The headline number from the Unemployment Report this morning showed 243,000 jobs were created, more than the highest estimated increase by any of the economists surveyed before the report was released (the average expected increase from the economist survey was 120,000 jobs). The unemployment rate fell to 8.3%, again lower than predicted, and certainly good news for President Obama. Job growth was nearly across the board – in retail, construction, manufacturing, business services, and the hotel and restaurant industry. You can believe all this if you want, or you can go into the details in the report for some interesting context.
First, ever since the credit crisis of 2008, there has been a trend in the unemployment report that shows a declining participation rate in the job market. While a whopping number of jobs were created in January, a far larger number of people left the labor force - 1,752,000 in fact. The percent of the total working population who did not have jobs rose to 36.7%, an all time high. It’s no wonder the unemployment rate fell, when the denominator shrinks so markedly. The total number of people employed fell by 737,000. So what do you want to celebrate – the 243,000 who got jobs, or the million or so people who dropped by the wayside and are no longer counted in the data?
It makes you wonder how much faith you can put in the Labor Department reports. For example, the government, the business press, and Wall Street rarely report on the fundamental ways in which the US labor market is changing, with so many people dropping out of the work force. The press has had a hard enough time getting to grips with the Labor Department’s Birth/Death model, which over time adds to the number of people reported as employed. The model is supposed to compensate for the inability of the government to get good information on the number of new businesses created every month and which presumably add to employment. The problem is the model has been shown in the past to have significantly overestimated the number of jobs created by new businesses. Economists still don’t know if the model is appropriate, and how much of the 243,000 jobs created this month are the result of the Birth/Death model.
The other odd thing about the January report is that it does not coincide with most other evidence about the US labor market. There have been tens of thousands of high paying jobs lost in recent months on Wall Street. American Airlines just announced it is cutting 14,000 employees this year. Challenger, Gray and Christmas, an executive outplacement firm that does job surveys, reported that this January job layoffs increased by 28%. The Gallup survey on business employment indicated a rise in unemployment at the start of this year.
Maybe the 1,752,000 workers who this past month were relegated to government statistical oblivion don’t matter anymore to the economy. Wouldn’t it be nice to just keep focusing on the fewer and fewer people who have jobs, and the 250,000 or so in good months who join them? The problem here is that those 1,752,000 people who have gone to Labor Department purgatory no longer have the money to spend that they used to have. This annoying little fact keeps showing up in the lackluster revenue growth displayed by corporations reporting on 2011 Q4 earnings. The number of companies that have reported revenue growth lower than expected by analysts is higher than it has been in many years. The flip side of this is that the revenue and earnings “beats” on the upside are far fewer than expected. For all the S&P 500 companies, upside surprises generated 45 cents per share for the index average, but of this, a full 43 cents per share came entirely from the technology sector. And if you delve into the technology sector, what do you find? Revenue growth for the sector has been in excess of 15% last year, but strip away Apple, and the number falls to 5% growth.
The sad fact is that there are 1,752,000 fewer people this month who are going to be able to afford Apple products or any other fancy new technology toy. Not only are these people out of a job and facing cash flow shortfalls, prices are going up everywhere they look. The price splurge engineered by the Fed last year with QE2, in their intention to generate at least 2% inflation, hasn’t gone away. The ISM Services Sector report this morning, which showed surprising growth in services beyond what economists expected, also showed surprising strength in inflation. Companies reporting in the ISM survey noted price increases in “Airfares; Beef; Chemical Products; Chicken; Crab; Coffee; Diesel Fuel; Gasoline; Medical Supplies; Paper; Petroleum Based Products; Resin Based Products; Vehicles; and Wire.” The only commodity going down in price was corrugated boxes.
The problem facing the unemployed, the underemployed, the part-time workers, the millions of people who have fallen off the labor rolls altogether, and even those ex-bankers who had to take a job in January in poorly paying industries like retail, medical, leisure and hospitality (in other words all the sectors in which jobs were growing in January), is that the cost of living is going up relentlessly while their wages are stagnating at best. The US needs these people at full employment, because full time workers contribute to federal income tax revenue, which is increasingly in short supply. The Wall Street Journal reports that in 2011 there was a surprising decline in contributions to federal tax revenue from corporations. From 1987 to 2008, US corporations paid on average 25.6% of their US revenue in taxes; last year they paid only 12.1%, the lowest contribution since 1972. Haven’t you been reading about record corporate net income in 2011? These stories are true, so why aren’t corporations contributing more to the Treasury, and why is the burden falling increasingly on cash-strapped individuals?
Corporations are having such a bumper year in net income that you would think they would have no problem keeping their pension plan obligations up-to-date. Sadly, this is not happening. Among the S&P 500 companies, 97% had underfunded pension plans in 2011. The amount of the shortfall was nearly a quarter of a trillion dollars. Blame is being placed directly on the Federal Reserve and its zero interest rate policy, as pension plans, insurance companies, endowments and other charities have had a difficult time meeting interest income targets when interest rates are at zero. Somehow, this story has traveled below the public radar, and therefore only a few companies have felt obligated to top up their pension plan with contributions from their earnings.
The millions of people struggling for food and shelter and clothing have one bit of good news: they can buy a car! Banks are making car loans with abandon. They argue that it is far easier to repossess a car than to foreclose on a home, and the amount at risk on a car loan is of course much smaller than on a home loan or equity line of credit. The Market Watch news service reports that the banks are helping Detroit sell in excess of 11,000,000 cars this year by increasing their lending to sub-prime borrowers (those with low credit scores from 550-619). This segment of the population comprised 40% of all car loans last year. Even more interesting, loans to the segment known as “Deep Sub-Prime”, with scores less than 550 and a high risk of default, were up 17% last year.
How do the banks get around the fact that even these credit-challenged customers can’t afford the monthly payments on an average car loan? Easy. The banks are doubling the maturity on their car loans. Instead of granting four year loans, they are granting eight year loans to keep the monthly payment down. You don’t have to be an expert to know the rate of depreciation on a typical car is very quick, and by about two or three years the banks will be underwater on most of these loans.
But that is two or three years from now – an eternity in financial terms. Even if things really went bad for the banking industry with its car loans, all the evidence they have suggests that the federal government will be there to bail them out, no matter what President Obama says about “no more bank bailouts”. He was more than happy this morning to tout the 243,000 new jobs created and the economy that is on the mend. He certainly hasn’t complained about how Detroit and the bankers are up to their old tricks again. Ben Bernanke hasn’t said a word about deteriorating credit standards in the auto loan market; he’s too busy stripping wealth away from retired people and anyone else with savings. Here we are in 2012, and we have learned absolutely nothing from the debacles of the previous decade.
Well, maybe not entirely nothing. The government has got a lot better in focusing everyone’s attention on only one part of the story – the part where 243,000 people supposedly now have a job, while 1,752,000 who have given up are to be forgotten and made invisible. Except you’ll be able to see them – they will be those people down the street who have lost their home, and are now sleeping every night in their new car.