Structurally High Unemployment for a Decade

Courtesy of Doug Short.

Since 2008 I have been stating the US would have “Structurally High Unemployment for a Decade“.

Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially “low” 8.5% (not that 8.5% is anything to brag about).

To show how difficult it will be to bring that rate down, let’s take a look at job growth (or losses), for the last three decades (numbers in thousands).

Bear in mind those tables are from the BLS establishment survey data while the unemployment rate is based off a phone survey. Nonetheless, with sufficient time (and BLS revisions), the results merge.

According to Fed chairman Ben Bernanke (and I believe he is correct on this point) it currently takes about 125,000 jobs a month to hold the unemployment rate steady, down from about 150,000 in 2000. I expect that number to drop for a few more years due to boomer demographics, but the key point is the number is positive not negative.

The only reason unemployment rate has dropped recently is because BLS surveys say the number is negative (a shrinking labor force).

Based on historical data and Bernanke’s estimates, one would have expected the unemployment rate to have risen during 2010 and peaked mid-2011. Instead, the unemployment rate fell from 10 to 8.5.

The Real Employment Situation

With that backdrop on historical job trends, please consider an excellent article by Lance Roberts of Streettalk Live: The Real Employment Situation Report For December 2011

If you take a look at the actual number of those “counted” as employed, that number has risen from the recessionary trough. However, in reality, employment is still far below the long term historical trend. Currently, the deviation from the long term trend is the widest on record and has made very little improvement. In order for the country to return to the long-term trend of employment by 2020, we will need to be creating nearly 250,000 jobs each month. This, of course, is a far cry from 200,000 that we saw this month. With the employment-to-population ratio remaining at levels not seen since 1984, the real pressure on the economy remains focused on the consumer. There are two very negative ramifications of this large and “available” labor pool. The first is that the longer an individual remains unemployed, the more the degradation in job skills weighs on future employment potential and income. The second, and most importantly, is that, with a high level of competition for existing jobs, wages remain under significant downward pressure. Business owners are highly aware of the employment and business climate, and regardless of the ranting and raving about the “cash on the sidelines”, businesses are not operated as charities. Business owners are milking the current employment climate for all it is worth in order to maintain profitability. With high competition levels for existing jobs, and the impeding threat of job loss for those working, employers can work employees longer hours at less pay. This is great for profit margins, and workers won’t complain because there are plenty of individuals that will be happy to take their job and do it for less pay. This impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the fact that recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is unsustainable, and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.

Employment Trends Since 1955

In Employment Trends Since 1955 I posted a chart from reader Tim Wallace that conveys the same idea in a different way.

Employment Trends

Click for a larger image

Wallace writes ….

Shrinking Job Opportunities and the Jobs Gap

Let’s look at the same data still one more way. Please consider Shrinking Job Opportunities: The Challenge of Putting Americans Back to Work

The December Jobs Gap

As of December, our nation continues to face a ?jobs gap? of 12.1 million jobs, down by 67,000 jobs from November

.

The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2024?over 12 years?to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by February 2017?not for another five years.

Statistically Impossible IFs

Based on the data tables from the BLS that I posted at the top of this article, each of those dashed line in the above chart represents a statistically impossible IF.

The economy is certainly not going to average 472,000 jobs per month for two years. Nor will it add 321,000 jobs a month for six straight years. Finally, the economy is not going to add 208,000 jobs a month, every month, for the next 12 years.

Indeed, one cannot find any 10-year period in which the economy added that number of jobs. The best 10-year period I can find is 195,000 jobs per month from 1991-2000, overlapping decades by 1 year (during the internet boom with hugely falling interest rates and Greenspan’s foot on the gas pedal nearly every step of the way).

Fundamental Case for Structurally High Unemployment

• At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
• At the height of the housing bubble in 2005, the economy added 208,000 jobs a month.
• At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 91,000 and 173,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution.

Moreover, debt levels are high and millions are trapped in their homes, unable to move. Boomers in retirement or headed for retirement have insufficient savings so one cannot expect a spending boom of any kind. Instead, one can expect boomers to draw down on their savings (assuming that have any savings).

In conclusion, the only way the unemployment rate can substantially decline from here is if millions more drop out of the labor force, thereby creating an even bigger “gap” between reality and the BLS’s alleged unemployment rate.

(c) Mike “Mish” Shedlock
Investment Advisor Representative
www.sitkapacific.com