Now we’ve all heard a lot of statistics that depict both a good and bad employment picture. We have 5% U3 (historic lows) but we have 62% labour force participation rate (record lows for double income household era). We hear Obama suggest he’s created 7 million new jobs but wages are stagnant. So is the job market good or bad?
Remember job growth figures are irrelevant without the context of the working age population. It’s all about supply and demand. That is, if my demand for labour increases, prima facie, that seems to put upward pressure on wages. But if my supply of labour increases by an even larger amount well that puts downward pressure on wages. And real wages are a good proxy for living standards, so this is important stuff. But jobs and wages have much broader implications than just the inconsequential living standards of the working class.
So let’s use relative comparisons to understand if our probabilities of getting a job, or better yet a breadwinner job, have improved or worsened over time.
The above chart depicts total private and government jobs as a percentage of the total working age population (demand for and supply of, labour). What we find is that we have a 5% lower probability of getting a job than we did in 1999 (meaning supply of labour has outstripped demand for labour). Now 5% doesn’t sound like a huge decrease but when the working age population is 204M we are talking about 10M proportionately more people who won’t get a job than in 1999. Further think about what happens to price of labour in this scenario; exactly what we’ve seen in wages for the past 20 years. But let’s look at breadwinner jobs specifically.
When we narrow the scope to just breadwinner jobs (above chart), both white and blue collar, we see the same 5% differential between 1999 and today. The reason is both a reduction of the numerator and an increase in the denominator.
Here’s a look at the numerator, which is actual 1.5 million fewer breadwinner jobs today than in 1999.
And here’s the denominator, which is actual 28 million more working age people.
However, when we look at part time and minimum wage jobs we see that they have almost kept up with working age population growth (.3% decline).
What this means is that while part time and minimum wage jobs have kept up with working population growth there remains a 5% gap overall and that gap is directly within the breadwinner job sector. Again this means there are proportionately 10M fewer breadwinner jobs for working age people in America today than in 1999. This is an objective mathematical fact (we like these). And so when people say “well the jobs market is just transitioning to different types of work” you can say yes, in part that’s correct, to part time and minimum wage work.
But I want to show you it is not just about transitioning from old world to new world the problem is more intricate and we must identify it if we are to first understand it and then to do something about it. You see there are significantly more consumers in America today than in 1999 because every mouth is a consumer. And so one would think more domestic consumption equates to more domestic production (jobs). But here we find the opposite phenomenon. That is, higher domestic consumption (i.e. higher revenues) but proportionately lower domestic production (lower relative demand for jobs).
Let’s have a quick look at what this looks like in practice.
Below is the 10yr moving average of Industrial Production Index growth.
What we find is that only twice in modern history has this long term average of industrial production gone negative. First was during the great depression and second was the recent financial crisis. However, perhaps more concerning is that the ‘recovery’ has failed to produce any recovery in industrial production. If we look at the above chart you’ll notice the Index growth failed to reach 1% before again rolling over. We’ve never seen this before.
Let’s add the second derivative, or the rate of change of growth to the above growth chart to see where we’re headed.
The above chart depicts a massive deterioration (red line) in the growth rate (black line) of industrial production. What’s perhaps most alarming is that each of the previous two times this rate of deterioration has occurred over the past 6 decades, growth was above 3% while today it’s already less than 1% (black arrows). Think of a 300 lb man suddenly losing 20% of his body weight. Well he still has 240 lbs of body weight. However, imagine a 100 lb man suddenly losing 20% of his body weight. Well he just died. This is exactly where the US is with Industrial Production.
This really gets at the heart of the problem. Consumption demand, at least the staples, will be realized to prevent death. But how is that consumption being realized if we’ve seen that domestic production has not kept up with domestic consumption? It is realized through current account trade deficits. Trade deficits (current acct) are what allow an imbalance between domestic consumption and domestic production and the mechanism for ‘balancing’ this imbalance is private and public debt (credit and welfare).
But do understand then, perpetual current account trade deficits simply equate to subsidized corporate revenue and profit by way of subsidized personal consumption. Another mathematical fact. And credit and welfare are a function of income in that there is a maximum ratio of credit and welfare to income (income has to be able to pay down the private and public debt). This means there is a ceiling on consumption in this country and that we must be approaching it.
Now I know in this very high tech new world very few academics or market strategists care much about US production but let me show you why they might want to adjust that perspective.
We can pretend fundamentals don’t matter and sure in the day to day profit taking of Citadel and the like they really don’t matter. But for investors i.e. savers, the last bastion for returns is equities but now even here we see the long term average returns failing to achieve more than 5% and with a large risk cherry on top. So while the PhDs may talk big about this new world economy where a move to universal welfare means jobs and wages don’t matter (this means you Bill Gross, Paul Krugman, Kevin Murphy, etc. etc.), well that is nonsense. Jobs and wages matter and they will always matter.
For those of you that still don’t believe me let me have one more shot at convincing you. We are all aware of the elephant in the room we simply never mention, namely, almost ubiquitous declining top lines throughout the market. And why?? Well this ain’t rocket science folks…..
What we find is that long term growth in PCE (red line) has been deteriorating since the early 80’s and currently at a pace (black line) rarely seen before. So Mr. Market Pro, CEO and PhD, as we quickly and undeniably approach the proverbial ceiling on consumption, where do you set the following parametres, Valuation = Price level/Fundamentals 10 years from now?