Saturday, January 29, 2011

We Can "Work" It Out

Another reason I believe the economy will be stronger in 2011 than the experts’ forecasts is the improving employment situation. The unemployment rate dropped 0.4% in December to 9.4%. While some people tried to downplay the good news due to statistical factors, this data caused most economists to lower their unemployment forecasts for this year.

My panel of experts lowered the forecast from 9.2% to 8.9%. This is closer to my 8.7% prediction. I am not ready yet to lower my forecast, but I will say that 8.4% by the end of the year is now within reach. Regardless, the government numbers do have considerable “noise”. So is the employment situation really improving? As Yogi Berra said, “You can observe a lot by just watching.”

- I recently spoke at a job seekers group that I used to attend. There were only 14 people in attendance. A year ago, the group averaged around 35. It was announced that attendance was down because five people had found jobs. I can remember meetings when there were five people joining the group and other times when that room of 35 people did not have five interviews scheduled, let alone five job offers.

In addition, some people I met in these groups that I thought would have much difficultly finding employment due to various factors have found jobs in the past few months.

(I know what you’re thinking. Attendance was down due to the quality of the guest speaker. Well if I can stimulate five people to go out and get jobs just so they don’t have to hear me talk, then I guess I am truly a “motivation” speaker. Even though unemployment never caused me to live in a van down by the river.)

- My previous employer has started hiring office and factory workers after slashing half of its workforce in 2008-2009.

- High end jobs are coming back. Fortune magazine reports that job listings for newly graduating Ivy League MBA’s are up 85% over last year.

- A local flatbed trucking fleet is advertising for drivers on the radio.

- DOT reported that total miles driven in November 2010 were 1.1% higher than last year. These people have to be driving somewhere and many more are driving to work.

- Previously I wrote about two industrial facilities in Canton, Ohio closing about the same time around a year ago. I speculated that most of those former workers would not be able to find new jobs for a long, long, time. I was wrong. A local industrial manufacturer has expanded production and is hiring factory workers. A medical company has opened a new warehouse. And finally, a local chip maker has greatly expanded its workforce.

Now again I know what you are thinking; wow, high-tech jobs in the rust belt! Well, not exactly. They are not producing computer chips, they’re making potato chips. But it is a decent wage with benefits. Most of the previously laid off works from the two facilities do now have job opportunities and I doubt if many of these workers with standard mortgages lost their homes. It is much better than the disaster that was expected a year ago.

Still A Long, Long, Way From Home
Of course things are still tough. It is taking people much longer to find jobs, but most people who keep trying eventually finding work. Several people that were in my job hunting groups who I thought would not find jobs due to difficult personal issues have found work in the past several months.

The salaries of the new jobs found by victims of the recession tend to be lower than previous jobs. The Wall Street Journal reports that 36% percent of previous laid off workers found jobs paying at least 20% less than the one they lost. Much of this is due to workers moving from higher paying jobs with manufacturing firms (both white-collar and blue-collar) to lower paying service industry jobs. But once again, this is better that the conditions of a year ago. People who regularly ate at the steakhouse now may have to eat at Perkins. Yes a step down, but there are 71 million people in the Congo who won’t give you much sympathy on this one.

And there is a limit to how far this jobs recovery will go. The unemployment rate is going down due to the business cycle going up. This means cyclical unemployment is going down. But remember, there was both cyclical unemployment and structural unemployment in this recession.

It is now expected that the unemployment rate will bottom out at 7% (instead of the usual 5%) during this recovery. We may be able to even get to the 7% number by the end of 2012 if things continue to go well.

Many economists are predicting that all the jobs will not return until 2015. However, some of the previous jobs were squeezed out of the economy when the labor markets were “restructured” and permanently changed by the recession. Those jobs are gone forever. It will be interesting to see how the resilient U.S. economy responds to this challenge. Where will the new jobs come from? Or will 7% unemployment become the “new normal”?

A Van Down by the River!

Monday, January 10, 2011

Time to Change Your Shorts

Another reason I believe the economy will be stronger (than expected) in 2011 is resiliency. The U.S. economy is extremely resilient.

How resilient? It’s like those action movies where the hero gets clubbed in the head with an iron pipe, hit in the face by a brick and repeatedly kicked in the groin and still goes on to win the fight. Now you always know the fight scene is unrealistic because of the groin kicking. No man could take even one kick to the groin and continue fighting. A mere tap to that area is enough to send a guy to his knees. (I know this because it was the object of a game the boys played at my grade school. I remember this because it is the worst game in the world for the tallest kid in the class. Your “target” is high and very accessible and your opponent’s “target” is low and difficult to tap.)

The U.S. economy took some tremendous hits in 2008 and 2009. It hit the ground hard during the Great Recession and it took an extended time to get to its feet. But after many counted it out, it is starting to “rumble” again. This economy is resilient. Remember when the terrorist attack of September 11 was supposed to bury the U.S. economy? This was one of the goals of the attack. And while the nation suffered in many other ways, the economy easily brushed off this cheap shot.

Another economic factor in 2011 is pent-up demand. Pent-up demand is created when something is needed in the present, but the satisfaction of the need is delayed to a future time for one reason or another. It is why sailors returning to port after months at sea often ran to the nearest bordello and why the women working there never won a beauty pageant.

The impact of pent-up demand on the economy can be illustrated by using our favorite economic indicator, men’s underwear sales. Blue-collar Bill saw some of his co-workers get laid off in 2009. Business wasn’t much better in 2010 and some weeks he didn’t work a full shift. In response Bill decided not to buy any new underwear during this time, but to get “extended use” out of his current inventory. But now orders are better. Bill even worked some overtime last week. His underwear may be “a-frayed”, but Bill no longer is. Bill is planning to buy at least two new packs of shorts this weekend. Likewise, Executive Ed had his bonuses reduced in 2009 and 2010. In response, Ed’s wife did not buy him the Italian-made silk boxers that Ed likes. She bought him cotton, that’s right cotton! Cotton may be the “fabric of our lives”, but it chafes Eddie’s thighs. (Remember, everyone has had to suffer in this recession). But now Ed’s business is picking up, it’s time to feel silky smooth again! (Maybe even good enough to hire some new workers)

There is tremendous pent-up demand by both consumers and businesses in this economy. When people and businesses begin to make purchases that they have delayed for the last two years, good things will happen.

We saw some evidence of this with Christmas spending this year. People spent much more this year after two lackluster years. Some analysts believe 2010 had the best holiday sales since 2006. Businesses are reportedly “sitting on “$1.93 trillion in cash (Wall Street Journal). When companies begin to spend more of this money, strong economic growth will follow. There is also pent-up demand in the labor markets. Companies have the need to hire more employees, but have been reluctant to do so. However going into 2011, this is also beginning to change. Look for job listings to jump in Q1.

The release of pent-up demand is linked to confidence. A year ago I wrote about the Iz (employed) and the Uns (employed). The Uns were not spending money because they were Uns, but the Iz were not spending money either because they were afraid they were going to soon become Uns. This of course led to more Iz becoming Uns than necessary. Now with new layoffs becoming few, the Iz (who remember make up over 90% of us) have started feeling confident enough to spend again. Business confidence is improving also which will help them start spending that almost two trillion in cash.

Those “green shoots” that people were looking for in 2009 are only starting now to appear. The problem is that most analysts grew tired of watching for them and now have trouble seeing the positives.

Many analysts claim you can’t have a strong economy recovery without a strong housing market. But it may be time to rethink this. Housing has been over stimulated since the mid-1990s and I believe capital was diverted from better uses during the housing boom in the aughts (00’s). A more productive allocation of capital, with housing getting its correct share, may be better for the economy that a new housing boom. I expect the housing market to bottom out in the middle of this year and then start a recovery. The recovery has already begun in some markets across the country.

Way back in October 2009, the Model T predicted what I termed the “UL” recovery. I described it as a long, slow, uphill climb, from the bottom. That forecast has proved to be very accurate, but it is now time to look at what is going to happen at the end of the “L”. I believe that we could be in what I am calling the “Delayed V”. It is starting now, will continue through 2011 and will accelerate in 2012. We are going to get the strong recovery that we wanted; we just had to lie on the ground an extended time to heal our wounds. You can even call it the “Bowl Recovery” \___/ if you wish.

Yes, this economy is resilient. Or as Sergeant Andy Sipowicz would say on NYPD Blue, “This economy has the stones”. Stones of steel.