RateWatch #420 Where Are the Jobs?
August 14, 2004 by Dick Lepre
dicklepre@rpm-mortgage.com
What's Happening
First of all, I must say that things are weird if the Google IPO is put off because of an interview
in Playboy. I mean, these dudes had their clothes on, right?
In a nutshell, if you are a Republican order your "Impeach Kerry" bumper sticker now. If the performance of the economy is a determinant in the November election President Bush had better hope that Osama bin Laden is captured by John Walsh. And if Walsh can reel in Osama he should get the CIA job.
Core and overall PPI (wholesale inflation) were both +0.1% in July. This was at expectation. The trade deficit was up for June and the May deficit was revised upwards. These have negative connotations for the next release of 2nd Q GDP.
Thursday's Treasury auctions were well-received and foreign buying was strong. There is an underlying current of concern if foreign buying for Treasuries falls off.
Japanese GDP was +1.7% (annualized) in the 2nd Q. Euro-zone GDP was +0.5% in the 2nd Q. High oil prices are decelerating the growth of the world's industrialized nations.
Initial Jobless Claims were 333,000 which is below previous and consensus. Retail Sales were +0.7% for July. Business Inventories were up +0.9%. The Retail Sales number was less than expectation and confused because the data from the previous month was revised upwards. The consumer continues to spend but not at an accelerating pace. Business is cautious. The effect of high oil prices continues to dampen both consumer and business spending and, consequently,
GDP. Tech stocks took a hit on HP's missed earnings.
Where Are the Jobs?
Last week I wrote that we incorrectly believe that the President is responsible for the economy in general and job creation in particular.
The more difficult question would seem to be "what controls the creation of jobs?"
Jobs are, in essence, like any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses.
Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or metaphysical force. They are a result of the nature of the way businesses work. Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.
Business opportunities are seen by a number of different companies and individuals who devote time and capital to business creation and expansion and the cycle always results in an oversupply. The consequence is recession.
The present recovery from the mild recession of late-2001 has seen job growth that is weak by the traditional standards for recovery. I think that there are three factors at work hurting job recovery: 1) the overcapacity caused by the last very bullish business cycle, 2) high worker
productivity and 3) the fact that the recession was so shallow that there is not a lot of recovering to do.
Overcapacity is an interesting issue. Capacity Utilization in the tech sector in May was 62.5%. That does not give Intel a lot of reasons to hire. You can easily personalize this problem by answering the following question: do you need to upgrade the computer on which you are reading this message? Intel's problem is that for most folks the answer is "no." There is a lot of excess capacity sitting on PC's. Industrial plant capacity dampens plant construction and lengthens the recovery time on the capital spent on the plants that exist. This defers investment.
Higher worker productivity may be interrelated to the excess capacity that we have on our PC's. A strange and difficult to quantify force is at work here. The only thing that I can personally relate this to is mail merges that we do for marketing purposes. When I first started doing these about
ten years ago it took about 10-15 times as long to mail merge a Word document with an Excel spreadsheet as it presently does. Also, the Windows XP that I use on this machine is a good bit
more stabile than Windows 3.1 so we no longer spend so much time saying things like "Not tonight, darling, I have to reboot."
In our business, escrows and appraisals are ordered on-line and delivered via e-mail. This increases worker productivity and lowers cost and - guess what? – requires fewer workers. When I started doing mortgages in 1992 we faxed a loan application to a credit bureau, received a printed report the next day and had that info manually entered into the loan processing system. If I put a loan application into my PC now I can click on a pull-down menu to order a credit report and in 10-15 seconds the information is in my PC, is merged directly into the loan application and the credit report (in PDF format) is being printed. I can then take the printed loan application and first page of the credit report and fax it to someone in out wholesale department who then transmits it to the FNMA Desktop Underwriting system. This produces a loan approval with conditions very quickly.
This means two things to us: we don't need a lot of new employees and we don't need new PC's.
Assuming that other companies and workers in the service sector are in a somewhat similar state it
is easy to see why job growth in the service sector is slow.
This has another effect. With the tech overcapacity that gigantic force which drove tech equity buying and the dot-com bubble of the '90's has stopped. Wall Street firms are laying-off, not hiring.
All of this is not the fault of Greenspan or Bush or Clinton. It is an effect of the cyclic nature
of my mantra: "Opportunity knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple."
Fool.com has an article of the performance of a dozen "blue chip" tech companies: Amazon,
Corning, Dell, Cisco, EMC, Intel, Lucent, Microsoft, Nortel, Oracle, Sun and Yahoo.
In the past 5 years only 2 of these companies have seen sales increase each year: Microsoft
and Amazon. Lurking in the background is this nasty issue of the accounting for stock options.
According to Bear Stearns and Goldman Sachs, if stock options had been expensed tech company earnings would have been 44% to 46% lower than reported. This serves to make investors nervous about the P/E ratios of these solid tech companies.
The shallowness of the recession (this was the shallowest recession post-World War II) implies that the potential size of the recovery of jobs was implicitly not there. In Greenspan's words,
"The normal rebound that we experienced in a lot of recoveries...was not possible." This does not
really explain why we have not gotten back to the employment levels of early 2001, it merely implies that we were not due for a boom.
The reasons for the low number of jobs now compared to 2000 were stated last week: the dot-com bust, the telecom bust and 9/11 which seriously impacted airlines and the hospitality industry. Add in some significant corporate collapses: WorldCom, Global Crossing, Enron, Kmart.
To some extent one can toss in offshoring. This has clearly cost us some jobs and must be addressed. We are not going to solve offshoring by bailing out on NAFTA and the WTO. We need, in the long run, to upgrade our education standards and provide new jobs for these better educated folks. A similar situation existed at the end of the Civil War. Northerners were convinced that they were going to lose their jobs to lower paid Southern workers. Auto workers in the 1960's and 1970's were worried that they jobs had permanently emigrated to Japan.
Offshoring has become a polarizing and somewhat political issue but my impression is that it is here to stay and that the U.S. must deal with it. In the longer term it is part of recognizing that this
is one big world. The world economy may actually serve to bring the world together rather that drive nations apart.
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