cat bubble” (my new term). The cat is still alive and has been lifted high in the air on a new stock market bubble. I will let the experts explain the causes of this bubble. And if you believe we are just too darn smart to create another bubble so soon after the last one, I have some Greek bonds that I need to unload. Financial historians will probably label the last 15 years the Lawrence Welk Era because you can never have too many bubbles.

So the cat is still floating high, contently sitting on the bubble. Everything goes well as long as the cat is calm. If the cat becomes frightened, its claws instinctively come out, the bubble bursts, and the cat comes crashing down. Then you get your dead cat bounce.