Jobenomics Employment Report: May 2013

Jobenomics tracks both unemployment (see: Unemployment Scoreboard: May 2013) and employment reports (this posting). This chart summarizes both reports.

Since year 2000, the United States has 4,838,000 people enter the US labor force as opposed to 21,545,000 departing the workforce into a US Department of Labor’s Bureau of Labor Statistics category called “Not in the Labor Force”, which includes people that can work but chose not to work. These Not-in-Labor-Force persons are in addition to the 21 million citizens that are classified as unemployed or under-employed. During the Obama Administration (Jan 2009 to today), 9 times as many people departed the US labor force than entered it. However, this negative trend has reversed itself in the last year. The bottom line is that the US must engage more people in the labor force and reverse the negative flow of people no longer looking for work.

For six decades, the US consistently produced tens of millions new jobs per decade. Then the bottom fell out with a loss of 1.2 million jobs in the ‘00s. Many believe that the Great Recession of 2008 caused such a catastrophic loss of jobs. Others believe that this is too simple an answer. Whatever the reason, it is critical that we produce a significant number of jobs this decade (’10s) for the US economy to recover. 20 million new jobs by year 2020 is a reasonable goal. Based on this goal, the US should have produced 10 million jobs by 1 May 2013. We have only produced 6.1 million, which represents a 39% shortfall.

Today, the 135,474,000 Americans are employed. 94,986,000 (70.1%) work in service-providing industries. Service industries include professional services business, education and health, financial, trade, retail, transport, distribution, and information-dominated businesses. 18,644,000 (13.8%) are in goods-producing industries that include manufacturing (8.9%), construction (4.3%) and mining. 21,844,000 (16.1%) Americans work for government at the federal, state and local levels. Since government employment is services-related, a total of 86.2% of all Americans work in service industries.

While the US has enjoyed some employment growth since the beginning of this decade, America is only producing 61% (39% shortfall) as many jobs as needed. The US produced only 6,101,000 jobs compared to the 10,000,000 jobs needed as measured against the traditional benchmark of 250,000 jobs per month (250,000 x 40 months = 10 million). Of the three employment sectors reported by the Bureau of Labor Statistics, the private sector’s service-providing industries created 5,879,000 jobs, the private sector’s goods-producing industries created 858,000 jobs, and the government sector lost 636,000 jobs—with 75.5% (480,000) of all government jobs lost at the local level.

83.3% of all new jobs this decade were produced by four industries in the service providing sector (professional and business services; education and health services; trade, transportation, utilities; and leisure and hospitality). Much touted manufacturing contributed 9.4%, which is vital but not significant. The non-internet information industries lost jobs during this decade. Government, at all levels, lost jobs.

Private sector businesses by company size. The following charts examine private sector businesses by size. As reported by the ADP National Employment Report (published monthly by the ADP Research Institute in close collaboration with Moody’s Analytics), data indicates that small business is the dominant economic force in terms of employment and job creation.

Today, small businesses employ 77% of all private sector Americans with a total of 87.8 million employees—5 times the amount of large corporations (1000+). Very small businesses with less than 19 employees also employ more than large corporations (29.3M versus 17.7M).

Since the beginning of this decade, small business produced 71% of all new jobs. This is an amazing statistic considering the adverse lending environment by financial institutions, mounting government regulation, and the pittance of federal government spending on small businesses. Equally important, is the lack of commercial lending to very small and startup businesses that have been starved for capital. Very small and startup businesses have traditionally been the primary source of employment for entry-level workers and the long-term unemployed. Had the US government paid more attention to this category of employers during its generous handouts of $14.6 trillion worth of stimuli, bailouts and buyouts since the Great Recession, Jobenomics estimates that as many as five million more Americans would be employed today. According the

US Small Business Association[1], startups, minus closures, create about 40% of American net new jobs. Also according the SBA, about half of all new businesses survive five years or more, and about one-third survives 10 years or more. Jobenomics is currently working with a dozen US cities to implement Jobenomics Business Generators to create hundreds of thousands of new startup businesses. The objective a Jobenomics Business Generator is to increase “birth rates” of new businesses as well as to extend the “life span” of new businesses.

It is a common misperception that small businesses, especially very small (1-19 employees), are the most fragile. The following chart indicates that very small businesses have been the most resilient of the five ADP business categories following the Great Recession of 2008. This fact cannot be understated in an environment where small businesses have been starved for investment capital from financial and government institutions.

Private Sector Industries by Company Size

It is also a common misperception that small businesses dominate service-providing industries and large major corporations dominate the goods-producing industries. The above chart indicates that small and medium sized businesses play a major role in both good-producing (manufacturing, construction, and mining) as well as the services industries.

Service-providing sector. The US service-providing sector now employs 95.0M and has grown 85% over the last three decades.

The US service-providing sector averaged 7% growth since the beginning of this decade with 5,879,000 new jobs created. Today, the US service-providing sector employs a total of 94,986,000 people across the seven industries shown below.

US Service-Providing Industry Sector Employment

Employment statistics for industries in the service-providing sector are ranked by the number of jobs created between 1 January 2010 and 1 May 2013 (40 months):

Professional/business services: 1,951,000 new jobs
Education and health services: 1,233,000 new jobs
Trade, transportation, utilities: 1,263,000 new jobs
Leisure and hospitality: 1,142,000 new jobs
Other services: 151,000 new jobs
Financial activities: 121,000 new jobs
Information (non-internet, like publishing): -50,000 jobs lost

Of the seven service-providing industries, only the Information (non-internet) industry lost jobs (-1.8%) during the post-Great Recession recovery period starting in January 2010. The top three industries are Professional & Business Services (+11.8%), Leisure & Hospitality (+8.8%) and Education & Health Services (+6.5%).

Goods-producing sector. The US goods-producing sector currently employs 18.6M and has declined 25% since its peak in March 2000.

US goods-producing sector has grown by approximately 900,000 since its post-recession low in February 2010, but has a long way to go to reach peak employment. Today, the US service-providing sector employs a total of 18,644,000 people across the three industries shown below.

Employment statistics for industries in this sector are ranked by the number of jobs created between 1 January 2010 and 1 April 2013 (39 months):

Manufacturing: 519,000 new jobs
Mining and logging: 199,000 new jobs
Construction: 140,000 new jobs

The fastest growing industry in the goods-producing sector is mining & logging, followed by manufacturing and construction. The goods news is that the construction industry is now positively producing jobs for the first time since the Great Recession.

While manufacturing has added about ½ million new jobs since the beginning of this decade, it has a long way to go to achieve peak its peak level of 19.6 million in June 1979 after sustaining a consistent growth rate from its post-World War II low of 12.5 million in September 1945. Since its peak in 1979, the US manufacturing industry has declined by 39%. Today, US manufacturing employs 11,990,000.

While the addition of 519,000 new jobs from manufacturing’s all time low of 11.5 million in January 2010 is positive, the manufacturing sector is still in the doldrums. Notwithstanding the political rhetoric about increasing US exports, re-shoring of US manufacturing jobs and increased US productivity, Jobenomics forecasts limited upside jobs potential in manufacturing due to excessive government regulation, improved automation, competitive foreign labor rates and a lack of higher-tech manufacturing skills in our civilian labor force (see Jobenomics’ Manufacturing Industry Forecast posting). The advent of new technologies (like 3D printing of manufactured parts and advanced robotics) reduce the need for non-skilled labor. By some accounts, US manufacturers have 3.5 million open high-tech jobs that currently are unfilled.

Jobenomics is also concerned by the amount political and public emphasis on the manufacturing growth as the primary engine for jobs creation. While manufacturing is vitally important to our nation, political emphasis needs to be on the high growth industries in the service sector. Manufacturing emphasis should be on protecting our gains and focusing on next-generation manufacturing technology, processes and recapitalization.

Construction industries continue to struggle after a rapid rise (69%) during the go-go years in the 1990s and the housing bubble in the early 2000s. In the 2006-07 time period, peak construction employment was 7.73M. Today, it is 5.80M, a loss of -25%. The good news is that construction employment has stopped its decline and has increased for its post-recession low of 5.44M in January 2011.

Residential construction employment was hardest hit of all construction sector with a 43% decrease from its pre-recession peak (3.45 million) to its post-recession low (1.98 M million Today, residential construction employment is down from its peak by 38% with a total employment of 2.12 million. Nonresidential construction fared slightly better with losses of -24% from peak and -20% today with 2.73 million employed. The heavy and civil engineering sector fared the best (largely due to federal stimulus programs) loosing -19% from peak and now down only -13% with a total of 808,000 employed.

Construction, lead by residential construction, usually leads economic recoveries. However, this recovery is different. Jobenomics forecasts that the residential construction industry will not produce a significant number of jobs for the remainder of this decade due to foreclosures, underwater mortgages, unemployment as well as changing attitudes to the value of homeowners. Due to the stagnant economy and government deficits, commercial and heavy construction is also unlikely to produce a significant number of new domestic jobs. Jobenomics does see potential in major foreign construction projects, green construction and renovation of older homes, and reconstruction of disaster areas like the Northeast after Hurricane Sandy that is getting a $60 billion infusion of cash form the federal government. However, these bright spots will not make up for stagnancy in US GDP and US employment.

Mining (oil & gas extraction, coal and minerals) and logging goods-producing sector continues to be a bright area for employment growth. From the beginning of this decade, mining increased employment by 199,000 jobs, with an impressive growth rate of 29.9%. With proper private and public sector support, this industry has significant upside potential.

Mining exploration and support employment has more than doubled in the last decade and likely to double again with exploration for domestic energy sources. Oil and gas extraction is also likely to double with new natural gas, oil shale, oil sands and offshore oil resources are exploited via new technology, like horizontal drilling and hydraulic fracking. Minerals mining employment has been stagnant over the decade, but this may change as commodity prices (gold, silver, copper) increase as well as worldwide demand for these commodities increase. Coal mining and logging are not likely to increase anytime soon mainly due to environmental pressure and the emphasis on clean renewable technology (wind and solar).

The Government Employment Sector. Total government sector employment currently is 21,844,000. Since 1 January 2010, government has lost 636,000 jobs, a negative 2.8% growth rate.

Employment statistics in this sector are ranked by the number of jobs lost between 1 January 2010 and 1 May 2013:

The government sector continued to lose jobs with 75.5% of all job losses occurring with local government (mainly teachers, police and firefighters), 15.4% at the state level, and 9.1% in the federal government (not including military, which is also downsizing). Jobenomics predicts that government job losses will continue to decline and accelerate at the federal and local levels especially if the US economy suffers an economic disruption due to either domestic or foreign events.

In conclusion, business and jobs creation is the number one issue facing US economic recovery. While some would argue that debt/deficits or entitlement/welfare are the biggest issues, it takes businesses to create lasting jobs that generate tax revenue to run government as well as supporting the less fortunate. The following chart is about as simple as Jobenomics can make it.

32% of all Americans are financially supporting the rest of the country. 103 million workers in the private sector are supporting 32 million that work for government (including contractors), 90 million that can work but choose not to work, 71 million that cannot work (children, retired, disabled, etc.) and 21 million that are looking for work (officially unemployed and unemployed). America’s number one priority is to grow the base with emphasis on small business creation, which produced the majority of all new jobs this decade.

[1] US Small Business Association, Office of Advocacy, Which businesses create more jobs—startups or existing businesses?, http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf

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Jobenomics Unemployment Report: May 2013

Jobenomics tracks both employment (see: Employment Scoreboard: May 2013) and unemployment (this posting). The following chart summarizes both reports. Since year 2000, the United States has 4,838,000 people enter the US labor force as opposed to 21,545,000 departing the workforce into a US Department of Labor’s Bureau of Labor Statistics category (Table A-16[1]) called “Not in the Labor Force”, which includes people that can work but chose not to work. These Not-in-Labor-Force persons are in addition to the 21 million citizens that are classified as unemployed or under-employed. During the Obama Administration (Jan 2009), 8.7 million more people departed the workforce than were employed. Since 2010 (the Jobenomics starting point), 104,000 more people departed the workforce than were employed. However during the last year, 41,000 more people were hired than departed the workforce. The bottom line is that the US must engage more people in the labor force and reverse the negative flow of people no longer looking for work.

US Labor Force Gains-Losses

Understanding Employment and Unemployment Numbers. According to the US Department of Labor Bureau of Labor Statistics (BLS), the basic concepts involved in identifying the employed and unemployed are quite simple:

People with jobs are Employed.
People who are jobless, looking for jobs, and available for work are Unemployed. Those who are marginally employed, and looking for jobs, are deemed Underemployed.
People who are neither employed nor unemployed are not in the labor force. Those who have no job and are not looking for one are counted in the BLS’ Not-in-Labor-Force (NiLF) category. When a discouraged worker stops looking for work, that person is no longer considered unemployed by the BLS, they moved into the NiLF category.

Therefore, as shown above:

Working Population = Employed + Underemployed + Unemployed = 155.1 million.
Non-Working Population = Not-in-Labor-Force + All Others = 160.7 million.

The Working Population includes 133.5 million employed and 21.4 million people who have a marginal job, no job, or are looking for work (U6 category). The BLS calls this group, the “Civilian Labor Force”, which is defined as citizens, who have jobs or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized.

The Non-Working Population includes 90.0 million in the BLS’ Not-in-Labor-Force category who can work but are not looking. Not-in-Labor-Force includes people (over 16 years old) such as discouraged workers, citizens who choose not to work, welfare recipients, students, retired, stay-at-home caregivers, etc. The remaining All Others category that include 70.6 million children, elderly, disabled, serving in the military, incarcerated, etc.

Every month, the BLS publishes unemployment and employment statistics for economic, policy and public decision-making. Unfortunately, few policy-makers, opinion-leaders, media-pundits and citizens understand these statistics. More importantly, Americans tend to focus on only one statistic—the U3 rate or “official” unemployment rate—which is deleterious to good decision making. The above chart highlights the U3 rate against a backdrop of other BLS unemployment (can work and are looking) and not-in-labor-force (can work but are not looking) categories.

The BLS calculates six unemployment categories (U1 through U6) every month for those that can work and are looking for work. The three most often reported categories are the so called Long-Term U1 Rate, the Official Unemployment U3 Rate, and the Total Unemployment U6 Rate. These rates and numbers are calculated as a percentage of the US Civilian Labor Force, which is less than half of the total US population of 315.8 million[2].

As of 1 May 2013, the U1 category is currently 4.1% with 6.4 million unemployed longer than 15 weeks. The U3 category is 7.5% with 11.6 million “officially” unemployed. The U6 category is 13.9% with 21.6 million underemployed or unemployed. These high unemployment rates have been consistently high for almost four years and many believe that high unemployment has become a floor as opposed to ceiling.

The chart above shows the recent US employment history. US peak employment occurred in January 2008 with 138.1 million employed. The post-Great Recession low occurred in February 2010 with 129.3 million employed. Today, there are 135.5 million employed. Consequently, -8.7 million jobs were lost from peak to low. From the low to present, 6.2 million jobs were created. From the start of the Obama Administration, the US has produced 1 million more jobs since the President took office. From the start of this decade, the Jobenomics starting point, 6.1 million jobs were created—all in the private sector, whereas each level of government (federal, state and local) lost jobs.

The “Not-in-Labor-Force” Category. The downward trends in the US working population and the upward trend in the US non-working population pose serious challenges to America’s economy and way-of-life. These trends are shown in the following charts.

Those in the Not-in-Labor-Force category (those that can work but don’t) has surged consistently since year 2000 by 21.5 million people. Since 2009, the start of the Obama Administration, it grew by 9.8 million. Since 2010, the beginning of the decade (Jobenomics starting point), it grew by 6.2 million people—more than the number of all new jobs created. In the last twelve months, it grew by 2.1 million—the highest average yearly rate in the last two decades.

From 1 January 2000 until today, the NiLF has grown 31% compared to 3% growth in the private sector work force. At the current rate of NiLF growth, those than can work but choose not to work will outnumber those working sometime in 2021/22.

As shown above, in terms of age, the NiLF includes 49 million people 55 years or older (54%), 24 million 25 to 54 year olds (26%), and 18 million 16 to 24 year olds (20%). In terms of gender, NiLF includes 54 million women (60%) and 36 million men (40%).

Since year 2000, the US working population suffered a serious decline from a high of 67.1% to 63.3% (the lowest rate since 1979) of our citizens are in the labor force. The primary reason for the dramatic US drop is largely due to those that simply have quit looking for work and are now categorized as Not-in-Labor-Force. Alarmingly, the BLS reports that 93% of the people in the NiLF currently do not want a job.

In comparison, the United States, United Kingdom (Britain) and Canada’s labor force participation rates are shown above as reported by the US Federal Reserve[3]. The US, UK and Canada share a common heritage and economic system. Comparatively, the percentage of citizens that are in participating in the US labor force is now shrinking significantly faster than those of our closest allies.

The American workforce is getting grayer. Economic uncertainty is keeping older Americans on the job and delaying retirement. According to The Conference Board (independent business membership and research association)” Nearly two-thirds of Americans between the ages of 45 and 60 say they plan to delay retirement… The increase was driven by the financial losses, layoffs and income stagnation sustained during the last few years of recession and recovery.”[4] As shown above, the BLS projects that the percentage of older Americans in the US civilian labor force will increase 43% from 1990 to 2020 while the percentage of younger Americans will shrink by 28%. Labor Department data also shows that once older workers are out of work, they have a much harder time finding employment than a younger worker.

The “Functionally Unemployed”. When a discouraged worker quits looking for work, he/she is eventually moved into the BLS’ Not-in-labor-force category—which essentially means that this former worker is in an unemployment limbo and off-the-grid from a working population perspective.

Jobenomics defines “functionally” employed as the total number of people that have no job and are capable of working—111.5 million Americans. From a Jobenomics perspective, Not-in-Labor-Force citizens should be classified as long-term unemployed. If all underemployed, unemployed and Not-in-Labor-Force people were “functionally unemployed”, the unemployment rate would be 35%.

Functionally Unemployed 2

The Jobenomics “functionally unemployed rate” equates to 35% of the US population or 111.5 million people. 111.5 million is calculated by adding the BLS’ U6 number (21.6 million) and the BLS’ Not-in-Labor-Force number (89.9million). Dividing 111.5 million by the total US population of 315.8 million yields a functionally unemployed rate of 35%.

Understanding the functionally unemployed rate of 35% is a much better indicator of economic distress, than the much lower 7.5% “official” U3 unemployment rate that is most often watched and reported. Jobenomics asserts that overemphasis on the official unemployment rate is politically and economically dangerous.

Sooner or later, the American people will figure out that the current way our government calculates unemployment is seriously flawed. Under the current system, it is theoretically possible for the US to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. Stated another way, since NiLF workers are not counted as unemployed, the official unemployment rate could theoretically be zero if all the current unemployed people simply quit looking for work and joined those in the NiLF.

32% of all Americans are financially supporting the rest of the country. 103 million workers in the private sector are supporting 32M that work for government (including contractors), 90M that can work but choose not to work, 71M that cannot work (children, retired, disabled, etc.) and 21M that are looking for work (officially unemployed and unemployed).

[1] Bureau of Labor Statistics, “Not in the Labor Force”, Table A-16, http://www.bls.gov/webapps/legacy/cpsatab16.htm

[2] US Census Bureau, US & World Population Clocks, 7 Dec 12, http://www.census.gov/main/www/popclock.html

[3] Federal Reserve Bank of St. Louis, Economic Data, http://research.stlouisfed.org/fred2/graph/?id=CIVPART,CANLFPRNA,GBRLFPRNA,

[4] The Conference Board, Gad Levanon on surging number of Americans delaying retirement, http://www.conference-board.org/, 1 Feb 2012

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Long-Term Deficit Reduction

23 January 2013

Jobenomics predicts that 2013 will be a pivotal year for the US economy. For 2013, Jobenomics assesses the following probabilities: 20% chance that the economy will improve, 20% that it will continue to muddle along, and 60% it will get worse, or perhaps much worse, depending on financial disruptions. The biggest near-term financial disruption involves a long-term deficit reduction agreement between the White House, the Democrat-controlled Senate and the Republican-controlled Congress.

To better understand long-term deficit reduction issues, Jobenomics created the following charts from data taken from current and historical White House fiscal documents[1].

Annual Budget Deficit-Surplus by President

According to White House budget data, over the last twenty years there have been only four years where the US federal government spent less than they received in tax revenues (surplus). As shown above, the Clinton Administration spent a net $300 billion more (deficit) than it received during the eight years the president was in office. The Bush Administration spent $2.0 trillion more than it received in eight years in office. The Obama Administration spent $5.3 trillion more than it received in four years in office. The reasons for these budget deficits are numerous and complex. However, it is safe to say that President Clinton had the benefit of the information technology revolution that created tens of millions of new jobs, and no major financial crises. Presidents Bush and Obama were not so fortunate.

While the latest figures for 2012 are still being tallied, the US federal deficit last year was $1.1 trillion with receipts of $2.6 trillion versus spending of $3.7 trillion. Individual income taxes and social insurance & retirement receipts (FICA taxes) accounted for 81% of the federal government’s income. On the spending side, mandatory spending for entitlements (mainly Social Security, Medicare and Medicaid) represented 59%. Mandatory spending are those expenditures that are mandated by Federal law that can’t be changed without an act of Congress. Appropriated spending (35%) represents the money set aside each year for running the government and the US armed forces. Net interest (6%) is the amount of interest paid on the money that the federal government has borrowed.

To finance the receipts/spending gap, the US federal government has been increasing the money supply (printing more money) and borrowing via the sale of US treasury bonds. As a result, our national debt has been rising rapidly. When President Bush took office, the national debt was $5.7 trillion. When he left office it was $10.7, which equated to approximately $625 billion per year for his eight years in office. When President Obama took office, the national debt was $10.7 trillion. Today it is $16.4, which equates to approximately $1.425 billion per year for his first four years in office. In 2012, the interest paid on the national debt was $223 billion. By 2022, interest payments will be $915 billion per year and the national debt $23.1 trillion according President Obama’s FY13 Budget projections.

Presidents Annual Budget Deficit Projections FY10 through FY13

The Obama Administration’s deficit spending projections have not been very accurate. As shown, the Obama Administration has consistently spent $200-$300 billion more each year than forecast. For example, the President’s FY10 Budget forecast a deficit of $557 billion in 2012, but raised the forecast each consecutive year, reaching $1327 billion in the President’s FY13 Budget—an increase of $770 billion in three years. Consequently, it reasonable to believe that trillion dollar deficits may be likely for the next few years, especially considering the needs of the financially distressed in America’s current silent depression.

Having roots as a community activitist, President Obama is acutely aware of the needs of Americans trapped in today’s silent depression. Most Americans associate depressions with people standing silently in long bread and soup lines. Today, we have 47 million Americans with food stamps standing mute in grocery store lines. Those standing idly by extend beyond grocery stores. According to the Bureau of Labor Statistics, in addition to the 22 million who are unemployed or underemployed, 88 million idle citizens that can work no longer look for work. Another 59 million receive some form of Medicaid. 51 million receive Social Security payments. 46 million fall below the poverty level and receive supplemental income from the government. 45 million are Medicare beneficiaries. And the list goes on. The total population of the US is 315 million. Last year, approximately 350 million welfare or entitlement payments were made. In this environment, meaningful spending cuts may be politically impossible due to the pervasive needs of over 100 million financially distressed Americans. It took the sacrifices of WWII and America’s unified response to restore prosperity. Let’s pray that it will not take another world war to help solve our long-term deficit reduction problem.

Long-term deficit reduction is essential for economic recovery, but for the last four years the budget process has not worked as it was designed to do. Normally, the president submits his annual budget to Congress in February. Then the Senate and House settle on a resolution for the 13 appropriation bills in October. However, the Senate and House have not been able to reach agreement on spending and taxes since 2009. In absence of such an agreement, the federal government has been operating on a series of stopgap funding bills, continuing resolutions, omnibus packages and last-minute deals to avoid government shutdowns and defaults. Over the last month alone, the fiscal-cliff and deficit-ceiling crises were sidestepped by kicking the can down the fiscal road until the March/April timeframe.

It is essential that President Obama presents his FY14 Budget to Congress in February with a balanced approach to reducing deficit spending. It is also essential that Senate Democrats develop a framework with the House Republicans on ways to shrink trillion-dollar annual deficits. Without a balanced approach and common cause, the US economy is likely to slide back into recession. Short-term deficit reduction gimmicks, such as continuing resolutions, have likely reached the end of their road. America needs to balance its books.

In December 2012, the federal government reached the current debt limit ($16.4 trillion) and hence it’s borrowing capacity. The debt ceiling is the statutory limit on the amount money that the US government is authorized to borrow to meet financial obligations. According to the Constitution, Congress has sole authority to raise the debt ceiling. The debt ceiling would have to be raised approximately $1 trillion in order to extend the Administration’s ability to borrow through 2013. It is unlikely that the Republican-controlled House will authorize this level of borrowing without meaningful spending cuts.

Failing to increase the debt limit would cause the government to default on its legal obligations that could precipitate an acute financial crisis. If additional borrowing is not authorized by Congress, the Administration will not be able to pay its bills (default). If the federal government is unable to borrow, it would be forced to default on some of its financial commitments, limiting or delaying payments to; creditors (such as interest payments that are mostly owed to foreign governments like China, Japan and Arab countries), beneficiaries (military salaries, Social Security and Medicare payments and unemployment benefits), and government contractors and vendors. Financial markets would also be affected including; downgraded US credit ratings, volatility in stock and bond markets, upward pressure on interest rates, reduced business investment, higher unemployment, recession, and increased calls by the international community to seek an alternative to the US dollar as the world’s reserve currency.

Jobenomics believes that moderate tax increases and spending cuts are both needed to balance our books, but the real solution involves growth. Private sector business is the engine that creates enduring growth. Moreover, it is small, emerging and self-employed businesses that have created 65% of all new jobs since the end of the Great Recession. This remarkable small business achievement was accomplished with little support of the federal government, financial institutions or big business. Small business benefits little from political rhetoric on education, training, hiring incentives and reduced regulation. What small business needs is financing and community-based business generators that mass-produce, finance and sustain new businesses at the base of America’s economic pyramid.

Jobenomics is working with numerous private and public (mostly mayors) institutions to establish community-based business generators that focus on four demographics: inner city groups (service-providing businesses that focus on journeyman skill sets), women-owned businesses (direct-care, direct-sales and education/training businesses), Generation Y (start-up businesses that focus on monetizing social networks) and veterans-owned businesses (businesses that specialize in defense industry related occupations). These demographics have the potential for 10s of millions of jobs and millions of new businesses. These new businesses will not only create economic growth but will provide hope to the unemployed, underemployed and discouraged individuals who can work but are no longer looking. Long-term deficit reduction issues can only be solved by long-term growth and initiatives to provide income opportunity for all our citizens.

[1] The White House, President Barak Obama, Office of Management and Budget, The Budget, Fiscal Year 2013 and Historical Tables, 21 Jan 2013, http://www.whitehouse.gov/omb/budget/Overview

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Income Inequality versus Opportunity

26 November 2012

There is a significant difference between income inequality and income opportunity. Income inequality represents a rearward view on how much money a person possesses at a given time. Income opportunity represents a forward view of wealth potential and upward social mobility. Jobenomics recognizes income inequality as a starting point, but focuses on income opportunity, via business and job creation, especially at the base of America’s economic pyramid.

Income Inequality. Income inequality is defined as unequal distribution of household or individual income across the various participants (regional, social, racial, gender) in an economy. Income inequality slows economic growth, reduces social mobility, causes financial conflicts and creates discord. A survey for the World Economic Forum identified growing income inequality as one of the world’s most pressing issues for the next decade. After a period of wane, income inequality is growing again in America. US income inequality is often associated with income fairness and is now a dominant issue for policy-makers, media and social activists.

Much of the $6 billion dollars spent on the 2012 US election process focused on income inequality, especially rich (top 1%) versus middle-class and poor (the bottom 99%). Inflammatory rhetoric and political attack ads offered few solutions but exacerbated our political divide. A recent New York Times article[1], entitled Look How Far We’ve Come Apart, addressed the severity of the political divide in our country. Polarization between our two main political parties (shown below) has grown to the point of political paralysis.

The article also indicates that the US public is similarly divided, almost to the extent as America was divided prior to the American Civil War. The media is also polarized. American has reached a crossroads where the left wing no longer believes anything the right has to say, and vise versa. Now that the 2012 elections are history, the world is anxiously watching to see if America can reverse course and unite as a nation to address our strategic challenges. If we continue to focus on income inequality, America will continue to divide politically, socially and economically. The word “inequality” is divisive, implying inadequacy and disparity. We cannot unify by using words, slogans and data that create dissension.

Conventional wisdom asserts (1) that income inequality is always bad, and (2) the United States is one of the most inequitable distributors of income on the planet. Both of these assertions are not accurate.

Income inequality is not a condition that we should tolerate, but is a myth that it is always bad. Throughout history, income inequality has been a powerful motivator. The American Revolution had issues of income inequality at its roots. Today, many of the greatest American success stories are about people from humble beginnings. Some degree of income inequality can be tolerated as long as a corresponding degree of income opportunity exists. Individuals and businesses would not innovate without the opportunity to reap rewards. When opportunity exceeds inequality, people are generally optimistic and motivated to succeed. However, when inequality exceeds opportunity, people are unhappy and motivated towards discordance. Unfortunately, America has entered a period where inequality exceeds opportunity, which places the US economy at risk.

Regarding the assertion that America is inherently inequitable, let’s take a strategic view of income inequality using official US government data, which is footnoted for the reader. Household income is generally used as the standard measure of income wealth by US government agencies. US household income includes the income of the householder and all other individuals 15 years old and over in the household. Household income is defined as income received on a regular basis not including capital gains or non-cash benefits (food stamps, health benefits, subsidized housing, and most other forms of welfare or entitlement benefits). “Median” household income divides the total number of households and families (including those with no income) into two equal parts.

According to the US Census Bureau, 95.7% of US households (multiple incomes) make less than $200,000 and 49.8% make less than $50,000. $50,000 represents the median US household income. The US poverty line is approximately $15,000 depending on the number of people in the household. These groups are usually defined as “middle-class” or “poor”.

The “the rich” are usually defined by personal income categorized in percentiles: top 5%, top 1%, and the ultra-rich. To qualify for an entry level position in the top 5%, a person needs to earn an annual income of $150,000. $340,000 is needed for the top 1%. An ultra-rich person in the top 0.1% starts at $1.5 million. An ultra-rich person in the top 0.01% starts at $8 million.

US median household income has fallen substantially this decade—the first such decline since the Great Depression in the 1930s. The Median US Household Income chart, from the 2012 US Census Bureau report[2], shows that median US household income started decreasing prior to the Great Recession. In 2007, the median US household income for all races peaked at $54,489. In 2011, it was $50,054, for a loss of $4,435, or 9%. All races suffered a decline over the same period, but the US Asian community continues to have the highest median household income of $65,129, followed by Whites ($55,412), Hispanics ($38,624) and Blacks ($32,229). Over the decades, income inequality has remained relatively the same between the races, collectively increasing during good times, and collectively decreasing over bad times. During the good times, income inequality was not a politically-charged issue since increasing household income provided a sense of well-being. During the last five years, declining household income has produced anxiety and discord.

The US Federal Reserve reports[3] on income inequality using the Income Gini Ratio (also called the Gini Index or Gini Coefficient) by race. The Gini Ratio is defined as a measurement of income distribution that ranges from 0, representing perfect equality, to 1, representing prefect inequality. As shown, Black Americans suffer the worse inequality within their own race. In other words, the distance between rich and poor within the Black community is greater than the distance in other races. The Hispanic community is the most homogeneous in terms of household income. Whites and Asians are in the middle with the Asian community having volatile swings during the decade.

A number of international organizations, like the World Bank and International Monetary Fund, use the Gini Ratio to define income inequality among nations. The Global Income Inequality chart (above) was created by Jobenomics using US Central Intelligence Agency data listed in their widely-accessed World Factbook’s Distribution of Family Income-Gini Index[4], which was compiled by the CIA using data from various international institutions. As far as global income inequality, the United States ranks slightly above average. The world’s worst income inequality is in emerging and totalitarian countries. Industrial and democratic countries are much more equitable in terms of income inequity. Globalization has narrowed the income inequality between nations but has exacerbated income inequality within nations due to global competition, international supply chains, global capital markets, and new information technology.

The data that gets most political and media attention is from the US Census Bureau’s Income Inequality Historical Tables[5]. The Census Bureau reports historical income inequality data in current dollars (not adjusted for inflation) and inflation adjusted dollars.

The US Historical Income Inequality chart was created by Jobenomics using Census 2011 dollars (adjusted for inflation) over the last 45 years. Over the last 4 ½ decades, the bottom 95% of US households have not made significant income gains. The top 5% average household income increased from $111,866 in 1967 (note: unadjusted 1967 household income for the top 5% was $19,000) to $186,000 in 2011 for a gain of 66%, or 1.5% per year— significant but certainly not great. To get to great numbers, one must use top 1% or top 0.1% data that is addressed below.

Here is the same chart showing current dollars that are not adjusted for inflation. In current dollars the top 5% increased their average household income by 879% ($19,000 in 1967 to $186,000 in 2011) as opposed 66% ($111,866 in 1967 to $186,000 in 2011) using 2011 Dollars that were adjusted for inflation. Jobenomics believes that inflation adjusted dollars give more of an apples-to-apples comparison, than non-adjusted current dollar comparisons.

Jobenomics created the Top 1% chart using the most recent bipartisan US Congressional Budget Office report[6], updated August 2012 (note: the US Census Bureau does not report on the top 1%). The chart shows that the top 1% far exceeds all other taxpayer incomes. In 2009 Dollars, the top 1% earned an average after-tax income of $886,700 down from $1,120,500 a year before the recession. The CBO also reports that there are 1.1 million top 1% households out of a total of 117.6 million US households, and that their share of total after-tax income was 11.5%. In other words, the top 1% represents 1% of all households and earns 11.5% of total US income.

There is no US government data that regularly reports on ultra-rich income. However, much antidotal data is available. The average CEO of the top US companies make $13 million per year, not counting stock options. By some accounts, the top 25 hedge fund managers make as much as all the top S&P 500 CEOs. These managers make billions, not millions, per year. From a global perspective, while Americans consider millionaires and billionaires to be rich, there are many areas of the world where personal wealth is measured in billions and trillions. In oil rich Arab nations, baby-sheikhs (20 year olds) are worth tens of billions of dollars and their fathers are trillionaires.

The 2012 presidential campaign debated the merits of increased taxation on the wealthiest American. Using Congressional Budget Office data[7], if taxes were increased by 5% on the top 1%ers, as requested by President Obama, approximately $60,985 more would be paid by each of the 1.1 million 1%ers. The net result would be approximately $69 billion dollars in new tax revenue, which is a relatively insignificant compared to $1 trillion annual deficit spending. Since $69 billion is only 7% of $1 trillion, the other 93% would have to come from increased taxes on the middle-class or reductions in spending. If taxes were increased all Americas in the top 20%, the net result would be $264 billion, or 25% of our annual spending deficit. It should be noted that the lower end top 20%ers (81^st to 90^th percentile) do not feel that they are wealthy, especially if the average $131,700 household income is a dual income family (e.g., husband and wife) each earning $65,850.

Income Opportunity. Income opportunity involves money that people can earn as opposed to money that they have. The term opportunity implies favorable conditions or prospects in order to attain advancement or success. Today, the American dream of upward mobility, fairness and optimism has been shaken in the wake of a Great Recession, chronically high unemployment and a stagnant economy.

Income opportunity is directly influenced by socio-economic mobility. Socio-economic mobility is the movement of an individual or group from one income level to another. Socio-economic mobility can be upward or downward. In America, with a few exceptions, mass upward socio-economic mobility has been the general trend since the creation of the United States. Most people that enter US workforce from high school or college move from initial lower paying jobs to higher paying careers. Those that dropout of school or society are likely to entrench themselves in the lowest income quintile with much lower mobility. While welfare and unemployment payments provide a safety net for those in the lowest quintile, these payments tend to trap these same individuals in low quintiles by eroding their socio-economic mobility. The longer a person is out of the workforce, the harder it is for that person to get a meaningful job. Socio-economic mobility is also influenced by education and social status. A presentation by Assistant Treasury Secretary Jan Eberly at the 2012 Economic Measurement Seminar produced an insightful graphic on intergenerational socio-economic mobility[8]:

According to Sec. Eberly, higher education is critical for economic mobility. Without a college degree, children born in the bottom income quintile have a 45% chance of remaining there as adults. With a degree, they have a roughly equal chance of attaining each income quintile, which means an 80% chance of being in a higher income quintile than their parents.

While America has always been know as the “land of opportunity”, the Great Recession and chronically high unemployment has eroded socio-economic mobility for those at the base of America’s economic pyramid. A 2012 study[9] by the Economic Mobility Project of the Pew Charitable Trusts states while “Eighty-four percent of Americans have higher family incomes than their parents did….Those born at the top and bottom of the income ladder are likely to stay there as adults. More than 40 percent of Americans raised in the bottom quintile of the family income ladder remain stuck there as adults, and 70 percent remain below the middle”.

Jobenomics believes that high school dropout rates, especially in the inner cities, is symptomatic of a greater problem—the lack of income opportunity. Jobenomics is working with local leaders in Detroit, Harlem, Atlanta, Washington DC and a number of smaller communities, all of whom say that high dropout rates are directly related to the lack of jobs. Why graduate from school when meaningful opportunities are not available? Jobenomics defines meaningful opportunities more in terms of careers as opposed to jobs. To most young people, minimum wage jobs are not meaningful as compared to income opportunities derived from illicit employment or government welfare benefits. Consequently, Jobenomics emphasizes community-based business generators in order to mass produce thousands of micro-businesses in the inner city. Micro-businesses provide meaningful income opportunity.

Many Americans feel that Washington policy-makers can fix our problems. Jobenomics disagrees for a number of reasons. First, a stagnant economy as well as a deeply divided citizenry makes political consensus-building difficult. Second, the biggest challenges for improving income opportunity are beyond Washington’s reach. Thirdly, global competition in the digital age levels the playing field for 6 billion other people around the world who want income opportunity and are often more motivated to strive to get it. While Washington has an important support role, it is up to the private sector to create businesses and jobs.

Since the beginning of this decade, small business has created 66% of all new jobs in America.

A recent McKinsey report[10] entitled Restarting the US Small-Business Growth Engine accurately describes small business as the engine of US economic growth with emphasis on “high growth” small businesses. The McKinsey article states that “a subset of small businesses—high-growth ones—creates the vast majority of new jobs. Seventy-six percent of these high-growth firms are less than five years old. The 1 percent of all firms that are growing most quickly (fewer than 60,000 in all) account for 40 percent of economy-wide net new job creation.” The biggest challenge for the McKinsey model is picking winners. It is hard to identify the next generation serial entrepreneurs, like Bill Gates (Microsoft), Steve Case (AOL), Mark Zuckerberg (Facebook) and Meg Whitman (eBay). Therefore, the McKinsey model focuses on small businesses that already have established themselves with potentially high growth products or services. McKinsey also advocates big business and government assistance to help emerging businesses grow rapidly and mass produce jobs.

Jobenomics focuses on “highly scalable” start-up businesses that are unlikely to receive significant government and big business support. Jobenomics is currently working on the establishment of a dozen community-based business generators that will mass produce small and self-employed businesses that can be replicated easily. Self-employed businesses (both incorporated and unincorporated) are a good example of the type of highly scalable business that can be mass produced in order to create millions of jobs. The Jobenomics model focuses on individuals that have a yearning to start a business. Jobenomics is currently concentrating on four demographics: inner city minority groups (service-providing businesses that focus on journeyman skill sets), women-owned businesses (direct-care, direct-sales and education/training businesses), Generation Y (start-up businesses that focus on monetizing social networks and the internet) and veterans-owned businesses (businesses that specialize in defense industry related occupations). These demographics have the potential for 10s of millions of jobs and millions of new businesses that can be replicated across America.

In conclusion, income distribution is relatively well divided in the US even though a majority of Americans believe otherwise. So why are Americans so upset about income inequality when official government data indicates otherwise? For America to prosper, the answer lies with income opportunity, not income inequality.

Today, too few are paying for too many. Only 32% of our population financially supports the rest of our population. We have a moral obligation to provide a safety net for the 23 million looking for work and the 70 million that cannot work. We also have an economic imperative to grow the private sector work force that currently consists of 102 million people. The Jobenomics goal is 20 million new private sector jobs by year 2020. The Jobenomics national grassroots plan is designed to unite a divided nation through business and job creation with emphasis on small, emerging and self-employed businesses in the middle and bottom of America’s economic pyramid. Providing meaningful income opportunity is essential to sustaining the American dream of mass upward social mobility.

[1] The New York Times, The Opinion Pages, Look How Far We’ve Come Apart, by Jonathan Haidt and Marc J. Hetherington, http://campaignstops.blogs.nytimes.com/2012/09/17/look-how-far-weve-come-apart/, 17 Sep 12

[2] US Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2011, by Carmen DeNavas-Walt, Bernadette D. Proctor and Jessica C. Smith, http://www.census.gov/prod/2012pubs/p60-243.pdf, issued September 2012

[3] US Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/graph/?id=GINIBAF,GINIWANHF,GINIHARF

[4] CIA World Factbook, Distribution of Family Income-Gini Index, https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html

[5] US Census Bureau, Historical Income Tables: Income Inequality, H-1 All Races, http://www.census.gov/hhes/www/income/data/historical/inequality/

[6] Congressional Budget Office, Distribution of Household Income (Supplemental data spreadsheet), updated 10 August 2012, http://www.cbo.gov/publication/43373

[7] Ibid

[8] US Department of the Treasury, Remarks of Assistant Secretary Jan Eberly before the National Association of Business Economists (NABE), 2012 ECONOMIC MEASUREMENT SEMINAR, 31 July 2012, http://www.treasury.gov/press-center/press-releases/Pages/tg1662.aspx, and http://www.treasury.gov/press-center/press-releases/Documents/View%20the%20charts%20shared%20with%20NABE%20today.pdf, Page 6

[9] Economic Mobility Project of the Pew Charitable Trusts, Pursuing the American Dream: Economic Mobility Across Generations, 9 July 2012, http://www.pewstates.org/research/reports/pursuing-the-american-dream-85899403228

[10] McKinsey & Company, McKinsey Quarterly, “Restarting the US small-business growth engine”, by John Horn and Darren Pleasance (Strategy Practice), November 2012, http://www.mckinseyquarterly.com/Strategy/Growth/Restarting_the_US_small_business_growth_engine_3032

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Manufacturing Industry Forecast

Executive Summary: US manufacturing is not likely to employ significantly more Americans than it currently employs.

Overview: Manufacturing is a vital component of our economy. Unfortunately, Americans have unrealistic expectations regarding the role of the manufacture sector in our economic recovery as well as jobs creation. The American economy is dominated by service-providing industries that employ the 86% of all Americans. Manufacturing (part of the goods-producing sector) employs only 9%. Correspondingly, American policy-makers and opinion-leaders do disservice to the American public by heralding manufacturing over other industries. Reasonable rates of employment and economic recovery can only be achieved via a balanced approach to resourcing and supporting all growth industries. Most Americans understand how we transitioned from an agriculturally-based society to an industrial-based society, but have not come to terms with the ramifications of a postindustrial, services-based, internet-empowered society that is significantly less dependent on domestic manufacturing.

Total US Employment. Out of a total population of 314 million, America employs 133 million people in three sectors: service-providing industries, goods-producing industries, and government services. 115 million Americans (including government employees) are employed in service related jobs, which equates to 86.3% of all working Americans. The service-providing sector employs 93 million Americans. Government (federal, state, local) is the second largest employer at 21.9 million. The goods-producing sector is the smallest with 18.3 million. Manufacturing is the largest goods-producing industry that employs 11.97 million, which equates to 9% of all working Americans or 3.8% of our population. At 9%, it is difficult to assert that the US is an industrial or manufacturing-based society. With 86% in service related jobs, America is better defined now as a postindustrial, services-based country.

Recent US Manufacturing Employment Statistics. US manufacturing employment decreased 39% from its pre-recession high. If adjusted for population growth, the declination is 55%. Over the last two years, manufacturing employment has increased 4% but is now trending downward. Jobenomics predicts that the entire US manufacturing sector (durable and nondurable goods) will not produce significantly more jobs than it currently does.

In 1946, 11.9 million Americans were employed in manufacturing. By 1979, manufacturing grew to 19.5 million. Then the decline began. Over the last three and a half decades, manufacturing has declined 39% to 11.97 million today. Since the post-Great Recession low in January 2010, manufacturing has grown by approximately 500,000 people. This is good news, but insufficient evidence to believe that a manufacturing renaissance is underway.

The US manufacturing sector is comprised of durable and nondurable goods. Durable goods consist of machinery, appliances or equipment that are not easily consumed or destroyed during use and lasts for over three years. Nondurable goods are items, such as food and apparel that are used up quickly or purchased infrequently.

Durable goods have suffered a 39% decline from the peak in 1979 and now employ 7.5 million people or 63% of the total manufacturing sector. From its post-recession low in January 2010, durable goods have added approximately 500,000 jobs or a gain of 7%. Much of this gain can be attributed to generous federal government stimuli and bailouts (e.g., the auto industry).

There are 10 durable goods industries or subsectors as defined the US Department of Labor’s Bureau of Labor Statistics (BLS) as shown above. The transportation/motor vehicles/equipment sector is the largest subsector with 1,468,000 employees.

The American public generally associates the automotive industry with this durable goods industry. However, according to the BLS[1], the entire US automotive industry (both foreign and domestic manufactures) only employs only 772,000 people in motor vehicles and parts manufacturing, or 10% of the durable goods sector, or 6% of the manufacturing sector, or 1% of all working Americans, or 0.2% of all American citizens. These percentages are offered not to diminish the importance of auto industry manufacturing, but rather to emphasize that there are a host of other industries and sectors that are equally critical to the American economy.

One could argue that the auto industry supports a vibrant retail trade (services-providing industry) with 1,716,500[2] Americans employed by motor vehicle and parts dealerships as well as another 815,000 independent automotive repair and maintenance personnel. This is true. Automotive manufacturing supports a large indirect jobs tail. However, it is also true that US automotive manufactures are no longer the dominant vehicle provider in America. In September 2012, out of a total of 1,188,865 light vehicle sales[3] made in America, only 44% (538,752 vehicles) were manufactured by American auto manufactures (GM, Ford and Chrysler). Consequently, foreign automotive manufacturers now have a longer indirect jobs tail in the US than American auto manufacturers. This large indirect tail of dealer and maintenance jobs would exist even if the Big 3 did not. This is not meant to imply that the Big 3 and domestic manufacturing is not important. It is vitally important. The point is that automotive manufacturing, as well as other durable and nondurable goods manufacturers, may not be the job creators that most Americans expect. Our limited resources should be invested in industries that have the most economic and jobs creation potential.

Nondurable goods have suffered a 38% decline from the peak in 1979 and now employ 4.5 million people or 37% of the total manufacturing sector. From its post-recession low in October 2010, nondurable goods have added an insignificant number of new jobs.

Coincidently, the largest nondurable goods industry, food manufacturing, employs exactly the same number of people (1,468,000) as the largest durable goods industry, transportation, and twice as much as the entire automotive manufacturing industry. In addition, as shown above, food manufacturing was much more stable after the Great Recession and did not need stimuli, bailouts and buyouts from the US government and its taxpayers.

Industry Employment Growth. As stated previously, manufacturing employs 9% of all working American’s, but how has it grown compared to other US industries?

Since the beginning of this decade (1 January 2010) with a growth rate of 10.5% over this 32 month period, the manufacturing sector is the fifth best jobs generator out of thirteen US sectors. This is a welcome development after decades of steady decline. Will this growth continue in the future? Probably not.

The latest Manufacturing ISM Report on Business[4] data (depicted above) shows that US manufacturing contracted in two of the last three months. This is the first contraction since June 2009 at the end of the Great Recession. Since the Great Recession, US manufacturing trended upward, leveled and is now trending downward. Note: the Manufacturing ISM Report index uses values over 50% as positive (expanding) and values under 50% as negative (contracting).

This downward trend follows general corporate trends like declining corporate earnings that are predicted to go negative in the first quarter of 2013[5] after positive growth in the eleven previously positive quarters (see posting entitled, Uncle Sugar High). To a large extent corporate earnings and manufacturing recapitalization are inextricably linked. Corporations are less likely to invest and hire with poor earnings.

In addition, the World Economic Forum (WEF)’s annual forecast[6] shows a rapid downward trend in American global competitiveness after being #1 for years. The WEF is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders. Out of 144 countries, the WEF ranks the US #1 in market size, #6 innovation, #10 business sophistication, #8 higher education and training, #23 goods market efficiency, #34 primary education, and #111 macroeconomic environment (i.e., low public trust in politicians and a perceived lack of government efficiency). In 2006, the United Kingdom was #2, but disappeared thereafter. Hopefully, the US will reverse the downward trend. Competitiveness is paramount to success.

In the long-term, Jobenomics predicts that the manufacturing industry will not produce a significant number of new jobs for the following reasons:

While the recent uptick in manufacturing jobs over the last few years has been slightly positive, the headwinds of the last three decades have not significantly abated.
Emerging economies with lower labor rates, less regulations, better technical skills, and greater government underwriting will continue to be competitive in global manufacturing.
US corporations will continue to outsource jobs to emerging economies despite government pressure and incentives to re-shore jobs. Many of the domestic job openings that require hi-tech skills will remain unfilled.
The political ideological divide will prevent any meaningful pro-business policies, or significantly reduce the regulatory environment.
The advent of the third industrial revolution has shifted the manufacturing equation from labor-intensive to technology-intensive and from jobs-heavy to jobs-lite with a premium on highly skilled labor as opposed to manual labor.

The American public generally understands the first four reasons even though they may be hard to accept. Political rhetoric about streamlining the regulatory environment, increasing US exports, creating reciprocal trade agreements, imposing tariffs on cheaters, and lowering corporate taxes is good for elections but is not likely to be enacted nor achieved in the near future. Free trade in a global marketplace will likely trump any attempts for protectionist legislation. Mandatory entitlement programs will continue to drive government spending which is dependent on individual and corporate taxes. In addition, corporations will, and must, continue to deliver profits to shareholders. US multinational corporations will continue to expand overseas in emerging economies as opposed domestic expansion in the mature US market. Finally, American workers, now the most productive workers in the world, will continue to produce more with less—requiring less labor per unit produced.

The third industrial revolution (reason #5) may be the biggest reason for a “jobs-lite” manufacturing future. The first industrial revolution (IR1) took place in the late 18^th Century with the mechanization of industry starting with the cotton gin. IR1’s labor force consisted of high-touch, non-mass production, manual labor, which created the infamous sweat-shops in the 19^th Century. The second industrial revolution (IR2) started in the early 20^th Century with the advent of Henry Ford’s moving assembly lines. IR2’s labor force consisted of high-touch manual labor augmented by machinery designed for mass production. The third industrial revolution (IR3) is currently underway. IR3’s labor force consists of highly-skilled, hi-tech laborers who support digitally automated factories. Each revolution has caused a reduction in low-skilled, high-touch jobs.

The third industrial revolution is powered recent technological advances including: artificial intelligence, high-speed broadband networks, robotics, web-based services, rapid prototyping (such as 3D computer-aided design and 3D printing), as well as innovative manufacturing processes that include better business process reengineering, global supply chain management, customer relationship management and enterprise risk management. Consequently, most of the jobs will no longer be on the blue-collar factory floor but in white-collar offices. Premium jobs will be for professional designers, engineers, logisticians, IT specialists and the like. Old fashioned repetitive manual labor jobs are being eliminated or outsources overseas. Traditional support staff jobs are also being eliminated or accomplished online.

In conclusion, manufacturing is vital to the US economy but is not likely to provide a significant amount of jobs to reach the Jobenomics goal of 20 million new jobs by year 2020. 20 million new jobs is a reasonable goal considering that the US produced 20 million new jobs in previous decades and that 20 million new jobs are needed for new workers (16 million per decade) and to decrease unemployment rates below 6% (4 million). As such, it is imperative that the American public, policy-makers and opinion-leaders properly promote and support manufacturing in relation to the other twelve US employment sectors. While major US durable goods manufacturers (such as automotive and aerospace) produce products that are a source of national pride, it is equally important to support less glamorous industries and businesses (especially small, emerging and self-employed) that are the engine of our economy and have the greatest jobs creation potential.

[1] Department of Labor’s Bureau of Labor Statistics, Automotive Industry: Employment, Earnings, and Hours, http://www.bls.gov/iag/tgs/iagauto.htm, July 2012

[2] Ibid.

[3] The Wall Street Journal, Auto Sales, Sales and Share of Total Market by Manufacturer, http://online.wsj.com/mdc/public/page/2_3022-autosales.html, retrieved 3 Oct 2012

[4] Institute for Supply Management, Manufacturing ISM Report On Business , September 2012, http://www.ism.ws/ismreport/mfgrob.cfm

[5] The New York Times, Earnings in United States Are Beginning to Feel a Pinch, 16 September 2012, http://www.nytimes.com/2012/09/17/business/earnings-outlook-in-us-dims-as-global-economy-slows.html?nl=todaysheadlines&emc=edit_th_20120917

[6] World Economic Forum, Global Competitiveness Report 2012-13, http://www.weforum.org/issues/global-competitiveness

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Uncle Sugar High

What’s going on? Stock markets are approaching historical highs while the middle-class has lost 40% of its net worth, unemployment is persistently high and the ranks of those “not in the labor force” (i.e., the Bureau of Labor Statistics’ category for those who can work but don’t) is increasing by three million people a year. Government efforts to artificially induce economic recovery explain much of reason that the markets seem to be disconnected from the rest of society.

The Great Recession of 2008/09 was a calamity that could have gotten much worse. Both the Bush and Obama Administrations and the Federal Reserve reacted strongly with stimuli, bailout and buyouts to reverse the downward trend. Thankfully, their efforts worked in regard to the stock markets, which have subsequently risen as much as 140% from their lows in March 2009 (see chart). The US government has committed $14.1 trillion to make this happen and keep the markets growing.

Composition of the $14.1 trillion is shown above. Federal Reserve programs totaled $8.4 trillion, mostly for banks, financial institutions, insurance companies and government sponsored enterprises (Fannie Mae and Freddie Mac—holders of most American mortgages). US Treasury programs totaled $2.9 trillion, mostly to individuals and the auto industry. Federal Deposit Insurance Corporation (FDIC) totaled $2.5 trillion, mostly for local banks. The US Department of Housing and Urban Development (HUD) totaled $0.3 trillion, mostly for homeowners via the Federal Housing Administration (FHA).

From a Jobenomics perspective, these stimuli, bailouts and buyouts have contributed to economic recovery, albeit slow and shaky. However, a number of big questions remain unanswered: (1) how effective are new stimuli, (2) when will stimuli become unaffordable considering government debt, deficits and the value of the US dollar, (3) how will the markets operate without government stimuli, and (4) how will the economy/markets react to the next major disruption? For the purposes of this blog posting, let’s focus on new stimuli (1) and address the other factors in future postings.

Quantitative easing (QE) is a monetary policy used by the Federal Reserve to stimulate the national economy by purchasing financial assets (usually toxic) from banks and private institutions with newly created money. The third round of quantitative easing (QE3) was announced by Chairman Bernanke on 13 September 2012. QE3 is an open-ended (at least to mid 2015) $40 billion per month program to buy the mortgage-backed securities that started the housing crisis and Great Recession. QE3′s goal is to reduce the amount of toxic mortgage-related financial assets from the private sector to spur the residential construction industry that continues to languish today and likely into the future (see Jobenomics’ Construction Industry Forecast).

Jobenomics is a big fan of Chairman Bernanke and considers him the “John Wayne” of our economy (read Jobenomics, the book, to find out why). However, Jobenomics disagrees with him on one major point. Chairman Bernanke believes that the US economy is facing a stiff headwind that will eventually abate and that stimuli are needed until the wind abates. Jobenomics believes that the US economy is structurally flawed when Americans, from Wall Street to Main Street, shifted emphasis from manufacturing and producing to investing and speculating, and seriously needs re-enginnering as opposed to stimuli.

On 4 September 2012, Chairman Bernanke told fellow central bankers “I see little evidence of substantial structural change in recent years… Following every previous US recession since World War II, the unemployment rate has returned close to its pre-recession level.” Consequently, his approach to encouraging economic growth is to rely on past practices and stimulate the economy by printing money, buying and selling treasuries and securities, and keeping interest rates low. He will be able to continue this course until the value of the dollar declines or inflation increases. Considering the turbulence in other developed economies and slowing growth in emerging economies, he may have only months to several years to do so. Europe is on the verge of recession and its contagion is likely to spread to the US.

Not all economists agree with Chairman Bernanke’s optimism. The National Bureau of Economic Research recently published a paper written by Northwestern University’s Robert Gordon that concludes the US growth rate is damaged, and the past 250 years may prove to have been a “unique” period of economic expansion. St. Louis Fed (FRED) President James Bullard says that “the economy was on one trend pre-crisis and is on a very different trend post-crisis.” Other skeptics include Mohamed El-Erian and Bill Gross of Pacific Investment Management Co., who popularized the term “new normal” meaning that economic malaise and high unemployment may be with us for the foreseeable future.

Regardless who is right, everyone agrees that increased profitability in banks, financial institutions and corporations have not translated to improvement in employment and wealth of the average American citizen who has lost 10% in household income and 40% in net worth in recent years.

Corporate profitability has more than doubled since the Great Recession low and is up over 25% since the pre-recession peak as shown above. As of September 2012, corporate-profits-after-tax is at an all time high of $1.65 trillion as reported by the Federal Reserve and Bureau of Economic Analysis. This does not include several trillion more dollars of corporate cash stranded overseas.

Financial institutions and corporations are inextricably linked. Financial institutions make money in a large part by speculating in secondary-markets that are comprised of corporate stocks listed on the major exchanges. The Dow Jones Industrial Average (DOW or DJIA) is comprised of the top 30 publically-traded US corporations. The Standard & Poor’s 500 (S&P 500) is based on the common stock averages of the top 500 American publically-traded companies. The NASDAQ Stock Market (formerly National Association of Securities Dealers Automated Quotations, now simply NASDAQ) specializes in emerging high-technology corporations. On the other hand, many major corporations are deploying their excess cash speculating in secondary-markets and exotic financial instruments (like derivates such as mortgage-backed securities) as opposed to recapitalizing and hiring domestic workers. Consequently, when the US government stimulates, it is the financial institutions, corporations and quasi government agencies (like Fannie and Freddy) that benefit the most.

If Chairman Bernanke and his backers are correct that economic malaise and chronic unemployment are due to a strong, but temporary headwinds, financial institutions and corporations should lead the way to economic recovery. However, there are signs that this may not be correct.

On 9 September 2012, this graph was posted in The New York Times [1]. It shows the year-over-year change in corporate earnings of the top 500 US corporations. Since the initial influx of bailouts, buyouts and stimuli, corporate earnings have decreased every year. According to Thomson Reuters (the world’s leading source of intelligent information for businesses and professionals [2]) and The New Times, the consensus forecast is that corporate earnings will go negative for the first time since the Great Recession. In other words, Americans are getting fewer bangs for the buck with government intervention. In addition, if the corporate world goes into recession, the entire US may not be far behind. The US averages 1.7 recessions per decade. So far this decade has not suffered a recession largely due to the $14.1 trillion worth of stimuli. This time QE3 may not produce it desired effort and the US is rapidly running out of big stimulus funds.

This chart shows that the Federal Reserve’s crystal ball may not be as good as one would hope. In January 2010, the Fed predicted that the stimuli would boost the economy to annual GDP (gross domestic product, the sum of all American goods and services) to 4.15%. Since then it has been consistently revised downward.

Uncle Sam’s bailouts, buyouts and stimuli can be compared to a “sugar high”—lots of temporary energy but no real nutritional value. To grow an economy, a nation needs three essential factors: (1) sound monetary policy, (2) sound fiscal policy, and (3) private sector growth. The Fed is responsible for monetary policy. Under Chairman Bernanke’s leadership, the Fed has done an admirable job by stimulating via controlling (increasing) increasing money supply, borrowing via selling treasuries, reducing toxic financial instruments and keeping interest rates low. However, the Fed cannot produce economic growth, it can only stimulate and incentivize. Congress is responsible for fiscal policy. Their failure to resolve debts and deficits, taxation and budgeting, as well as a host of other economic and employment issues are major obstacles to recovery. The private sector is responsible for growth. Since the beginning of this decade, big business has added only 5% of all new jobs. Small business has added 95%. Unfortunately, big business gets the bulwark of government financing and small business gets a lot of rhetoric. Unless we provide real nutrition (sponsorship, incentives and patient capital) for small, emerging and self-employed business creation, the Uncle Sugar High will create economic malnutrition and unemployment obesity.

[1] http://www.nytimes.com/2012/09/17/business/earnings-outlook-in-us-dims-as-global-economy-slows.html?nl=todaysheadlines&emc=edit_th_20120917

[2] http://thomsonreuters.com/about/

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Who Should I Vote For?

Jobenomics believes that the economy is the most important issue facing American voters. A strong economy allows us to be secure and create the lifestyles that we desire. In the not so distant past, there was relatively little difference between the political parties. Today, the chasm between the parties is vast—leaving many Americans in a quandary regarding for whom to vote.

Recent political campaigns recently have been more about labeling than solutions. In modern politics, labeling fits well in a 20-second TV and radio sound bites. Americans rely on labels, brands and phrases to establish the goodness or badness of a product, person or community. Consequently, let’s examine labels relating to the politics relating to the economy.

The political spectrum is often defined as left or right wing. The terms “left” and “right” can be traced back to 16^th Century Europe where politicians were grouped by those loyal to the King and those advocating reform or independence. In contemporary times, the left-wing is associated with liberals, progressives, greens, social democrats, socialists, communists, and anarchists. The right-wing is associated with conservatives, capitalists, reactionaries, nationalists, as fascists. Clearly there is a wide spectrum of categories in each the left and wing. That is why labeling is so effective. President Obama defines himself as liberal Democrat, which puts him left of center. His opponents want to portray him as far-left of center, so they use the label of socialist. Governor Romney has declared himself as a conservative Republican right of center. His opponents want to portray him as far-right of center use reactionary labels. Since there is no consensus on the meanings of political labels, it is up the voter to determine how far right or left a candidate is and whether that is a good or bad attribute.

Economically, Democrats tend to promote a public sector driven philosophy over a private sector driven philosophy that is promoted by Republicans. In the past, both Democrats and Republicans alike generally supported a minimalist government role in the economic affairs of the private sector. The historic election of a president firmly rooted in publically-driven philosophy set the stage for a new dialog on the role of government vis-à-vis the private sector. However, it was the Great Recession of 2008 that was the real catalyst for change. The magnitude of the recession and the stagnant recovery has given voice to those on the left that promote a greater governmental role. Moreover, the ranks of those dependent on government (government workers, unemployed, under-employed, entitlement/welfare recipients) as well as those subsidized by government, are becoming the new majority.

Today, only 32% of all Americans financially support the rest of the country. Out of a population of 101 million workers in the private sector are supporting 32M that work for government (including contractors), 88M that can work but choose not to work, 71M that cannot work (children, retired, disabled, etc.) and 23M that are looking for work (officially unemployed and unemployed). See Jobenomics Employment Scoreboard posting for more detail.

Given this economic distribution, the left argues that the need of the many outweigh the few (especially given the historically high degree of income inequality). The right argues that too few pay for too many (which may lead to an economic collapse). American voters are at a crossroad. The road to the right is largely the road that we have traveled. The road to the left represents an economic inflection point—a point of change.

Those on the left who yearn for a public economy generally favor increased government involvement, egalitarianism, regulation of business, wealth distribution, robust government spending, taxation and stimulus packages focused on resolving economic inequalities. Those on the right tend to favor limited government involvement in the private sector, the free market system, limited taxation, deregulation of commerce and industry, and increased austerity measures regarding entitlement and welfare programs.

So, which path does Jobenomics endorse? Jobenomics is a bipartisan, centrist movement that deals with the economics of business, job, wealth, and tax revenue creation with a goal of creating 20 million new private sector jobs by year 2020. As such, Jobenomics promotes a middle way.

In regard to a public or private economy, Jobenomics leans center-right. Jobenomics favors a private/public partnership where the private sector leads and the public sector supports. With the exception of times of crisis, government’s role in big business should be minimal. On the other hand, government needs to play a greater role in small, emerging and self-employed business creation—America’s economic engine. Financing to the base of the America’s economic pyramid is needed. Almost all of government’s recent stimulus, bailout and buyout program funding went to financial organizations and large corporations. Little went to small business. To make matters worse, now healthy banks are more restrictive in their lending practices, and big businesses are hoarding cash. Initiatives, like the Jobenomics Community Based Business Generators and Jobenomics Women-Owned Businesses that are designed to mass produce small and self-employed businesses, are needed. Government also has a role in investing in research and development that is the lifeblood of hi-tech small businesses. Rather than touting shovel ready highway projects, government should focus on the next-generation broadband super highway.

In regard to higher taxation, Jobenomics leans center-left. An eroding middle class leaves only the rich to bear the tax burden. However, Jobenomics does not favor transferring the wealth to government bureaucrats. Instead, rich individuals and corporations should be offered incentives to invest in community business generators, business incubators and vocational training programs. Big business has trillions of dollars of cash and even more trillions that could be repatriated from foreign business accounts. Jobenomics is not suggesting social charity. Instead, community investments by the rich could be in the form of debt (micro business loans) and equity financing that would maximize the potential for a win/win/win for small businesses/big businesses/local communities. The rich know how to maximize return on investment.

In regard to austerity programs, Jobenomics is neutral. There is no doubt that the soaring national debt is an economic albatross that will eventually cripple or topple the American economy. On the other hand, there were over 350 million welfare and entitlement annual payments (51M social security, 45M Medicare, 59M Medicaid, 44M food stamps, etc.) are made to financially distressed Americans. Considering that the total population is only 314 million, this surreal number begins to give scope to the growing divide between haves and have-nots. An austerity program is needed but should be implemented slowly to keep from upending the fragile recovery. In the near-term, Jobenomics supports capping spending on the major entitlement programs and seeking savings on non-essential discretionary programs. For essential programs, like national security, it is time that we look at reorganizational efforts of the magnitude of the National Security Act of 1947.

So who should I vote for? The answer is the one who comes closest to the center.

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The Fiscal Cliff

The so-called “fiscal cliff” generally refers to the major fiscal events that may happen in January 2013. These events include expiration of the Bush era tax cuts, the payroll tax cut, other important tax-relief provisions, the sequestration of the ten-year $1.2 trillion cuts of domestic and defense programs required under the bipartisan deficit reduction agreement, and reaching of the national debt ceiling. Without a satisfactory resolution of these issues, the shock to US economy is likely to push America back into recession.

The US economy averages 1.7 recessions per decade. We are now almost three years into this decade without a recession. From a Jobenomics perspective, the reason is relatively straight forward. The US federal government has injected $12.7 trillion dollars worth of bailouts, buyouts, stimulus (shown below) into the US economy since the end of the Great Recession in 2009 in an effort to induce economic recovery.

In addition to the $12.7 trillion, the Federal Reserve took the unprecedented move of lowering interest rates on money lent directly to banks to near-zero, hoping to revitalize the economy. These efforts of “going big” have indeed spurred a modest but fragile recovery. However, these bold efforts have not produced the kind of results that the federal government and American public expected.

In January 2010, the Federal Reserve forecast that the annual US Gross Domestic Product (the monetary value of all finished goods and services produced in America) growth rate would be 4.15% in year 2012 (today). This forecast was revised downward in June 2011, April 2012 and again in June 2012 to 2.15%. Consequently, the Federal Reserve, the organization in charge of US monetary policy, believes that the US economy is getting worse. It was the Federal Reserve Chairman, Ben Bernanke, himself who recently coined the term “fiscal cliff”. In his semi-annual monetary and economic report before the Senate Banking Committee on 17 July 2012, Chairman Bernanke stressed that Congress (the organization in charge of fiscal policy) to find a solution the impending fiscal cliff without harming the “fragility of the recovery”.

Monetary policy generally involves setting interest rates and money supply by the central bank (Federal Reserve) while fiscal policy involves generally spending and taxes by the legislature (Congress). Jobenomics has been and currently is supportive of monetary policies the low-key and often controversial Ben Bernanke. America would be worse off without him. Jobenomics is not so generous with Congress, which is deadlocked in an acrimonious ideological divide.

It is unlikely that the US Congress will be able to find a solution the impending fiscal cliff due to the ideological divide between the politics of the left and right. Each side is ideologically entrenched in their beliefs with little room for compromise. From a Jobenomics perspective, a combination of selected government stimulus and austerity programs is needed in the near-term to avoid the approaching fiscal cliff. However, this is a short-term fix. Government cannot create sustainable jobs. Only businesses can create careers, professions and jobs that last over time. Consequently, Washington’s focus needs to be on business creation, not job creation.

Small business has been responsible for 95% of all new jobs created this decade (see Jobenomics Employment Scoreboard – July 2012 posting). Big business created only 5%. Despite all the rhetoric, neither candidate for president nor the members of Congress have produced a viable small business growth plan. What is really needed is emphasis on small, emerging and self-employed business growth—growth that depends on motivating and financing the base of America’s economic pyramid.

Even with a viable small business growth plan, the US has to over a number of potential disruptive forces that portend to upend our economy. As discussed, the biggest problem facing the US economy is the lack of leadership. Those responsible for fiscal policy need to accommodate a common vision. The next highest priority involves fixing the national debt crisis that could bankrupt our country by the end of this decade.

Today our national debt is $15.9T (trillion). America will reach its national debt ceiling of $16.4T in a matter of months. The national debt ceiling is a level imposed by Congress on how much debt the US can carry at any given time. It is likely that this debt ceiling will be increased, but with a lot of political rancor, vitriol and brinksmanship. Since $5.3T of our debt is held by foreigners, political rancor and brinksmanship will not only further erode confidence in America but also empowers the international community to look elsewhere for a new reserve currency not based on the US dollar.

More importantly, the annual interest payment on today’s national debt of $15.9T is approaching $500 billion. According to the President’s FY2013 Budget request, by 2022 the national debt is projected to be $23T with an annual interest payment of $1T. Many believe that this is a best case scenario. If a major recession hits, Jobenomics calculates that our national debt could theoretically skyrocket to $38T with an annual interest payment of $2T. However, the US economy would collapse well before such a number is reached.

As posted in previous blogs, Jobenomics places the odds at 20% for economic improvement, 30% for the status quo and 50% for the US economy to worsen, perhaps dramatically.

Major positive forces that will effect a sustainable recovery include: the inertia of the world’s biggest economy, the stamina of American small businesses to produce jobs under adverse conditions, American entrepreneurial spirit and our ability to reinvent ourselves, and the current status of the American dollar as the world’s reserve currency which allows the US to print and borrow money. Major disruptive forces include: political gridlock, public and private debt and deficits, high unemployment and erosion of the middle class, recession in Europe and an ongoing eurozone crisis, cooling of emerging economies like China and Brazil, wars, conflicts (especially with Iran and the Arab Spring), asymmetric threats such as cyber warfare, global commodity (energy, food, water) crises, as well as unanticipated Black Swan events such as 9/11.

Unfortunately, negative disruptive forces outnumber the positive. It is imperative that American leadership coalesces on a mutual understanding and a comprehensive plan for America to avoid the January 2013 fiscal cliff as well as a larger national/ global economic crisis.

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Construction Industry Forecast

Highlights of this posting:

The US construction industry was one of the hardest hit industries in the Great Recession and is the second worst industry in terms of employment of the ten private sectors industries.
Overall construction industry employment is down -29% with the residential sector down -42%, nonresidential (commercial building) down -23% and the non-building publically financed infrastructure/heavy construction/civil engineering sector down -18%. The official unemployment rate for this industry is 14.2% as of June 2012.
Overall construction industry spending is down from peak -32% with the residential sector down -62%, nonresidential (commercial building) down -29% and the non-building publically financed infrastructure/heavy construction/civil engineering sector down -16%.
Jobenomics forecasts that:
- The residential construction industry will not significantly increase in the foreseeable future.
- The commercial industry will not increase significantly in the US but has potential international opportunities in emerging markets.
- The publically funded infrastructure/heavy industry/civil engineering sector will not increase significantly due to federal/state deficits and debt.

Over the last three decades, the US construction industry grew from approximately 4 million employees to peak employment of 7.8 million in April 2006 when the decline began. The Great Recession of 2008/09 accelerated a rapid decline. Today, the US construction industry has 5.5 million employees—a decline of -29% from the peak six years earlier. As of June 2012, the Bureau of Labor Statistics (BLS) reports that the US Construction Industry has an unemployment rate of 14.2% compared to a national average of 8.2%[1].

From the employment peak, residential construction lost -42%, commercial construction -23% and heavy construction lost 18%.

As a percentage of total US employment, the construction industry now represents only 4.2% of the US workforce.

Since the beginning of this decade (‘10s), all private sector industries have been growing with the exception of Information (-4.1%) and Construction (-1.8%). The Information (e.g., publishing, broadcasting) industry’s decline is largely due to the Internet, whereas the Construction industry decline is largely due weakness in the residential housing and commercial building sectors.

The US construction industry can be characterized by type or labor category. By project type, according to the Department of Labor, this industry is 48% nonresidential commercial, 37% residential and 15% heavy & civil engineering (often called infrastructure or nonbuilding). By labor category, this industry is 63% specialty trade contractors, 22% construction of buildings and 15% heavy and civil engineering.

The Construction Industry is classified by the North American Industry Classification System as NAICS Code 23, shown above. The NAICS Association reports that NAICS Code 23 consists of 1,466,475 million businesses[2]. Consequently, by dividing the number of businesses by the total number employed (5.5 million), the US construction industry can be characterized largely as an industry of small firms with an average of 3.8 employees. According to the Professional Builder’s 2011 Housing Giants Rankings , the top 225 US Home Builders accounted for only 19% or $48.6 billion out of the $254 billion spent on residential construction. The top 10 US residential home builders accounted for only 9% or $22 billion of the total.

The Federal Reserve Bank of St. Louis (FRED) provides a view of US construction spending. Total construction spending peaked in March 2006 at a total of $1.21 trillion and hit a 15-year low in March 2011 at $762 billion, a -37% decline. Today (June 2012), total construction spending is $820, a +8% increase from the 2011 low.

The residential construction industry peaked in March 2006 at $414 billion (two years before the Recession) and hit a 20-year low in September 2010 at $228 billion, a -66% decline. Today, it is $256 billion, up +12% from its low in 2010 but still down -62% from peak.

The nonresidential (private sector commercial building) construction industry peaked in January 2008 at $414 billion and hit a 15-year low in 2011 at $244 billion, a -41% decline. Today, it is $293 billion, up +20% from its low in 2011 but still down -29% from peak.

Public construction (heavy construction and civil engineering) spending peaked in July 2009 at $323 billion and hit its current low today at $271 billion, a -16% decline. As the chart indicates, the federal government stimuli (i.e., politically-oriented, shovel-ready, infrastructure projects) increased public construction at the beginning of the recession ($294 billion in January 2008), which lifted this sector +10% to its peak latter in the recession. After the recession, government spending has decreased significantly.

Jobenomics studies US and international economic trends. Jobenomics assesses the following probabilities regarding the overall US economy: 30% chance that the economy will improve, 30% that it will continue to muddle along, and 40% it will get worse, or perhaps much worse, depending on the severity of potential financial disruptions. For a more detailed discussion on why Jobenomics assigns these percentages to the US economic future read Jobenomics (the book) or visit our website (www.Jobenomics.com). Since the US construction industry is one of the bottom performers of all US industries, Jobenomics assesses the chances that the overall US construction industry will not improve significantly in the foreseeable future with the exception of the commercial sector that has opportunities in foreign markets. Jobenomics forecasts that:

The residential construction industry will not significantly increase in the foreseeable future.
The commercial industry will not increase significantly in the US but has potential international opportunities in emerging markets.
The publically funded infrastructure/heavy industry/civil engineering sector will not increase significantly due to federal/state deficits and debt.

Residential Construction Industry. Jobenomics assesses the chances that the US residential construction industry will improve at 10%, remain stagnant at 20%, and will worsen at 70%. This assessment is a nationwide assessment. However, like real estate, the residential construction industry is largely local. Residential traditionally has been the driving-force in the construction industry. However, this may no longer be true.

This chart shows the total number of privately owned residential new starts since the middle 1950s. The January 2006 peak almost reached the previous peak in January 1972. Then the US housing bubble burst which contributed significantly the Great Recession two years later. From the peak in 2006, the number of residential new starts plummeted a staggering 79% to historic lows by April 2009. Since April 2009, the number of new homes increased from 478,000 to 717,000 today, a +50% increase but still -68% from the 2006 peak.

For the foreseeable future, Jobenomics predicts that new starts will not appreciate at a significant rate, due to the following factors:

1. Slow growth of the overall economy

2. Chronically high unemployment and a shrinking middle class

3. Distressed selling due to:

a. Foreclosures

b. Delinquent mortgages

c. Underwater mortgages

d. Strategic defaults

4. Changing attitudes on home ownership (more people renting)

Other leading economics agree with this Jobenomics assessment. According to Yale economics professor Robert Shiller, the co-creator of the Standard & Poor’s/Case-Shiller home price index, “I worry that we might not see a really major turnaround in our lifetimes” for the residential real estate market[3].

Nonresidential & Nonbuilding Construction. Jobenomics assesses the chances that the US nonresidential and nonbuilding construction (infrastructure, heavy and civil engineering) industries will improve at 20%, remain stagnant at 30%, and will worsen at 50%. These two sectors did not suffer to the extent that their residential counterparts did during the housing bubble burst and Great Recession. In addition, they were the beneficiaries of more government stimuli (e.g., “shovel-ready” infrastructure projects) than residential. Assuming no major domestic or foreign disruptions to the US economy, Jobenomics believes that worst may be over for the nonresidential and nonbuilding construction industries. Unlike residential construction, the nonresidential and nonbuilding construction industries have upside potential in the international marketplace that could offset downward trends in domestic public sector funding.

Most construction analysts predict that the US government public sector funding growth will resume as it has done in the past. Jobenomics disagrees due to the magnitude of public debts and deficits. A quick look at the largest government agency, the US Department of Defense, is indicative of what will happen to other government agencies including federal, state and local government agencies. The US Department of Defense’s Military Construction Budget is dropping precipitously due to budget constraints. The DoD’s Fiscal Year 11 (actual), FY12 (actual) and FY13 (planned) construction budgets (TOA, total obligation authority) where $20.1 billion, $13.9 billion and $11.2 billion respectively. The difference between FY11 and FY13 is $8.9 billion, a decline of 44%.

McGraw-Hill Construction, a mainstay in construction industry forecasting, predicts that upsides in private sector construction financing (plants, warehouses, hotels, and commercial buildings) will be offset by large declines in public sector construction projects funded by municipal, state and federal governments. New public sector projects like school, healthcare, electric utility and other public works programs (bridges, parks, roads) are problematic due to fiscal constraints at all levels of government. In addition, new industry entrants face challenges with access to capital. Strict lending standards will continue to exclude many general contractors from being eligible for loans.

Compared to their residential counterparts, larger corporations play a much larger role in the nonresidential and nonbuilding construction sectors. There is some debate on the size and revenues of the major US construction corporations due the fact that many are private corporations. However, the ENR (Engineering News Record) and Fortune 500’s Top 10 US Contractor Lists for 2011 represent the major players in the nonresidential and nonbuilding construction sectors.

Bechtel and Fluor are not only the leading US construction firms; they are the trendsetters for the entire US nonresidential and nonbuilding construction industries. From a Jobenomics perspective, the future of all US construction corporations will largely depend on their success in the international arena with emphasis on emerging economies and economics within our own hemisphere (Canada and Mexico).

Bechtel Corporation (Bechtel Group) is the largest engineering company in the United States, ranking as the 5th largest privately owned company in the US[4]. In 2011, Bechtel had $32.9 billion in total revenue (up from $27.0B in 2007) and employed 53,000 workers on projects in nearly 50 countries. Bechtel doubled its New Work to $53 billion in 2011 from $21.3 billion in 2010 and $20.3 billion in 2009. Fluor Corporation is one of the world’s largest publically owned engineering, procurement, construction, maintenance and project management companies[5]. In 2011, Fluor had $23.4 billion in total revenue (up from $16.7B in 2007) in revenue and employed 43,000 workers on projects six continents. Fluor’s international business sectors (in order of consolidated backlog by region) are: 24% Australia, 22% United States, 16% Canada, 15% Latin America, 13% Middle East, 6% Europe, 2% Asia Pacific and 2% Africa. According to Fluor, Fluor’s future growth is dependent on international business as opposed to domestic US.

The following chart (extracted from ENR’s Top 225 Global Contractors list for 2011[6])) shows the top 10 global contractors (Bechtel #10) as well as the top 10 US global contractors (Bechtel #1)

Within the global top 10, Chinese companies had 5 positions and Europeans had 4 positions. Bechtel, the lone US company, occupied the 10th position. The top 10 US contractors earned a combined total $74.767 billion in 2011. The top single Chinese contractor (China Railway Construction Corporation) earned slightly more ($76.206 billion) than the total of the top 10 US contractors. Bechtel and Fluor earned almost as much as the next 8th largest US companies ($36.9B versus $37.9B). From a Jobenomics point-of-view, the international market holds immense potential for US construction industry, including US domestic homebuilders. What is needed is a common vision and collective game plan.

[1] Bureau of Labor Statistics, Industries at a Glance, Construction: NAICS 23, http://www.bls.gov/iag/tgs/iag23.htm, 21 Mar 12

[2] NAICS Association, Six-Digit NAICS Codes & Titles, http://www.naics.com/free-code-search/sixdigitnaics.html?code=23, 21 Mar 12

[3] MSNBC, Economy Watch, http://economywatch.msnbc.msn.com/_news/2012/04/24/11369617-home-prices-up-for-first-time-in-10-months?chromedomain=bottomline&lite, 20 Apr 12

[4] Forbes, Largest Private Companies in 2011, http://www.forbes.com/lists/2011/21/private-companies-11_Bechtel_800U.html

[5] Fluor, Investor Relations, 2011 Annual Report, http://investor.fluor.com/phoenix.zhtml?c=124955&p=irol-irhome

[6] ENR, Top 225 Global Contractors: 2011, http://enr.construction.com/toplists/GlobalContractors/001-100.asp

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Big Business Profitability

Successful business is the solution to America’s economic recovery. The good news is that American corporations have successfully recovered from the Great Recession of 2008. However, their success is not universal. Unemployment remains chronically high and the middle class is rapidly eroding. In order to facilitate an economic recovery for all Americans, US corporations need to play a much greater role. Their future depends on it.

The following two charts from the US Department of Commerce’s Bureau of Economic Analysis (BEA) and the Federal Reserve Economic Data (FRED) contrasts the success story of America’s corporations and languishing fortunes of the average American citizen.

This “Corporate Profits” graph shows that corporate profits have more than doubled (+111%) from $0.75 trillion ($750 billion) in 2008 to $1.58 trillion in October 2011 (latest available data as of May 2012). According to BEA and FRED, US corporate profits are now the highest in US history. Since major corporations are bulwark of our economy, this is very good news.

In contrast, the “Disposable Income Per Capita” graph shows that the average American citizen (per capita or each individual) has decreased -6% over the same period of time from a high of $34,641 in May 2008 to $32,685 in March 2012. Real disposable income per capita income is the portion of personal income that is left after personal taxes are subtracted, and thus is the amount of personal income available to people for consumption spending and saving. Real disposable income per capita income is also an indicator of a country’s standard of living.

So why does Jobenomics make the assertion that the future of US big business depends on deploying its resources to increase America’s overall standard of living?

Today, the US population is 313 million people with only 96 million in the private sector work force. These 96 million via familial obligations or paying taxes financially support:

89 million who can work but are not looking
71 million who cannot work due to age, disability, care-giving, etc.
35 million who work for the government.
22 million under/unemployed who are looking for work.

Since the Great Recession of 2008, the private sector work force has decreased by almost 5 million people while those “Not-in-Labor-Force” has grown over 9 million alone. In other words, too few are paying for too many.

Of the 96 million people in the private sector labor force, the majority (70 million) are employed by small business that was hit hard by the Great Recession. To make matters worse, small business received almost none of the trillions of dollars of federal government stimuli, bailouts and buyouts that went mainly to large financial institutions and corporations. Even though small business still struggles with adverse lending conditions, this community single-handedly produces almost all (95%) of the new American jobs. The following chart shows the contribution to the US labor force since the beginning of this decade. Small business generated 3,266,000 new jobs, whereas big business produced a meager 168,000 jobs.

In many ways, the Great Recession contributed to making American corporations the most productive businesses in the world. Downsizing and eliminating non-productive operations was important for global competitiveness. Now that big business is economically stable, it is time that it becomes socially more responsive.

If big business continues on its current path of hoarding profits and deploying resources overseas in rapidly growing emerging economies, it will face increasing hostility from the American public who are most interested in domestic growth and jobs. Joblessness, income inequality and budget deficits are already major issues. Eventually, corporate taxes will have to rise significantly to cover trillion dollar tax revenue shortfalls that are needed largely for entitlement and welfare payments. As evidenced by recent European elections, electorates favor increased taxes over austerity programs. Corporations have a simple choice either to deploy their profits in ways that create win-win scenarios, or let government bureaucrats tax their profits and use the proceeds that best suits government priorites that often emphasize social over economic issues.

From a Jobenomics perspective, big business should consider small, emerging and self-employed business creation as one of their primary means of deploying a portion of their profits for the common good. While this may seem counterintuitive, small business creation offers many benefits for big business. First it grows the base (96 million) of the private sector work force, which is needed to support government programs and the needs of the non-working population. Second, it grows consumers whose purchasing power represents 70% US GDP. Consumption powers the economy. Decreased consumption public and investor confidence and adversely impacts stock markets. Third, small businesses are more apt to hire the unemployed, thereby alleviating pressure on big businesses to hire unnecessary workers. And lastly, big businesses could benefit from alliances with the small business community to provide specialized skills on a subcontractor basis as well as being public relations advocates for big business that support small business and jobs creation.

Jobenomics offers one example for big business to consider. Jobenomics Harlem is our leading community-based business generator that is designed to produce 1,000 new businesses per year in inner-city Harlem, New York (see Jobenomics Harlem posting). Jobenomics Harlem has secured a micro-business loan from a leading bank for $20 million with a limit of $50,000 for each individual loan. Since Jobenomics intends to clone this program in a hundred other cities, major corporations may want to sponsor a community-based business generator, underwrite micro-business loans, and use their human resources for mentoring and training of new small business tailored to their industry. Energy companies would sponsor green-business and jobs creation opportunities. Industrial companies would sponsor new business specializing in trades most needed in manufacturing.

Many major corporations complain that they are having trouble finding skilled labor for 21th Century jobs. Community-based business generators could focus on training, certifying and starting small businesses to meet the future needs of big business. Not only would corporations help America’s economic recovery, but enhance their public relations while recouping their investments via repayment of the micro-business loans. What small and emerging businesses need most is “patient capital” and sponsors who understand how business works. Business creation should be a role for business as opposed to government. Corporations would be able to get government support and incentives for sponsoring community-based business generations. The Jobenomics team discussed with leading policy-makers the possibility of tax breaks for corporations that repatriate foreign profits for efforts such as this. Their response was very positive.

In conclusion, America’s biggest corporations have largely recovered from the Great Recession. It is now time for them to help others not as fortunate. If corporations fail to do so, voters and legislators will target corporate profits as a major source of tax revenue. Rather than have government bureaucrats deploy their capital, it seems that corporations would prefer to invest in projects like the Jobenomics community-based business generators.

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Nation of Shopkeepers

The epithet “Nation of Shopkeepers” was used by Napoleon to infer that a British merchant society was incapable of effectively waging war against the mighty nation of France. Napoleon was wrong. British merchants and industry provided the resources that enabled England, with half the population of France, to win the Napoleonic Wars.

The phrase, “Nation of Shopkeepers”, did not originate with Napoleon. It first appeared in The Wealth of Nations by Adam Smith in 1776. Smith believed that when individuals pursue their self-interest, they indirectly promote the greater good of society. He argued that merchants, seeking their own self-interests, contribute significantly to the commonwealth by producing vital goods, services and tax revenues. Without this “invisible hand”, societies would be incapable of effectively pursuing self-sufficiency, prosperity and wealth creation.

Recent articles in prestigious publications, like USA Today and The Economist, make similar claims that a nation of small businesses cannot compete in the global marketplace because:

Big is better. Big firms employ more, are more productive, can reap economies of scale, can focus resources on innovation, offer higher wages, and pay more taxes.
Smaller means weaker. Small businesses fail at greater rate than big businesses. Small businesses are not particularly adept at creating jobs, at least not the best jobs. Almost all the 6 million companies in the US are small businesses, with fewer than 500 workers. Most small business owners just want to be their own boss and never expect to hire more than a few employees.

Like Napoleon’s premise that a nation of shopkeepers cannot compete, those that believe that a nation of small businesses cannot compete are simply wrong. Small business is America’s economic backbone—producing $6 trillion worth of annual products and services and employing half of the American private sector work force. Moreover, it is small business, not big business, which is the foundation of job creation. Since the beginning of this decade, small business generated 95% of all new American jobs (see: Employment Scoreboard: March 2012). As far as innovation, the Small Business Administration (SBA) reports that small business produce 16.5 times more patents per employee than large firms.

There are not 6 million small businesses in the US. There are 27.3 million small businesses. The latest available Census data show that there were 5.9 million firms with employees and 21.4 million without employees in 2008. These 27 million small businesses pay 43% of total US private payroll and are responsible for 97.5% of all identified exporters with 31% of export value as reported by the SBA Office of Advocacy. Just as important small businesses do not export jobs like big businesses.

The perception that small businesses regularly fail is only partly true. While the failure rate is high, so is their entrance rate. A recent landmark Census Bureau study showed that small establishments are no more inclined to exit business than large businesses. This misperception exists because of the high exit rate of micro-firms (1-4 employees), which averaged 18.4% over the last three decades. While this rate was high, their entry rate was even higher at 21.3%, therefore producing a net gain of 2.9% over the period. The entry/exit rate difference for all firms was only 1.9%. Looking at this data from a different perspective, compared to all businesses, micro-firms were more likely to succeed, which is counter-intuitive to common perception.

More recent data, reported by the ADP National Employment Survey, shows that very small businesses with 1-49 employees grew +7% over the last dozen years, whereas small businesses with 50-499 employees and medium/large businesses with more than 499 employees lost -4% and -16% respectively over the same period of time.

According to a recent Kauffman Foundation Study, job growth in the US is driven entirely by startups. The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing one million jobs net combined per year. By contrast, in their first year, new firms add an average of three million jobs. According to the Kauffman Foundation, “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

From a Jobenomics perspective the government’s primary jobs creation role is to create an environment where small, entrepreneurial businesses can flourish. Unfortunately, government officials are locked in a mindset that a nation of “shopkeepers” cannot compete and the solution to growing the economy is a combination of big business and government. Perhaps the greatest factor contributing to this mindset is the scarcity of business owners working in government. Furthermore, entrepreneurs and serial-entrepreneurs are almost completely absent in government decision-making.

Bureaucrats tend to view risk as a liability, whereas entrepreneurs embrace risk as an opportunity. Serial entrepreneurs embrace multiple ideas, get companies started, and transfer leadership to operational managers so they can move on to new ventures. Steve Jobs is an example of a serial-entrepreneur who created multiple iconic businesses. Our country is blessed with tens of thousands of proven serial entrepreneurs. Unfortunately, few serial-entrepreneurs serve on government economic councils that are replete with politically-correct and process-driven corporate chieftains and economists.

If small business is America’s economic engine, and if entrepreneurs and innovators are essential to business startups, then how does America change the government mindset? The upcoming presidential election debates are a good place to start.

From a Jobenomics point-of-view, neither the President nor the leading Republican candidates have yet articulated a viable jobs creation strategy. Virtually all of the proposed job creation plans are top-down political agendas oriented to ideologically-driven constituencies. Almost every political speech contains references to a reformed regulatory environment, better tax incentives and cuts, debt and deficit reduction, helping the middle-class, importance of small business, revitalized manufacturing, green jobs, environment protection, energy independence, stimulation packages, tort reform, reciprocal trade agreements, and increased exports as ways to increase jobs. While all of these areas are necessary, they are insufficient.

Political focus has to be on business creation, not job creation. In recent years, small, emerging and self-employed businesses have been responsible for virtually all of America’s new jobs. Yes small businesses fail, but enough survive to prosper our society. Seven out of ten startup firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. From an entrepreneurial perspective, these are very lucrative statistics that should be the bedrock for a national business initiative to create millions, or tens of millions, of new small and self-employed businesses by year 2020.

A nation of small businesses empowered by 21^st technology can compete globally in ways never before thought possible. It is almost inconceivable that today half of America’s GDP is generated by 27 million small businesses. It is equally inconceivable that 52% of these businesses are home-based. Jobenomics envisions that the American labor force will continue to be transformed by small, largely self-employed, home-based businesses. This transformation will be lead by 70 million members of America’s millennial generation who will monetize the internet and social networks in ways not yet conceived. The country that learns how to monetize social networks, like Facebook with 825 million users, will be transformed almost overnight. Tens of millions of new businesses (mostly small and self-employed) will be created.

American innovation, ingenuity and entrepreneurship are the keys to a prosperous future where everyone who wants to work can find a job. A national small business initiative starts with an achievable vision. President Kennedy focused American science and technology on getting to the moon in a decade. In comparison, the Jobenomics 20 million new private sector jobs by year 2020 (20 by 20) goal should be very achievable. If China can lift 400 million peasants out of poverty in two decades, America can create 20 million new private sector jobs in one decade. Adding millions of new “shopkeepers” to a nation that is already of nation of small businesses could boost our commonwealth to new economic heights.

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Big-3 Potential 2012 Disruptors

Business, job, wealth and tax revenue creation is the top priority for America. The tyranny of hundreds of trillions of dollars of debt and obligations will dramatically change America, if we do not produce our way out of it. In addition, numerous potential international and domestic crises could derail our nascent recovery. Jobenomics addresses the issues of debt and potential crises as part of the overall strategy to produce jobs, wealth and revenue, whether in good or austere times.

Jobenomics predicts that 2012 will be a pivotal year for the US economy as well as business/jobs creation (see 2012 Jobenomics Outlook article). Economically, the US is skating on thin ice. A major or series of minor economic disruptions could shatter this ice and plunge the economy back into recession. Three potentially large disruptors are: US national debt problems, meltdown in the Eurozone, and conflict with Iran.

US National Debt Problems. The US national debt is growing at an alarming rate. At the beginning of the Clinton Administration the US national debt was $4.1T (trillion). At the beginning of Bush Administration, it was $5.7T and rapidly grew to $10.0T eight years later due to post-911 conflicts (Iraq and Afghanistan) and implementation of new entitlement programs, like Medicare Part D. During the first three years of the Obama Administration the national debt increased by almost $5T to $14.8T with a 2011 interest payment of $205 billion. According to the Obama Administration’s FY2012 Budget, over the next ten years, the US national debt is projected to grow by almost $10T to $24.2T with a projected annual interest payment of $928 billion.

The Congressional Budget Office estimates the total US national debt to be $27.6T by 2021, an increase of almost $13T.

From a Jobenomics perspective, $24.2T or $27.6T by 2021 could be conservative numbers if the economy does not recover or if tax rates are cut in an effort to stimulate the economy. Assuming that US federal government tax revenues grow at 2.5% per year (which is the percentage that the US economy is currently growing) and planned government expenditures continue, the US national debt will reach a whopping $32.6T by 2021. Jobenomics calculations are shown below. Considering that the decade of ‘00s (2000 to 2009) lost one million jobs that were tax revenue producers, a 2.5% growth rate could be considered a conservative number as well.

To understand how significant debt and deficits are, a snapshot of the President’s planned FY2012 outlays and revenues paints a vivid picture. The total US deficit is estimated at -$1.164T for FY2012 (it was -$1.293 in FY2010 and -$1.597 in FY11). This year the federal government plans to receive $2.2T in tax revenues and plans to spend (outlay) $2.3T on mandatory spending programs (e.g., Social Security, Medicare, Medicaid, Interest Payments) and $1.4T on National Security and other discretionary government programs. In other words, mandatory spending of $2.3T for entitlement programs and interest payment will cost more than all the money our government takes in. Consequently, we will have to borrow an additional $1.2T to defend to run government and pay for national security.

Unless spending is dramatically cut (Tea Party emphasis), or taxes are significantly increased (Occupy Movement emphasis on taxing the top 1%), or tax revenues dramatically increase via a growing economy (Jobenomics emphasis via small, emerging and self-employed business creation), huge annual deficits will continue for the remainder of this decade. Whether the US national debt is $24T (President), $28T (CBO) or $33T (Jobenomics @ 2.5% revenue growth) is largely academic. The US economy is likely to collapse under any of these scenarios.

Compared to other grassroots movements, Jobenomics national grassroots effort is small but growing rapidly. With its focus on middle-class business and job creation, Jobenomics can help bridge the gap of America’s ideological divide regarding US debt spending and receipts. Jobenomics appeals to the left and right, rich and poor, urban and rural, and members of all political parties. Small, emerging and self-employed business creation is the only realistic way to increase tax revenue and reduce welfare spending by putting people back to work.

Eurozone Meltdown? The global financial community is watching the PIGS, which is a derogatory acronym for Portugal, Italy, Greece and Spain. All of these countries are in financial turmoil. All are in recession. All have serious debt issues and are considering bankruptcy and strategic defaults as ways to escape their debt burden. Moreover, the PIGS are threatening the financial stability of the entire European Union (EU), which is bifurcating into have nations (France, Germany, UK) nations that have stable economies, and have-not nations (PIGS) that are skating near the edge of financial abyss.

Like any family, financial issues generally bring out the worst in people. This is no exception in the 27-nation European Union where 17 nations share the euro as a common currency. Traditional rivalries, like those between Germany and France, as well as Eastern and Western Europe are beginning to intensify as financial difficulties continue to worsen with the PIGS. While the PIGS are in the worst trouble, they are not unique. Thirteen of the 27 EU members face debts equal to more than 60% of their GDP, the limit set by the European Commission.

There is mounting concern that Greece will be unable to finance a budget deficit, which is more than four times the EU’s debt limit, or make payments on its sovereign debt. A Greek default has far-reaching financial and political implications for the EU, which by charter constitutes a single market. If one part of its market is allowed to fail, what does that mean for the viability of the entire market? The term that most economists and policymakers use is “contagion.” They are as much concerned about the Greek contagion spreading as the Greek crisis itself.

Many fear that the Greek contagion will spread to Portugal, Spain and Italy whose credit ratings are also falling. If this continues, financial institution and investors will be unwilling to continue to fund these countries. Without the ability to sell bonds or borrow money, these countries will default on their debts and sovereign obligations. Default will put significant pressure on European banks that own securities from these countries. The European Central Bank (the EU equivalent of the US Fed) controls the monetary policy of the Eurozone member states. It is also the major source of funding for countries like Greece, and could face major losses on its own loan portfolio if Greek banks fail and the government defaults.

There is significant evidence that the Greek contagion is spreading. On 13 Jan 2012, the S&P Credit Rating agency downgraded 9 of the 17 Eurozone countries. France and Austria lost their coveted AAA ratings, which were lowered one notch to AA+, and Italy and Spain had their ratings cut by two notches. Germany, Finland, Luxembourg and the Netherlands all retained their AAA status, while the ratings of Portugal and Cyprus were cut to junk, thereby joining Greece which is one notch away from default.

A Eurozone meltdown or a PIGS contagion will not only spread throughout the EU, but will engulf US public and private financial institutions that are heavily invested in Europe. No other economic relationship in the world is as integrated as the transatlantic EU/US economies. The EU and the US economies account together for about half the entire world GDP and for nearly a third of world trade flows. The transatlantic relationship also defines the shape of the global economy. Consequently if Europe plunges into recession, it will likely pull the US back into recession as well.

Conflict with the Islamic Republic of Iran . Of all the military and terrorist threats facing the US, war with Iran has the most menacing consequences from both security and economic standpoints. A detailed presentation, entitled Conflict with the Islamic Republic of Iran, was written by this author in 1996, and reviewed by the Joint Chiefs of Staff and the leading military war colleges. A downloadable copy can be obtained at by clicking: Conflict with the Islamic Republic of Iran.

Jobenomics, the book published in 2010, has the following information about a conflict with Iran and its economic disruptive potential.

Iran is provoking a conflict with the West, using American and Israeli occupation in the Middle East as the cause célèbre for Islamic common cause. However, there are more fundamental reasons motivating the Ayatollahs and the leaders of the Islamic Republic of Iran. These reasons include:

Political: Supreme Leader Ali Khamenei and President Mahmoud Ahmadinejad repeatedly state that their primary political objective is to revive the crumbling Islamic Revolution. An external enemy helps advance the ultra-conservative position over reformers and youth who want détente with the West.
Economic: Control of 50% of the world’s oil reserves greatly benefits Iran. Increasing economic sanctions will either motivate Iranian leaders towards moderation or encourage aggressiveness.
Military: Compared to a hundred thousand US forces and diplomats in neighboring Iraq and Afghanistan, the Islamic Republic has several million combat personnel strategically positioned to dominate the region. Additionally, they openly state their right to develop a nuclear capability.
Religious: Messianically-inclined Shia leaders are preparing for confrontation with Israel and America, the expected near-term return of the Islamic messiah, and the establishment of a global Caliphate.
Historical: Confederacy with Shiite communities throughout the Middle-East (starting with Iraq, Bahrain, and Saudi Arabia) is a historic opportunity after 1,000 years of domination from Sunni Arabs and Ottoman Turks.

The Iranian leaders have repeatedly stated that war with the West is inevitable. Iran is currently engaged in a war of words and saber rattling. When they achieve nuclear weapons capability, their rhetoric may turn to military action, especially if they feel that they are about to be attacked by Israel and Israel’s Western allies.

Military planners foresee three possible engagement scenarios: closing the Strait of Hormuz, military action against Israel, and military action against America either at home (terrorist attack) or abroad.

Strait of Hormuz. Closing the Strait of Hormuz would create a global energy and economic crisis. The Strait of Hormuz is of great strategic importance. It is the only sea route through which oil from Kuwait, Iraq, Iran, Saudi Arabia, Bahrain, Qatar, and the United Arab Emirates, can be transported to the rest of the world. Approximately 20% of the world’s oil supplies transit the narrow Strait of Hormuz. The strait at its narrowest is 21 miles wide with two 1-mile wide channels for marine traffic. Iran has conducted several major naval exercises to showcase its capability to close the Strait of Hormuz and Supreme Leader Ali Khamenei has publicly stated that Iran will close the Strait if provoked. If the Strait is closed, the price of oil could quadruple overnight. More importantly, the disruption of the flow of oil would quickly impact the economies of numerous nations.
Military action against Israel. President Ahmadinejad has stated on numerous occasions that Iran intends to “wipe Israel off the map,” “very soon,” with a single decisive blow. Preemptive military action against Israel would likely entail a coordinated missile attack, including 40,000 short-range rockets (Katyusha), hundreds of medium-range missiles (Scud) and a few nuclear-tipped theater ballistic missiles (Shehab). Israeli leadership takes these threats seriously and is considering preemptive military action of its own, which could include the use of nuclear weapons. The use of nuclear weapons by either side, or military intervention by the US or Israel to destroy Iranian nuclear development sites, would have major consequences in the global political/economic balance-of-power. It is hard to foresee any outcome that would benefit the US economically or otherwise.
Military action against America at home or abroad. As a result of the 1980-1988 Iran-Iraq War, the longest conventional war in the 20th Century, the Iranian military has maintained the bulk of their 32 divisions and 87 brigades, most of which are stationed on the Iraqi border. Several million Iranian troops, along with Iranian special operation forces (Qods) already in Iraq, could quickly overwhelm the fledgling democracy Iraq. Any such action would precipitate a major military response from the US. To counter this response, the Iranians would likely create diversionary or retaliatory attacks within the US. The types of terrorist actions that they could inflict within the US have been the subject of much conjecture and study. The most serious types of attacks would cause massive loss of life and devastating economic impact. To accomplish an Iranian version of shock-and-awe, bio-terrorism, dirty bombs, or an offshore EMP explosion would be the most devastating. According to the US Commission to Assess the Threat to the US from Electromagnetic Pulse (EMP), “Because of the ubiquitous dependence of US society on the electrical power system, its vulnerability to an EMP attack, coupled with the EMP’s particular damage mechanisms, creates the possibility of long-term, catastrophic consequences.”

From a strategic perspective, Iran is the lynchpin in a larger strategic equation that involves both Russia and China, both of which support Iran politically, militarily and economically. If Iran is successful in establishing itself as the dominant regional power in the Middle East, the global geo-political center would shift increasingly from the West to the East.

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Recent US Employment Trends

In January 2008, total US employment was 138.0 million. By January 2010, the Great Recession caused the loss of 8.7 million jobs. As of November 2011, only 2.4 million jobs were created since the beginning of this decade (1 Jan 10). Government (mainly local and municipal governments) shed approximately ½ million jobs as shown. Whereas, the private sector generated 2,548,000 jobs in service-providing and 336,000 jobs in goods-producing industries respectively. While this is good news, America continues to have a 58% jobs shortfall as measured by the traditional economic benchmark of 250,000 jobs per month to achieve economic recovery.

From a Jobenomics perspective the three most important employment sectors include private sector service-providing industries, private sector goods-producing industries, and the government sector (federal, state and local). Based on Bureau of Labor Statistics data, private sector service-providing industries, is the only sector that contributes to meaningful jobs creation with 106.7% increase relative to the total number of jobs produced. Looking at the total private sector (service-providing and goods-producing), 99% of new jobs were generated by small business whereas only 1% by large business as shown.

From a Jobenomics perspective, America’s near term emphasis should be on small businesses in the service-providing industries with emphasis on professional, business, information, financial, trade, transportation, utilities, leisure and hospitality services which have sustained strong to moderate growth over the last three decades as well as post recession. If the US government and American people had placed greater emphasis on these small businesses, as opposed to large financial institutions and big businesses, the number of new American jobs may have doubled or tripled since the end of the Great Recession.

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Self Employment Screen

Welcome to the Jobenomics “Self-Employment Screen“.

“20 Million Jobs by 2020″.

What is the Self-Employment Screen (SES)? The SES analyzes the key inherent characteristics and attitudes that influence entrepreneurial success and can help predict which of the four major entrepreneurial business environments a person is most naturally suited to: agent/representative, consulting/contract, franchises or small business.

The SES does not pre-judge whether someone should be self-employed. Rather, it provides the person interested in becoming self-employed with insights into her/his business development style, motivational factors, developmental needs and the type of self-employment that she/he would be most naturally suited to.

A copy of the SES report is provided online immediately upon completion of the survey.

For your complimentary assessment to determine the best type of opportunity fit for you, click here: Take the Self-EmploymentScreen™

Veterans

If you are a Veteran, we invite you to complete the CareerManagementPro™.

This profile will provide you with key insights into yourself and your personal strengths as you make important career decisions.

To begin this assessment, please click here: CareerManagementPro™ for Veterans

More Information

For more details and to purchase available profiles, please click here.

To hire small business coaches, contact: Hugh Ballou or Micro Biz Coach

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5 Million Government Layoffs Ahead?

Recent US Employment Trends addressed the three most important employment sectors: private sector service-providing industries, private sector goods-producing industries, and the government sector. This article examines the government sector in more detail and hypothesizes how many more job losses could occur in the near future.

2012 will be a pivotal year for the US economy. For 2012, Jobenomics assesses the following probabilities: 20% chance that the economy will improve, 30% that it will continue to muddle along, and 50% it will get worse depending on the severity of financial disruptions (see 2012 Jobenomics Outlook article). Given this 50/50 forecast, Jobenomics forecasts that the current government trend of government layoffs will continue.

The Jobenomics plan calls for creation of 20 million new private sector jobs with emphasis on small, emerging and self-employed businesses in service-providing industries in order to generate a robust economic recovery. Our plan also calls for zero government growth as opposed to cuts in government employment. However, since the US is creating new jobs at only 45% of what is needed (see Recent US Employment Trends) reductions in the government workforce appear inevitable. A drop of 5.4 million government jobs is our best guess given current economic conditions and trends. It is our hope that these reductions will not occur if the economy improves on its own, or is nudged by the Jobenomics national grassroots movement.

Local Government Civilians: 2 million potential job reductions.

State and local governments have been shedding jobs for the last three years. This trend will likely accelerate and perhaps double from the current rate of 250,000 (see BLS/CBPP chart) to as much as 500,000 layoffs per year. There are four major reasons for this assertion. The first reason deals with decreased discretionary income due to unemployment, under-employment, and declining middle-class wages and net-worth. Decreased discretionary income translates to reduced consumption and lower government tax revenues. Second, federal stimulus funding has ended and new stimulus funding is unlikely. Third, non-essential state, municipal and local programs and services have already been cut. Future cuts are likely to involve personnel. Fourth, reduced property tax revenues will be a major new factor with local governments that are responsible for 82% of all recent government sector layoffs.

Property taxes are the main source of tax revenues for municipal and local governments. Because it takes years to process property assessments, the collapse in housing values are just now beginning to impact local governments at a time when federal and state aid are ending. Most local governments predict that their tax base, generated by residential and commercial property taxes, will shrink consistently each year over the next five years.

Since the Great Recession of 2008, when tax revenues from inflated property values and federal/state aid were plentiful, local governments were compelled to shed hundreds of thousands of jobs. Today times are much worse financially. Rainy-day funds have been largely depleted. Cuts in non-essential programs and services mostly have been made. Without a robust US economic recovery, a perfect storm is brewing where local governments may have to make deep cuts in essential services including teachers, police and firefighters. Since education constitutes 56% of local government employment, teachers will be particularity hard hit.

In the last two years, local government jobs decreased from 14,498,000 to 14,078,000, a loss of 420,000 jobs or 1.45% per year. Due to the shrinking tax base, it is likely that this rate could increase to 3%, resulting in 2 million job losses over five years.

State Government Civilians: 340,000 potential job reductions. Over the last three years, states had budget shortfalls of $430 billion. State governments rely heavily on sales taxes, income taxes, business taxes, excise taxes and tuitions for state-funded universities. All of these sources of tax revenues are likely to increase, which should keep state layoffs to the minimum. On the other hand, increasing entitlement (Medicaid) and welfare expenses, dwindling federal subsidies, persistently high unemployment rates, and a sluggish economy make balanced budgets a difficult goal for the 42 states that are projecting a $110 billion budget shortfall in 2012.

In the last twelve months, state government jobs decreased from 5,144,000 to 5,073,000, a loss of 71,000 jobs or – 1.4%. While states have the capability of raising many forms of taxes, Jobenomics predicts that voters reject most of the legislative efforts to increase taxes. Without additional tax revenue, states will continue to reduce its public sector workforce. Consequently, it is likely that the -1.4% trend will continue and 340,000 jobs will be lost over the next five years.

Federal Government Civilians: 300,000 potential job reductions. In the last twelve months, federal government employment decreased from 2,844,000 to 2,817,000, a loss of 27,000 jobs or – 0.9%. This modest rate is likely to increase due to budget and deficit concerns. There are growing calls from Congressional conservatives that the US federal government should reduce size by as much as 10%. While opposed, Congressional liberals are faced with a dilemma justifying high federal government salaries in relation to growing needs of the unemployed and other financially challenged groups. Jobenomics predicts that federal civilian workforce reductions (not including the US Postal Service and DoD Civilians) will average 2.5% over the next five years, which would result in 170,000 job losses.

612,000 US Postal Services employees are federal employees. In the last twelve months, the postal service lost 30,700 jobs, or 4.8% of its workforce. Due to inefficiencies within the postal service, private sector competition and increased use of email, this trend is likely to continue at its current rate for a loss of 130,000 jobs in five years.

US Military: 435,000 potential job reductions. The Department of Defense (DoD) is comprised of 1,430,895 active duty, 848,000 reserve, and 779,000 federal civilian employees for a total of 3.1 million personnel. Secretary of Defense Leon Panetta is considering reductions once thought sacrosanct. Planned cuts of $450 billion will reduce the military budget by 7% to 8%. According to Panetta, “Rough estimates suggest after ten years of these cuts, we would have the smallest ground force since 1940, the smallest number of ships since 1915, and the smallest Air Force in its history.” SecDef’s forecast does not include $600 billion of other potential congressionally mandated DoD reductions which could increase DoD cuts to approximately 20%. $600 billion is half of the potential $1.2 trillion sequestration amount.

Priority currently is being placed on cutting weapons programs, but in the end, manpower will have to be reduced since it is the largest component of the national security budget. Due to annual trillion dollar budget deficits, a flagging economy, priority given to mandatory accounts (Social Security, Medicare) over discretionary accounts (National Security), attrition of returning Iraqi and Afghani veterans on top of normal attrition, rising personnel and retirement costs, and inflation, the DoD is a prime target for severe cuts in manpower.

Jobenomics estimates that the US military and civilian workforce is likely to decrease at an annual rate of 3% per year over the next five years. If this occurs, 435,000 positions will be lost.

Government Contractors: 2.3 million potential job reductions. Exact numbers of government contractors are hard to obtain. So Jobenomics accessed data from USAspending.gov which provides the public with information about how their tax dollars are spent. According to USAspending.gov, in fiscal year 2011, the US federal government’s direct payment to federal government civilian contractors was $895 billion. Jobenomics estimates the approximate number of federal contractor employees by dividing their estimated average wage and benefits of $120,000 (triple the median private sector wage, but equal to the average federal government civilian pay) into $895 billion, which equals 7.4 million federal contractor employees. While the number of state and local civilian contractors jobs are unknown, it is safe to assume at least 2.6 million (1/3 of federal contractor jobs), for a total of 10 million government (federal, state, local) civilian employees.

Due the size of budget deficits at all levels of government (federal, state and local), 5% cuts are likely for federal contractors over the next five years, resulting in the loss of 2.3 million jobs.

Cuts of this magnitude would cause a crisis for defense and aerospace industries. While national security enthusiasts will vigorously resist the magnitude of these cuts, similar defense industry cutbacks occurred after WWII, Vietnam, and the Cold War. Cold War spending was replaced by the so-called “Peace Dividend” which reduced military expenditures as a percent of GDP by approximately 50% over ten years. Considering the severity of annual trillion dollar budget deficits, and a potential post-Iraq/Afghanistan peace dividend, it is conceivable that massive defense contractor reductions could occur in a period of five years, if the US economy does not significantly improve soon.

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Dropping Unemployment Rates?

There is little reason to celebrate the dropping unemployment rate because it is largely a numerical illusion. Yes, the number of people unemployed has dropped consistently over the last four months. However, the ranks of people that have quit looking for work swelled by an equal amount.

This chart is derived from the US Bureau of Labor Statistics, Table A-1, Employment Status of the Civilian Population. It shows from 30 September 2011 to 31 December 2011 the official unemployment rate (U3) dropped from 9.0% to 8.5%, which equates to a decline of 0.5% or 597,000 people. However, the same table also shows an increase of 630,000 people who joined the ranks of the “Not in Labor Force” category. According the BLS, “the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as “not in the labor force.”” Consequently, 33,000 more people have joined the no job-not looking category as opposed to being simply being unemployed.

From a Jobenomics perspective, the “functional” unemployment rate (see The 35% “Functionally” Unemployed Rate article) remains at 35% as shown below.

Jobenomics has consistently advocated using employment numbers, rather than unemployment, as a measure of economic health. As shown above, unemployment numbers and rates can be confusing. Policy-makers and opinion-leaders need a better yard stick for reporting and decision-making. Rather than reporting on a “glass half empty” (unemployment), we should focus on a “glass half full” (employment). Those who are employed are the ones who are contributing to economic growth (see Too Few Pay For Too Many).

Using the same Table A-1, the employment picture has improved by 683,000 over the last four months. Using the same metrics as we did with unemployment numbers, the civilian labor force decreased 117,000, so the net change is +566,000, which is good news. If we subtracted increases in population growth (200,000 new US citizens, not shown), the net would be +366,000, which is a reason to celebrate.

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Manufacturing/Construction Forecast

Our Recent US Employment Trends article indentified the three most important US employment sectors: private sector service-providing industries, private sector goods-producing industries, and the government sector. This article examines private sector goods-producing industries with emphasis on manufacturing and construction industries.

As discussed in our 30-Year US Employment Trends article, US private sector goods-producing industries have deteriorated by 25% over the last three decades. If adjusted for US population growth deterioration of this sector exceeds 50%. In lieu of a significantly improved US economy, Jobenomics forecasts that goods-producing industries decline may stabilize but will produce few, if any, new private sector jobs in the near future.

Private sector goods-producing industries include: Manufacturing (11.8 million jobs), Construction (5.5 million), Nondurable goods (4.4 million), and Mining/Logging (700,000 jobs). Manufacturing and construction are the two largest and most influential categories.

Manufacturing. US manufacturing hit its peak in 1979 with 19.43 million jobs. Today, US manufacturing only employs 11.71 million people, a 40% decline from its peak in 1979 and the lowest since 1941. As a percent of population, manufacturing has suffered a 55% decline (the US population in 2011 is 312M, compared to 225M in 1979). As shown by the very small uptick on the chart, manufacturing has increased 1.6% over the last year for at total 189,000 jobs. While this good news, the big question is will this micro-trend continue?

From a Jobenomics perspective, manufacturing is not, and, will not be a significant contributor to US employment in the next five years. 189,000 yearly jobs equates to a monthly average of 16,000 jobs. Measured against the traditional benchmark of 250,000 monthly jobs needed for economic recovery, 16,000 jobs equates to a meager 6% contribution. Looking back to the start of the Great Recession (January 2008), manufacturing is down by almost 2 million jobs, so this recent uptick is relatively insignificant.

From a more strategic perspective, major corporations are the driving-force for manufacturing employment. These corporations are disinclined towards hiring domestic workers and will likely remain so disposed in the near future. The chief reason is US economic uncertainty. As long as US GDP muddles along at near stall speed with storm clouds on the horizon, corporations will continue to be reluctant to retool or build new plants. Instead, cash-rich corporations will continue to invest their trillions of dollars worth of cash reserves in overseas emerging markets (China, India, Indonesia, Brazil and other countries that have robust GDP growth) and in the financial markets. US government over-regulation, high US labor rates and unions, makes foreign manufacturing much more appealing than domestic pursuits. While there is a lot of political rhetoric about reducing regulation and promoting exports, it is likely that nothing meaningful will happen anytime soon. Devaluation of the US dollar has been helpful making US exports more competitive overseas, but devaluation adds to corporate uncertainty as well as poor consumer and investor confidence. Unemployment and aging population are also factors. 78 million baby-boomers are likely to spend more on services than big-ticket manufactured items.

Construction. The US construction industry employs 5.5 million Americas in three sectors: residential (2M jobs or 37% of the total construction industry), nonresidential (2.7M or 48% of total), and heavy & civil engineering (843,000 or 15% of total). Nonresidential deals mainly with commercial properties. Heavy & Civil Engineering deals mainly with infrastructure projects, like highways, bridges, and dams.

Since the employment peak in the mid to late 2000s, the overall commercial industry declined 40%. During the same time period, residential construction declined a whopping 71%, nonresidential declined 30%, and heavy & civil engineering declined 20%. Over the last year, the overall construction industry has stabilized with only minor losses of jobs. From a Jobenomics perspective, this recent period of stabilization is temporary with more jobs losses in the near future, unless the US economy significantly rebounds, investor confidence markedly improves, and financial institutions make credit more accessible to builders. None of these three conditions appear likely in 2012.

Residential is currently the driving-force in the construction industry. The Great Recession was caused mainly by the housing bubble burst. In the wake of the Great Recession, housing prices collapsed. As shown above, homes in the top 20 US cities lost 33% of their value. Some metropolitan areas, like Washington DC, fared slightly better (-27%) largely due to the federal government. On the other end of the scale, Las Vegas was hammered with -61% losses. While home values seemed to stabilize briefly in 2009-2010, the top 20 city composite index lost 3.4% in 2011.

The 2012 residential housing market forecast is cloudy. Foreclosures, underwater mortgages, delinquencies, and strategic defaults (walking away from home mortgages) are still major challenges. Conversely, home affordability is now more in par with renting. Buyers who have stayed on the sidelines may return to the market. However, buyers are aware of the fact the home prices could continue to fall. A new wave of foreclosures is predicted as banks begin to release their plentiful inventory of reprocessed homes. According to some economists, home prices could fall as much as 25%, which, in turn, would keep the residential construction industry depressed.

The commercial and heavy construction industries are poised for a period of growth. However, McGraw-Hill Construction, a mainstay in construction industry forecasting, predicts that 2012 construction starts will remain flat. Significant upsides in private sector construction financing (plants, warehouses, hotels, and commercial buildings) will be offset by large declines in public sector construction projects funded by municipal, state and federal governments. New public sector projects like school, healthcare, electric utility and other public works programs (bridges, parks, roads) are problematic due to fiscal constraints at all levels of government. In addition, new industry entrants face challenges with access to capital. Strict lending standards exclude many general contractors from being eligible for loans.

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2012 Jobenomics Outlook

Jobenomics predicts that 2012 will be a tough year for the US economy, unemployment, and business/jobs creation. The biggest bright spot is small business which, contrary to popular opinion, is now the engine of the American economy as discussed in an earlier Jobenomics article entitled, Small Business: The New “Big Dog”.

US Economy. From a Jobenomics perspective, there are three US economic scenarios: V, W, L (see: Economic Recovery Scenarios article). A V-shaped recovery occurs when the market rebounds after hitting bottom, and returns to its previous high. Eight out of nine US recoveries after a recession have been V-shaped. A W-shaped recovery, also known as a double-dip, happens when the economy rebounds, retreats, and rebounds again. W-shaped scenarios happened during the Great Depression and in the 1975 and 1982 era. An L-shaped recovery indicates a stagnant economy whereas a declining-L symbolizes a declining economy. Japan is undergoing a declining-L scenario for the last two decades. European economies in Greece, Portugal, Spain and Italy are declining to the point of potential economic collapse. As far as America, Jobenomics believes that an equal case can be made for each scenario and that the US economy could take very different paths depending on the American entrepreneurial spirit, leadership decisions, and how our country navigates future disruptions and crises.

Our weakened economic situation makes America vulnerable. The past two years have been relatively free of major disruptions, which allowed our economy to grow, albeit very slowly. If a major event or multiple cascading events happen, a severe recession or a depression is plausible. Potential internal disruptions include: debt or deficit crisis at all levels of government, energy crisis, a wave of strategic defaults in the housing sector, unrest due to unemployment, as well as known and potential unknown “black swan” events, like 9/11. As far as external disruptions, the US economy is far more interdependent and vulnerable to foreign financial crises and conflicts than any time in recent history. Eurozone crisis, Iranian crisis, new wars and conflicts, terrorism and cyber attacks are all possible foreign disrupters.

Unemployment. Jobenomics predicts that the “functional” unemployment rate of 35%, or 111 million US citizens who unemployed/underemployed/no longer looking will continue to rise as the middle-class erodes and the jobless exhaust their unemployment benefits and join those “not in the labor force” (see: 35% “Functionally” Unemployed Rate article). The “official” (U3) unemployment rate will likely increase to the 9% to 9.5% range, or even exceed 10% if a major financial disruption occurs. The primary reason for seeing unemployment increase rather decrease is due to America’s preoccupation with symptoms rather than the cure. Unemployment is a symptom. Employment, via business/job creation is the cure.

Business/Jobs creation. Jobenomics predicts that America will continue to produce only half of the jobs needed (see: Recent US Employment Trends) since it is preoccupied with top-down government and big business solutions. Since January 2010, small business is responsible for 99% of all new jobs created in the US (see: Small Business Produces 99% of Jobs). The US government sector will lose 3% of its workforce per year over the next five years for a total of 5.4 million lost jobs (see: 5 Million Government Layoffs Ahead?). US good-producing industries, dominated by large manufacturing and construction firms, may stabilize from their precipitous decline in recent years, but will produce few, if any, new private sector jobs in the near future (see: Manufacturing/Construction Forecast).

Engaging the American entrepreneurial spirit will be paramount to economic recovery regardless of scenario or outlook. The Jobenomics 20 by 20 Campaign plan calls for 20 million new private sector jobs by year 2020. 18 million are generated by small, emerging and self-employed businesses, 2 million from large US businesses, and zero growth in US federal, state and local government employment. Jobs creation will be dominated by the private sector service-providing industries that are dominated by small business.

Core to the Jobenomics concept is business creation with emphasis on small, emerging and self-employed businesses that are the engine of the US economy and principal employer of 70% of all American workers. To achieve the Jobenomics’ goal of 20 million new jobs by 2020, America needs to redirect its focus from government and big business solutions to small enterprise growth. As shown below, since the beginning of this decade, very small business (1-49 employees) have consistently produced the most jobs and weathered two recessions as well as small, medium and large businesses.

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Small Business: The New “Big Dog”

Historically, the main driving force of the US economy has been the goods-producing sector with manufacturing (mainly automotive) and construction (mainly housing) being the “big dogs”. These big dogs have huge tails that influence many other industries in their direct and indirect supply chains during both upward and downward economic trends. Consequently, most decision-makers focus on these big dogs as opposed to their purported tails—small business. From a Jobenomics perspective, small business has evolved to become the new big dog and will remain so, at least for the remainder of this decade.

Over the last thirty years, goods-producing industries have declined 25%, where service-providing industries, mainly small business, have increased 81% (see Jobenomics blog entitled, 30-Year US Employment Trends). Today, according to the US Bureau of Labor Statistics, US manufacturing employs 11.8 million and construction 5.5 million, which is 3.8% and 1.8% of the US population (312 million). On the other hand, service-providing industries employ 91.6 million or 29.4% of the US population. Of this 91.6 million, 77.4 million or 85% are small businesses of which 55% (42.9 million) are very small businesses with less than 50 employees (source: ADP). Based on these numbers, very small business is the big dog now.

The question for policy-makers, decision-leaders, talking-heads and all-Americans is whether this new big dog can survive without the former big dogs. The answer is probably not. However, the question should not be an either/or question. America needs all its dogs in the economic fight. Americans need to focus on small business as the new economic champion giving old dogs time to heal, grow and effectively compete again.

The biggest reason that small business can compete globally is largely due to technology. Small information, technical, financial, professional and trade service firms can now compete globally due to broadband communication and advanced information technology systems. Collectively, little has become big. 77.4 million service-providing, small business employees make it so.

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30-Year US Employment Trends

To see where one is going, it is often useful to look back to where one has been. Today, the common perception is that the private sector workforce has been decimated and the federal government workforce has exploded in its place. These perceptions are only partly true. A deeper understanding is important for healthy economic and policy decisions. This blog looks back 30 years. The next blog will deal with recent US employment trends so far this decade, the “10s.

From a Jobenomics perspective the three most important employment sectors include: private sector service-providing industries, private sector goods-producing industries, and the government sector (federal, state and local). The 30-year employment trends (shown above) were calculated by the Bureau of Labor Statistics.

Private sector service- providing industries have grown significantly at 81% over the last three decades in terms of raw numbers. Even if these numbers were adjusted relative to 36% US population growth (230 million in 1981 to 312 million today), the growth in this sector is still significant. Private sector service-providing industries include:

Trade, transportation, and utilities that employ 25.1 million Americans and have experienced a growth rate of +36%.
Professional and business services employ 20.2 million with a growth rate of +162%.
Leisure and hospitality employ 13.3 million with a growth rate of +96%.
Financial activities employ 7.6 million Americans with a growth rate of +49%.
Information (telecommunications not including internet, publishing, motion picture, broadcasting, data processing/hosting) industries employ 2.7 million with a growth rate of +13%.
Other services (repair and maintenance, personal and laundry services, membership associations and organizations) employ 5.5 million with a growth rate of +93%.

The central focus of the Jobenomics movement is on the private service-providing sector since it historically has been the most robust and is projected to the most robust in the future. Additionally, this sector, combined with the advent of “big data age” and new 21^st Century networking solutions, will be the one most advantageous to small, emerging and self-employed business creation. Small business has been responsible for virtually all of the new US jobs this decade (see previous blog entry entitled, Small and Self-Employed Businesses Produced Almost 100% of Net New Jobs This Decade). If America wants to maximize jobs creation, it should focus on small, IT-empowered, services businesses that have enjoyed double and triple digit growth rates.

Private sector goods-producing industries have deteriorated by 25% over the last three decades. If adjusted for US population growth deterioration of this sector exceeds 50%. Private sector goods-producing industries include:

Manufacturing (durable goods) employs 11.8 million with a negative growth rate of -37%.
Construction employs 5.5 million with a growth rate of +36%. Note: construction has taken a massive hit since the Great Recession in 2008 but is still up from 1981.
Nondurable goods (food manufacturing, textiles, apparel, paper/plastic/rubber products, etc.) employ 4.4 million with a negative growth rate of -37%.
Mining/logging employ 0.7 million with a negative growth rate of -35%.

While Jobenomics acknowledges the importance of the goods-producing sector, with the exception of foreign owned businesses coming to the USA, this sector is unlikely to contribute more than 10% towards the Jobenomics goal of 20 million new private sector jobs by year 2020 (20 by 20). In this author’s opinion the manufacturing and construction industries are likely to continue to decline despite all the Washington rhetoric. US manufacturing suffers from high government regulation as well as high labor costs relative to foreign goods-producing industries. Washington’s promises of a less austere regulatory environment and fair trade agreements will take years, if ever, to enact and implement. US construction is highly dependent on the housing industry that will remain depressed for years to the over abundance of foreclosures and short sales. Washington efforts, like the Home Affordable Modification Program (HAMP), have failed to reduce the plight of underwater homeowners and foreclosures.

Consequently, the Jobenomics near-term emphasis in the goods-producing sector is on bringing manufacturing back to America by incentivizing foreign-owned businesses to manufacture a greater percentage of their products in the USA. In the 1980s, the Japanese were incentivized to start numerous US automobile plants that now employ 150,000 US workers. The Jobenomics Center for Industrial Development initiative is designed to attract foreign businesses and foreign investors via the US Customs and Immigration Service EB-5 foreign investor program. The Jobenomics goal is to create 3 million new US jobs via foreign-owned corporations. If foreign corporations want access to America’s $14 trillion annual GDP, then it is reasonable to” incentivize” them to build in America.

The government sector (federal, state and local) has grown by 34% over the last three decades. When adjusted for the increase in population, government is employing approximately the same percentage of people per population today as yesteryear.

Contrary to popular perception, the US federal government has lost -5% over three decades. In 1981 the feds employed 2.96 million, whereas in 2011 it employed 2.82 million. However, these numbers do not include the explosive growth of government contractors which employ approximately 10 million people who represent a significant portion of the outsourced government jobs to the private sector.
State government and local governments employ 5.1 million and 14.2 million and have grown by 40% and 46% respectively over the last three decades. However, due to the Great Recession, and its concomitant decrease in tax revenues, state and municipal governments are laying off significant number of personnel during the last several years. If the US economy reenters recession, a double-dip, it is not inconceivable that state and municipal governments will have to lay-off 2 to 3 million more employees to balance budget shortfalls.

The Jobenomics Plan for America calls for zero growth in government. This zero growth goal should not be hard to achieve since all levels of government will continue to shed jobs as outlays continue to outpace revenues for the foreseeable future.

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Economic Recovery Scenarios

There is much debate among economists and policymakers about the shape of the US recovery. From a Jobenomics perspective, there are three scenarios: V, W, and L or declining-L.

V-Shaped Scenario. The V-shaped scenario is the predominant historical scenario. The premise of a V-shaped recovery is that the market rebounds after hitting bottom, and returns to or exceeds previous highs. Eight out of the nine recessions that the US has experienced since WWII have been V-shaped recoveries.

Due to rebounding US stock markets (Dow, S&P and NASDAQ), policymakers tout the V as proof that recovery is underway, and that government stimulus packages are working. Economists further argue that the normal business cycles are a series of peaks and troughs. Recessions (troughs) are distinctly shallower, briefer, and less frequent than expansions (peaks). Since the US economy is still the largest and most powerful in the world, Americans should expect a peak greater than before. While the current recession (aka, The Great Recession) has been bad, our current economic balance sheet is no worse than it was a decade ago.

W-Shaped or Double-Dip Scenario. The W-shaped scenario happened during the 1975 to 1982 recessionary era. It also happened during the Great Depression. The premise is the market rebounds, then decreases, and rebounds again returning to historic highs. The W is a double V, also known as a double-dip recession. After a false start, optimism returns to the marketplace. Past W-shaped scenarios were largely caused by excessive or inappropriate government policies and intervention. A future double-dip recession could be induced by another domestic financial crisis or an international event.

L- or Declining-L Shaped Scenario. The L-shaped scenario has not happened in recent US history, but has occurred numerous times in other countries, like Japan and Greece. The L-shaped recovery premise is that the market does not rebound, or takes a significant amount of time before it rebounds. The “declining” L postulates that the economy erodes, and in extreme cases, collapses. The square root symbol is a third variant, where the recovery dips, recovers slightly (due to stimuli), and then flattens. Economists who believe that the current economic crisis has been caused by flawed economic principles endorse the L. Numerous anti-capitalists also ascribe to this point of view since they believe that the American-era is over, and is in decline. Even V and W advocates acknowledge that multiple crises, or a catastrophic event, could cause an L, or even a declining L, depending on the severity of the crisis or event.

A reasonable case can be made for each scenario, which implies that there is 2/3 chance that the US economy will get worse in 2012. This reflects the dour mood of Americans, who by a 2/3 margin believe that the US economy is moving in the wrong direction. It is the author’s opinion that the US economy will continue to struggle with low GDP and high unemployment rates, but will eventually recover if there are no major crises. However, this is a very large “if”. Dark clouds are on the horizon. These clouds include a deadlocked political environment in Washington, eurozone crisis , conflict with Iran, a massive energy crisis ($300 barrel of oil), a second major real estate crisis, layoffs by state and local governments, terrorist (cyber, or physical) attacks, civil unrest, or an unanticipated “black swan” event.

Consequently, if American leadership (Bernanke, Geithner, Obama and Congressional leaders) make the right monetary (the Fed) and fiscal (the Congress) decisions, our economy shouldslowly recover (V-shaped recovery). If a financial, manmade, or natural crisis occurs, America is likely to suffer a
double dip (W) recession that will lead to economic malaise and higher unemployment rates. If multiple crises occur, the US economy could enter a prolonged era of recession (L), or depression (declining-L), which is an increasingly likely prospect for the eurozone. 2012 will certainly be a pivotal year for America and the other Western economies.

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35% “Functionally” Unemployed Rate

Every week, US unemployment numbers make headlines, but few Americans understand what these numbers actually represent. More importantly, these numbers constitute a driving force behind many policy and economic decisions. Jobenomics believes that policy decisions should be made on those functionally unemployed, which is a much better indicator of economic distress. The total number of US “functionally unemployed” is 110.6 million people, or 35% of the US population.

The Bureau of Labor Statistics (BLS) calculates six unemployment categories (U1 through U6) every month. The three most often reported categories are the Long-Term U1 Rate, the Official U3 Rate, and the Total U6 Rate of unemployed and underemployed. As shown above, in November 2011, the U1/U3/U6 rates equated to 5.1%/8.6%/15.6% or 7.8/13.7/24 million people unemployed respectively. These rates and numbers are calculated as a percentage of the US Civilian Labor Force, which is currently 153.9 million Americans. The BLS defines the US Civilian Labor Force as citizens, who have jobs or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized.

The U3 “Official” Unemployment Rate is the rate that is most often watched and reported. In October 2011 the U3 Rate was 9%. In November 2011, it dropped 0.4% to 8.6%. This drop made headlines around the world as a potential sign of US economic recovery. However, buried in the newsprint, 300,000 Americans were also reported to have “simply quit looking for work”. Where did these people go? The BLS provides a little light on where these people went in the Table A-1 “Not In Labor Force” category. This category is the BLS equivalent of limbo for “those who have no job and are not looking for one”. From a Jobenomics perspective, these unfortunate souls joined the ranks of the functionally employed and still need to be supported by government welfare programs, by families, or by other means, like crime, in lieu of having a job.

As of November 2011, the Jobenomics “functionally unemployed rate” equates to 35% of the US population or 110.6 million people. 35% is derived by dividing 110.6 million by the total US population figure of 312.7 million, as reported by the US Census Bureau. 110.6 million is calculated by adding the BLS’ U6 number (24 million) and the BLS’ Not In Labor Force number (86.6 million).

Understanding the functionally unemployed rate of 35%, or 110.6 million Americans, is a much better indicator of economic distress, than the much lower numbers indicated by U1 through U6. Even better, decision-makers and
opinion-leaders need to balance private sector employment taxpayer numbers (currently 96 million, not including government contractors who rely on taxpayer funding) against 110.6 million functionally unemployed who need
familial or governmental economic support to survive.

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Small Business Produces 99% of Jobs

Small and Self-Employed Businesses Produced Almost 100% of Net New Jobs This Decade

Since the beginning of this decade, January 2010, to November 2011, the small business sector has produce 98.7% of all the net new jobs in America. As shown in this chart, small business (employing 499 people or less) accounted for 2.6 million jobs, where as big business (500+) accounted for only 35 thousand jobs. With better government and financial institution support, small business would have added significantly more jobs.

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Jobenomics

Goal: Creating 20 Million Jobs By 2020

Category Archives: Jobenomics Trends & Forecasts

Jobenomics Employment Report: May 2013

Jobenomics Unemployment Report: May 2013

Long-Term Deficit Reduction

Income Inequality versus Opportunity

Manufacturing Industry Forecast

Uncle Sugar High

Who Should I Vote For?

The Fiscal Cliff

Construction Industry Forecast

Big Business Profitability

Nation of Shopkeepers

Big-3 Potential 2012 Disruptors

Recent US Employment Trends

Self Employment Screen

5 Million Government Layoffs Ahead?

Dropping Unemployment Rates?

Manufacturing/Construction Forecast

2012 Jobenomics Outlook

Small Business: The New “Big Dog”

30-Year US Employment Trends

Economic Recovery Scenarios

35% “Functionally” Unemployed Rate

Small Business Produces 99% of Jobs

Small and Self-Employed Businesses Produced Almost 100% of Net New Jobs This Decade