On the Economy

The Labor Department recently reported that the unemployment rate dropped from 9.0% in October to 8.6% in November. So, does this means nirvana is just around the corner?  Are our problems are over?  With .4% drop per month, will we be below 5% unemployment in under a year?  Wow.  If only this were true.

The unemployment rate is determined by the Labor Department’s household survey.  The government takes a survey and asks how many are unemployed and that becomes the reported rate.  Unfortunately the hard numbers tell a different story.  About 102,000 jobs were created last month according to the Department.  But just to keep up with the population increases, over 200,000 jobs need to be created every month.  So, basic math says that the unemployment rate hasn’t decreased.

According to Neil Dutta, US Economist at Bank of America Merrill Lynch, “When the unemployment rate declines, we want to see both employment and participation increase as discouraged workers return to the labor force. Today, we got the former, but not the latter, making the 0.4 percent drop look a bit suspect.  We would not be surprised to see the unemployment rate give back some of its decline in the coming month(s).” (http://www.cnbc.com/id/45521793)  According to CNBC, “Claims for unemployment insurance unexpectedly rose last week, climbing past the psychologically important 400,000 mark as the jobs market showed signs of more weakness.” (http://www.cnbc.com/id/45506837/)  This obviously doesn’t support a falling unemployment rate.

Over 310,000 people left the labor force last month thereby dropping out of the number counted as unemployed. (http://finance.yahoo.com/news/jobless-rate-drops-8-6-133402269.html?l=1/)  These include women who previously worked as well as early seniors who have simply given up hope of working and slipped into unintended early retirement. Further, a large percentage of the 102,000 jobs gained last month were seasonal retail jobs that likely are temporary.

Let’s look at it another way.  The unemployment rate in 2006 and 2007 was 4.6%. (http://www.bls.gov/cps/prev_yrs.htm/)  According to Edward Glaeser (Glimp Professor of Economics, Harvard University), “Since 2007, the number of employed Americans has fallen by 7 million.” (http://www.hks.harvard.edu/centers/rappaport/events-and-news/op-eds/more-americans-need-to-work-and-to-marry/)  Clearly this is not good.  Regardless of year-over-year or month-over-month changes, 7 million fewer people are working than just a few years ago.  Reports suggest that people have grown discouraged and taken themselves out of the workforce and so are no longer reporting themselves unemployed.  At 102,000 new jobs per month, it will take until 2017 to get back to the employment level of 2007!

As an aside, there are about 140M people employed in this country (http://www.bls.gov/news.release/pdf/empsit.pdf).  That’s only about 45% of our 312M population.  63% of the population or 197M people are between the ages of 18 and 65.  So only 71% of the working aged population is employed.  That’s a lot of unproductive people and a huge waste of human resources.

So what conclusion should small businesses derive from these new data?  The economy remains sluggish, unemployment remains very high, 7 million fewer people are employed versus a few years ago, and there is no short-term catalyst for economic growth.  Small companies should be cautious, pay attention to cash flow, and continue to wait for sunnier days to take investment risk.

– Steve Odland

The U.S. Economy went into free-fall in the latter part of 2008 when the housing crisis and its falling assets values triggered a banking crisis, triggering a liquidity crisis, triggering a severe economic contraction.  If only we hadn’t glutted the market with easy money.

Perhaps we should have retained the 20% down, 80% maximum mortgage standard and the housing boom wouldn’t have been so high.  Perhaps the 20% down payment would have exposed property owners to the first 20% decline in prices without triggering asset write-downs and crises at financial institutions.  Perhaps there wouldn’t even have been a 20% decline in values since there likely wouldn’t have been the real estate boom.  Perhaps, perhaps.

People still are seeking to parse blame for the crisis.  Some blame the “greedy” banks that loaned all that money.  But I don’t recall the banks loaning money to people who didn’t ask for the loan.  Some blame Congress for pushing lax standards at Fannie Mae and Freddie Mac. Sure, they set up economic incentives that made real estate buyers an “offer they couldn’t refuse,” like no money down, little required documentation of ability to pay, etc.  Perhaps, but Fannie and Freddie didn’t force people to take loans they couldn’t afford.

So who’s to blame for the crisis?  People.  People in government who demanded eased standards.  People in banks who went along knowing that loaning money to people who couldn’t pay wouldn’t work over the long run.  People who bought real estate they couldn’t afford and financed it with loans they couldn’t repay.  We continually look for “perpetrators” of acts against “victims.”  The people who set up the environment of loose money aren’t exactly perpetrators and the people who took money they never expected to repay aren’t exactly victims.  Perhaps we should stop with the labels and call it a draw.

The real issue now is what to do.  We still are trying to prosecute people on the loaning side while trying to “protect” people on the borrowing side.  Perhaps the real victims are we the people who had nothing to do with any of the above but now are expected to pay for it. We need to be very careful here not to continue the mistakes that got us here to begin with.  For instance, some are arguing that we need to loan more to stimulate real estate purchases to reignite the economy.  Really? Didn’t we learn anything?  Some are saying we need to raise taxes to take money from those who still have some to fund more giving to “victims.” Hmm.  Does that really work anywhere in the world?

So what’s it going to take?  Let’s go back to lending standards that encourage personal responsibility.  Let’s go back to people living within their means.  Let’s go back to everyone paying something to support this great country rather than having a view that “others can pay.”  Maybe we need to let the market work rather than having quasi-government agencies distort the markets.  Maybe we then need to be patient and let things heal.  Let the economy catch up to the new liquidity levels, let markets adjust to new equilibriums, and let people adjust attitudinally to newfound responsibility to act accountably as did previous generations.  Then, it will get better.

– Steve Odland