Paul Rochette, Senior Partner
Some new and persistent downside (and a few upside) international risks can affect our economy.
New risks are emerging. These include China’s housing bubble which, in terms of the number of units, makes ours look miniscule. China, to stimulate their economy, built entire cities only to find no one showed up. As a result, the Chinese economy, which has served as a global engine of growth, is slowing. While the latest figures show it not slowing as much as feared, the latest projection of growth in the 7.5% range is still a significant drop from the plus 10% range of the past decade.
In addition there is the potential for currency wars as the world attempts to stimulate their economies and support central government spending by devaluing their currencies – AKA printing money. The new Japanese Prime Minister Abe has stated that the Japanese are specifically trying to stop deflation by increasing the money supply, and that the slide of the yen is a result, not a reason, but few in Europe or the U.S. believe that. Coupled with aggressive money supply policy in the U.S. and continued challenges to the faith in the euro, a currency war may slowly emerge. The Chinese, while moving towards encouraging increased domestic consumption, are still heavily influenced by state owned enterprises (SOE’s) that wish to continue to export, and want the yuan to remain undervalued as well. All of the forces keeping other currencies weak will provide some further softening of U.S. prices, but at the cost of higher U.S. trade deficits, especially if the U.S. recovers sooner than others.
The European Union continues to be a cause for concern. After beating back the fears of a Greek default, the markets for Spanish, Italian and other southern tier debt stabilized, at least until this past week when Cyprus moved to center stage. For the first time in the euro crisis, depositors are being asked to contribute to the bailout. This is hitting depositors with more than 100,000 euro in Cyprus’s largest two banks, a large percentage of them Russians who have found Cyprus to be both a tax haven and a retirement center. The ramifications of depositors being hit means that now depositors in other southern European nations may no longer be so sanguine about the safety of their deposits, which both contributes to the growing southern European resentment towards Germany and also the growing sense that the crisis is not over. Perhaps depositors in Italy and Spain should be worried should the banking crisis not abate there. We will see if panic disintermediation hits this Thursday (3/28/13) when Cypriot banks reopen.
There are a few positive notes as well. The U.S. has entered trade talks with Japan and other Asian nations under the Trans Pacific Partnership, and is beginning talks with the EU over reducing trade barriers. Many economists agree that lowering trade barriers has net beneficial effects. With agricultural exports being one of the U.S.’s (and Colorado’s) strengths, continued global economic prosperity suggests more U.S. and Colorado exports of foodstuffs.
Canada, the EU and Mexico are Colorado’s three largest export destinations. While the EU is in the doldrums, Canada and Mexico are looking at respectable economic growth rates. Combined with China and Japan as our 4th and 5th largest export destinations, exports look to be a strong contributor to the U.S., the State and the region.
A couple of years ago I laid-off an employee. I sensed at the time this newly unemployed person would not get another job for at least 99 weeks ; and maybe forever. Why? Not because the demand for his skill set was so weak, but because the gentleman being laid off was a retired military pensioner and unemployment compensation would be the perfect supplement to his income totally eliminating the need to work. This is what economists call perverse incentives – incentives the motivate people to pursue the wrong behavior from a societal perspective. As a result of that layoff I continue pay a higher unemployment “tax” on my own unemployment insurance as the sole employee of my corporation. I think someday I’ll get even as I too face a perverse incentive to lay myself off a year before retirement.
As economists we get calls every month by the media to comment on the unemployment rate. It’s somewhat of a shame because the unemployment rate is a really poor measure of where the economy stands and tells us nothing about where it’s going. Last month the unemployment rate dropped below 8% nationally — a sign things are better. But did the rate change because more unemployed people looking for work got jobs or did it improve because they quit looking for work and therefore are no longer officially unemployed as they are not participating in the labor force. Or did they simply find work as a sole proprietor or through a part-time job which in the unemployment formula still counts as employed. What about the chronically unemployed? The devil is always in the details.
Let’s look at some of the details. For starters the average American is clearly not better off that they were four years ago when the sub-prime mortgage crisis exploded and the world recognized we were in a recession. By September, 2008, the U.S had lost 1% of its wage and salary job base. Today, despite additional new jobs being created every month since March, 2010, we are still down 3.4% relative to the number of jobs the economy had at the end of 2007. This means we have about 5.5 million more people unemployed than might normally be the case. In addition, we have 8 million people (approximately 3 million more workers than typically found) working part-time because they cannot find suitable full-time jobs. This totals 8.5 million more people who are either unemployed or sub-employed than would otherwise be the case under the “old normal”. Perhaps even worse than the 8.5 million shortfall is the approximately 15 million Americans who either left the workforce since 2007 or who have not entered the workforce as they come of traditional working age. All of this is occurring as almost 10% of U.S. companies report they cannot find qualified workers.
Who are these people ? Five million Americans who are looking for work have been unemployed for more than half a year. This by by far the largest group of unemployed workers, peaking out at over 4% of the labor force in 2010, when usually the number of longer-term unemployed is substantially below those who are unemployed for less than 14 weeks. This can be seen in the following graph from www.calculatedriskblog.com.
Over 2 million are construction workers. The unemployment rate among those people without a high school education is three times the rate of people with at least a college degree. Many of the sub-employed, part-time workers appear to have made their own jobs by becoming self-employed as the U.S. had 1.4 million more proprietors in 2010 than we had in 2007. In addition to the “chronically” unemployed, the number of people collecting disability social security is rising.
There is some good news. The number of “new hires” slightly exceeds the number of people being laid off or quitting their jobs. And the total number of job openings is steadily climbing. Small business hiring plans are at the highest level since the beginning of the Great Recession and new home construction appears to be gaining solid traction. The front edge of the Baby Boomers are hitting the traditional retirement age making room for the large number of Millennials entering the labor force.
When one flies above the forest and tries to interpret the big picture what appears to be happening is two-fold. First, our least skilled unemployed appear to be the least employable in the modern economy. In addition to competing with cheaper foreign labor for repetitive motion manufacturing jobs, they are also losing out to technology such as cameras and billing systems replacing toll-takers. Even if there were no minimum wage and more jobs were available, this group may have little incentive to work in the legitimate labor market. It appears the economic transition since at least 2008 has created a whole new wave of chronically unemployed even as many firms report being unable to find qualified workers. The labor market’s skill sets do not match the skill sets needed and training of the young Millennials generation could produce great payoffs. On the other end of the labor market we are seeing more jobs being created for people with Associate degrees than Bachelor degrees indicating focused education is critical. One could even argue we may need to focus less on Associate and Bachelor degrees and more on training certificates. This could even become part of high school curriculums.
Second, many semi-skilled jobs were lost with the housing and construction industry collapse. This creates a real challenge for Baby Boomers over 45 who are not readily re-trainable or whose careers have taken a physical toll on them as semi-skilled jobs often involve manual labor. This may be the most problematic group of Americans in the coming decade as they are the most likely to fall out of the middle class and into poverty. While improvements in new home construction are certainly encouraging, we need more effort in this sector of the economy. The notion of investing in infrastructure could take advantage of the skill sets of the aging construction workers before they hit retirement age. Perhaps infrastructure projects should have a training component matching young apprentices with seasoned and aging workers. Such job matching use to be a valuable function of labor unions in the construction trades.
The turnover of the 50-something semi-skilled workers in the next decade does create an opportunity as many under-educated Millennials could easily fill well paying jobs such as automobile repair technicians, plumbers, electricians, carpenters, machine operators, dye makers, and numerous other hands-on trades which are already showing shortages. The need for job training and retraining is as great as it’s ever been as is the need to re-engineer labor market incentives and disincentives to encourage people to work and companies to hire.
My Mother use to tell me “I have no idea what to tell people you do.” As practicing economists we run into this a lot. There are academic economists who teach and conduct research for the purpose of adding to the body of knowledge for societal consideration. Then there are applied economists.
We are essentially decision support professionals. We attempt to consider the wide range of variables impacting a situation to assess the costs and benefits of different courses of action. In one sense we are futurists who, as our tagline states, “peer into the future before it becomes the present”. In another sense we are historians looking retrospectively to assess whether or not decisions were reasonably rational given the common knowledge of the day. We are social scientists looking at data to see how different variables might correlate and to assess causality – does one thing cause another? Given the plethora of variables out there, in a very real sense we are artisans taking our best informed shot at delineating the outcomes of courses of action. It seems that regardless of the assignment, we always are weighing the costs to the benefits based upon the forecasted outcomes.
Some of the applications of our profession include:
- economic impact on communities and industries from actions
- financial or fiscal impact on organizations whether governments, non-profits, or for-profit
- the likelihood of proposed projects performing to desired standards
- strategic assessments of organizations and industries
- evaluations of different business models as well as organizational and community processes
- market analyses, including the impact of changing environmental fundamentals
- product and project portfolio analysis
- opining on the reasonableness of decisions given the timeframe of when the decision was/is made and knowledge base that was/is reasonably available
- assessing the fairness of arrangements or prospective agreements based upon the allocation of costs and benefits among the various parties or stakeholders.
Friday night on Rocky Mountain PBS @ 7:30 PM tune in to Colorado State of Mind as Tom Binnings makes an appearance as one of four panelists discussing the job market. Chime in with your forecast and thoughts (especially as it relates to your business or industry) by commenting on this blog posting or on the PBS blog.
The following graph from www.calculatedriskblog.com provides a comparison of the current challenges relative to recessions since WWII. Three points are notable: 1) the Great Recession was still gaining momentum on the downside as most past recessions were in recovery; 2) the two prior recessions (1990 and 2001) had the longest periods of recovery as measured by the time to recoup the jobs lost in the recession, and 3) the great recession has earned it’s name relative to modern history.
Why these changes in recovery times? The three most likely explanations are 1) gains in productivity from technology and capital investment displacing jobs, 2) globalized production of manufactured goods, and even services, and 3) a lack of new investment and consumption opportunities to drive the economy.
When the elongated recovery times are combined with the longest post-WWII expansion that we experienced in the 1990′s. it appears the business cycle itself is getting longer.
Trend Towards Gross National Happiness
An interesting article from the NY Times (8/8/2010) articulates how some consumers are restructuring their lives. The article points out that while this was occurring BEFORE the recession, the trend has gained substantial momentum as a result of the recession. It’s in stark contrast to the previous 20 years when easy consumer credit reduced savings rates and drove consumption from about 66% of GDP to just over 70%. This trend should not be taken lightly.
Whether out of necessity or out of a change in consumer disposition, there are early signs of a new consumer ethos emerging. In a class on comparative economics I teach at Regis University, I was surprised at the level of enthusiasm with which students of all ages (24 to 60) gravitated towards the concept of Gross National Happiness (GNH). While the nation of Bhutan usually gets credit for creating this economic measure, it is being studied more and more and even used in the world of analytics by social networks such as Facebook. As Venture Beat reports:
Facebook built the index by collecting words categorized by social psychologists that reflect positive and negative emotions. They include words like “happy,” “yay,” or “awesome” for positive emotions, while negative words include “sad,” “doubt” and “tragic.” The company’s researchers tried to correlate use of these words with surveys that showed that Facebook users who used more positive words tended to report higher satisfaction with their lives.
Whether GNH becomes a future economic measure or not is less relevant than the implications if the social trend towards “simple lives” takes hold thereby impacting major sectors of our economy like housing and commercial retail space. STAY TUNED
Summit Economics, LLC
Colorado Springs, CO