Friday, December 2, 2011

3 million jobs and counting

This has been one of the weakest recoveries in modern times, but nevertheless it has generated about 3 million new private sector jobs. This is shown in the top chart, which compares the results of the household and establishment surveys of private sector jobs. These two surveys don't always track each other closely, but over time they do tend to tell the same story. Over the past six months, the growth rate of private sector jobs according to the two surveys has been almost identical: 1.5% annualized. And since the recovery started, the household survey has found 3.2 million new private sector jobs, while the establishment survey has found 2.9 million. Call it 3 million new jobs and you're on pretty solid ground. We are still 6 million jobs shy of reaching a new high, however.

At the current 1.5% growth rate for jobs, the economy is on track to post real growth of 2.5-3.5%, since productivity tends to average about 2% per year, but it has only been 1% over the most recent 12 months. This isn't all that great, but it sure beats zero growth, and it is progress.

Meanwhile, the public sector continues to shed jobs. This is good news, since it shows that the U.S. economy is already undertaking the unpleasant task that faces many European economies, by shrinking its bloated public sector. If we could only be cutting spending the way we have been cutting government jobs, our deficit outlook would be dramatically improved. Regardless, we have only begun to scratch the surface of the problem: public sector jobs have only shrunk by 2%, while private sector jobs are still 5% below their 2008 high; and private sector jobs haven't grown at all for the past 10 years, whereas public sector jobs are still up over 3%.

The unemployment rate has dropped from 10% to 8.6%, which is more than would be expected given the relatively tepid rate of jobs growth, since the labor force tends to grow about 1% per year. But unfortunately, the labor force hasn't grown at all in the past four years, so tepid jobs growth translates into a larger decline in the unemployment rate. Apparently lots of folks have become discouraged and dropped out of the labor force. (Or maybe dropping out has been made easier by the huge increase in food stamps and unemployment insurance benefits.)

Today's jobs reports provide solid evidence of an economy that is growing at about a 3% pace. That's very slow given how many people are still looking for jobs, but it is better than a lot of other developed economies. And of course, there is no sign of the dreaded double-dip that so many have been calling for. We could be doing a lot better if we had more growth-oriented policies, but it is a testament to the dynamic nature of the U.S. economy that it has been able to grow in spite of all the headwinds it has faced: massive and wasteful "stimulus" spending, a 25% increase in federal spending as a % of GDP, a wrenching housing market collapse, a big increase in regulatory burdens, great uncertainty over the future course of monetary policy, and a historically weak dollar.

Perhaps more importantly, the U.S. economy today is in far better shape that it was expected to be just three years ago. As 2008 was drawing to a close, financial markets were priced to a global economic armageddon; credit spreads were predicting that as many as half of the companies in the U.S. would be bankrupt in 5 years' time; at 2.1%, 10-yr Treasury yields were priced to years of deflation and a multi-year depression; and the one-year forward-looking PE ratio of the S&P 500 was a mere 12.6. Yet despite all the improvement, the forward PE ratio of the S&P 500 today is only 12.1, and the 10-yr Treasury yield is only 2.06%. By these measures, the market is even more concerned about the future today than it was three years ago. In short, the market is expecting the fallout from Eurozone sovereign defaults to be worse than anything we have seen so far.


Jake said...

"the U.S. economy today is in far better shape that it was expected to be just three years ago"

Four more years for Obama?

Benjamin Cole said...

I agree with Scott Grannis on much of what he says here in this excellent and authority-undermining presentation, except for his commentary on the dollar.

The dollar is helping exports and domestic industries, and hopefully attracting tourists and investors to the USA. Maybe some Americans are touring stateside too, rather than in Banjobistan.

Japan has experimented with a strong yen since 1990. The results have been catastrophic for investors (equities and property down 80 percent) while every inflection point in 1990 turned weaker and stayed that away.

Incredibly, the Japan GDP is lower today in nominal terms than in 1990, though it may be higher in real terms due to deflation.

I wonder is the USA economy could withstand the twin and prolonged bear markets in equities and stocks that tight money will bring. Not something I would like to see.

Benjamin Cole said...

Also, I am not so sure a price-earnings ratio (pe) of 12 is "low."

Sure, it has been higher in the past. But would you pay more than 12 times earnings for an operating company? A well-run restaurant? A construction company? A laundromat?

Given competition? Uncertain global economy? Sure, some companies have growth stories, but we are talking 12 times for the entire market.

Would you pay 12 times earnings to buy a company in which your only recourse, if you felt management was poor, was to sell?

You do get the advantage of liquidity on Wall Street, except during rare panics.

12 ties earnings sounds about right for me. More than 15 sounds rich, even in good times (as good times do not last forever). Under 10 sounds low.


Bill said...

I am not sure how trustworthy these numbers are. It seems to me that the Obama people have lots of incentive to cook the books.

mmanagedaccounts said...

My wife and I vacationed in Banjobistan last summer and it was one of the most desolate spots in the world. The only redeeming characteristic is its wine vinegar vinyards. That's what made our time there memorable. The capitol city, Punjabistan, was overrun by vacationers from the southern Eurozone, spending as though money was as abundant as water. Sleep deprived, we were so happy to be back in the United States of America, and will vacation this summer on the north side of Niagra Falls.

Benjamin Cole said...

Managed Accounts-

If you want to vacationing the USA, I would suggest the south side of the Niagara Falls.

BTW, I would die to spend six months in Italy.

William said...

From the Guardian Dec 2nd:
"Angela Merkel vows to create 'fiscal union' across eurozone"

Copy & Paste in your Browser:

Bill said...


Just curious. Where do you think the S&P 500 will finish Dec. 31st?

John said...

Regarding the jobs charts: what do we know about these jobs?

1. Are they full time, or could they be FTEs comprised of multiple part time gigs, chopped up sort of like subprime mortgage bonds?

2. Do the jobs come with health insurance?

3. Do the jobs come with retirement plans? Vacation and sick time? Life insurance?

Without an understanding of quality of jobs, the long term data, as presented, really don't mean much.

Those apples in 2000 may have turned to rotten oranges by 2011.

Benjamin Cole said...

Inflation is dead, and getting deader---see Mark Parry's latest post at Carpe Diem.

I do not know what the Fed is waiting for, unless it is a new and GOP president. I can almost sympathize with that, but would prefer apolitical macro-economic policy.

McKibbinUSA said...

@Benjamin, the Federal Reserve and ECB are great at polemics, but bad at politics -- the reality is that the central bankers are no closer to passing deep austerity measures than they were when the global economic crisis began four years ago -- austerity measures will fail during the transition from polemics to deployment -- I am not even sure that the Federal Reserve and ECB might not be abolished in the next year or two -- again, nothing significant has been passed by the austerity hawks, who tend to be economists with conceptual ideas that are neither pragmatic nor policially feasible -- the great inflation is coming -- use the time we have to position yourself in preparation -- buy dividend and rent-paying equities and avoid holding cash or precious metals, which can be confiscated -- also, beware of holding too large a percentage of your assets in qualified plans such as 401(k)'s or IRA's -- finally, be sure you are holding your shares as physical certificates and deeds rather than as custodial holdings at some bank or investment outfit -- again, hang in there...

McKibbinUSA said...

PS: The portfolio strategy above will likely deliver highly positive gains over the coming 15-20 years regardless of which way monetary policy proceeds -- contraction or expansion, dividend-paying and rent-paying equities are the only realistic path toward future financial independence in today's markets...

Benjamin Cole said...

Dr. Perry reports TIPS expectations of inflation are down under 2 percent again.

Why we are fighting inflation when the economy is 13 percent below trend is inexplicable. Now is the time to stimulate the economy, not suffocate it.

The Fed is following an extremely tight monetary policy---otherwise, why do investors expect historically low inflation rates?

And what make 2 percent inflation so desirable? From 1982 to 2008, the USA experienced nearly continuous prosperity, marked only by short recessions. Inflation was moderate, ranging from 2 percent to 5 percent almost always.

Obviously, we can prosper with mild and varying inflation. Japan has not shown we can prosper with low inflation or deflation.