Monday, April 7, 2008

Jobs, Again: Double Trouble

I continue on the employment subject because I believe it is of great importance in evaluating the economy's prospects, shorter and longer-term. First, a chart (click to enlarge) that compares the annual growth rate of the civilian labor force (those that want to work - red line) to growth in the payrolls of the private sector (those that are currently working in businesses - blue line).

The initial observation is that we are likely already in a recession, if we judge by the history of past drops in the growth rate of payrolls below that of the labor force. The economy is now creating jobs slower than people need them.

Also important is the simultaneous decline of both growth rates to near zero. The drop in payrolls means that the economy is losing jobs right now, whereas the drop in labor force means the economy is unlikely to create many jobs in the future. This has only happened twice in the previous 50 years, in 1991 and 2001. Interestingly, the recoveries following both recessions were called "jobless".

But in 1991 and 2002 household debt as a percentage of disposable personal income was 85% and 108% respectively, whereas today it is at 136%. Since debt must be serviced from future earned income, the current combination of record-high debt and zero (soon, negative?) job growth is very dangerous, both from a short and long-term perspective.

Therefore, I believe that the current credit crunch is not merely a cyclical event but a fundamental problem that will be with us for a long time to come.

14 comments:

  1. Hellasious,

    Good graph and analysis. A couple of thoughts:

    1) What makes you think the debt ratio could not be pushed higher than 136%? Looking back at 2001, it was historic high at 108%, and I bet many were calling for depression or deflation era at that time. But the envelope got pushed higher.

    Or in other words, can you prove mathematically that 136 is the absolute limit? Looking at what Bernanke and Bush and Congress is doing to Nationalise every debt, I think there is a distinct chance to go higher, until foreigner starting to dump the bonds and USD.

    2) Can you explain the reason behind the quote "... the drop in labor force means the economy is unlikely to create many jobs in the future". Are you saying economy expansion is highly dependent on the population growth?

    ReplyDelete
  2. "Are you saying economy expansion is highly dependent on the population growth?"

    Growth is highly dependent on the growth of the labor force, not necessarily population. Age plays a major role and so does gender.

    For example, Europe is facing a major ageing crisis and is pushing the retirement age out by several years.

    Regards,
    H.

    ReplyDelete
  3. What was the catalyst for the market inflection in July?

    A - ABS derivative funders stopped rolling commercial paper due to excessive default and foreclosure on real estate loans.

    Going back to 1991 or 2001, what were the catalysts to take the market higher?

    1991 - Computer technology improved productivity.

    2001 - Speculative mortgage origination created an artificial boom in real estate construction.

    Median US household income:
    1991: $40,873
    1999: $46,236
    2006: $48,023 **Most recent gov stat.**

    The game can only continue if the funders of debt walk away though. What we have seen over the past 9 months is the Fed having to step up to keep banks running and providing them with capital to originate. The Fed's balance sheet is presently ~60% committed though, so private demand for debt needs to return for normal functioning to resume.

    ReplyDelete
  4. The game can only continue if the funders of debt DON'T walk away this time around.

    :)

    ReplyDelete
  5. Shawn,

    The absolute limit is determined by carrying costs. The reason the debt ratio has been able to increase is because of historically low interest rates. As rates go up the ratio must necessarily come back down either by increased paybacks or defaults. Both would have negative effects on future consumption.

    ReplyDelete
  6. Speaking of consumer debt check this out:

    http://digg.com/business_finance/MR_MORTGAGE_EXPOSES_BIG_BANKS_HOME_EQUITY_EXPOSURE

    digg it if ya dig it!

    ReplyDelete
  7. Sorry here it is in tinyurl

    http://tinyurl.com/6puo56

    ReplyDelete
  8. Is disposible income defined as net income after taxes?

    ReplyDelete
  9. "The absolute limit is determined by carrying costs. The reason the debt ratio has been able to increase is because of historically low interest rates. As rates go up the ratio must necessarily come back down either by increased paybacks or defaults."

    What yoyomo said. In the current decade, it has taken an increase of $5 in debt to produce $1 of GDP; in the '50s, it took $1.33. With home prices collapsing and interest rates likely to rise as foreigners give up on the dollar, debt accumulation has reached a tipping point, and we are dealing with end-game phenomena.

    ReplyDelete
  10. I've always had trouble with the 'perpetual growth for perpetual prosperity' model of an economy. Given limited increases in productivity ('value added'), it just is not sustainable.

    ReplyDelete
  11. More or less what you have been saying (Since debt must be serviced from future earned income, the current combination of record-high debt and zero (soon, negative?) job growth is very dangerous, both from a short and long-term perspective.):

    The fundamental reason why we are having these problems in the US is that real wages and incomes have not kept pace with home prices since the 1960s and that's what drove demand for these affordability products.

    ReplyDelete
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