On numerous occasions we have written (more times than we care to recall) that this has been a unique recession/recovery cycle with a steady growth in output but lacking a corresponding rise in employment. It has long been our view that high productivity, overseas outsourcing, and post bubble excess capacity are the key factors conspiring against growth of U.S. employment. Add to that an ongoing secular decline in manufacturing, and you have the makings of a very unusual lack of job creation during a period of historical stimulus and modest economic growth.
Three factors make the present situation all the more perplexing: the Recession was shallow, Unemployment is at relatively low historical levels, and real wage growth has remained surprisingly strong. Why then is this problem so intractable?
This issue has started gaining traction amongst the economic intelligentsia. Now, the New York Federal Reserve has weighed in. In a study titled “Has Structural Change Contributed to a Jobless Recovery?,” the NY Fed determined that many of the jobs lost are due to “structural change [and] permanent relocation of workers from some industries to others” The largely permanent nature of this recession’s job losses helps explain why new jobs have not been materializing, despite modestly improving economic growth.
How might this impact the economy, and of interest to us, the markets? The NY Fed concludes that we should expect a very long lag before these displaced workers get rehired: “Job growth now depends on the creation of new positions in different firms and industries, [while] Employers incur risks in creating new jobs, and require additional time to establish and fill positions.” Newly unemployed workers seeking new positions will find the task of getting rehired “to be even more complicated.” (See nearby charts).
Under traditional economic recoveries, new hires contribute to increased retail spending and consumer confidence as the cycle progresses. If that hiring does not appear, it will cap both the recovery and the market later in the cycle.
For the working economist, “a surge in payroll jobs used to be a reliable sign of the end of a recession—but not any longer. When the National Bureau of Economic Research (NBER), the accepted arbiter of business cycle dating, recently designated November 2001 as the end of the nation’s latest recession, it based its decision largely on the growth of output (GDP).” The “divergent behavior of employment” is a complicating factor – for portfolio managers, economists – and Presidential candidates.
Chart(s) of the Week
Job Adjustments by Industries (Early 1980s)
Job Adjustments by Industries (during the 2001)
Source: New York Federal Reserve
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Quote: “Some people say that they wish to await a clearer view of the future. When the future is again clear, the present bargains will no longer be available.” -Dean Witter