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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Employment Scoreboard: May 2012

Jobenomics tracks both unemployment (see: Unemployment Scoreboard: May 2012) and employment (this posting). The Jobenomics employment goal for this decade is to create 20 million new US private sector jobs.

Highlights of this posting, since 1 Jan 2010:

The US has produced a total of 3,670,000 new jobs, a 48% shortfall of what is needed as measured by the traditional benchmark of 250,000 new jobs per month.
While the US produced a total of 3,670,000 new jobs an additional 4,648,000 citizens have simply quit looking for work and joined the ranks of the Bureau of Labor Statistics’ category called “Not-in-Labor-Force”.
The private sector produced 4,180,000 jobs. 95.1% were created by small business. 86.7% were in service-providing industries. Manufacturing contributed 10.7%.
The government sector lost -510,000 jobs, most (83.1%) government job losses occurred at the local level.

Between 1 Jan 2010 and 1 May 2012, per the above chart, while the US has enjoyed steady employment growth since the beginning of this decade, America is only producing half as many jobs as needed (48% shortfall). The US produced only 3,670,000 jobs compared to the 7,000,000 jobs needed as measured against the traditional benchmark of 250,000 jobs per month (250,000 x 28 months = 7 million). Of the three employment sectors reported by the Bureau of Labor Statistics (BLS), the private sector’s service-providing industries created 3,622,000 jobs and the private sector’s goods-producing industries created 558,000 jobs, and the government sector lost -510,000 jobs.

While the US produced a total of 3,670,000 new jobs since 1 Jan 2010, an additional 4,648,000 citizens have simply quit looking for work and joined the ranks of the Bureau of Labor Statistics (BLS) category called “Not-in-Labor-Force”. In other words, a million more discouraged workers quit looking than those who found jobs. According to the BLS, when a discouraged worker quits looking for work, he/she is eventually moved into the 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. From a Jobenomics perspective, Not-in-Labor-Force citizens should be classified as long-term unemployed. See Jobenomics Employment Scoreboard: April 2012 for more detail on this disturbing trend.

Private Sector Statistics. Today, the US private sector employs a total of 110.5 million people. As shown, 92.4M (83.5%) are in service-providing industries and 18.2M (16.5%) goods-producing industries. Manufacturing (a sector of the goods-producing supersector) employed 11.8M or 10.7% of the private sector workforce.

Service-providing sector. The US service-providing sector has grown 80% over the last three decades and averaged 4% growth since the beginning of this decade.

Employment statistics for industries in this sector are ranked by the number of jobs created between 1 Jan 2010 and 1 May 2012:

Professional/business services: 17,860,000 employees, 1,391,000 jobs created, growth rate 8%.
Education and health services: 20,249,000 employees, 899,000 jobs created, growth rate 5%.
Trade, transportation, utilities: 25,252,000 employees, 690,000 jobs created, growth rate 3%.
Leisure and hospitality: 13,612,000 employees, 679,000 jobs created, growth rate 5%.
Financial activities: 7,719,000 employees, 40,000 jobs created, growth rate 0.5%.
Other services: 5,358,000 employees, 40,000 jobs created, growth rate 1%.
Information: 2,628,000 employees, -113,000 jobs lost, growth rate -4%.

Goods-producing sector. The good-producing sector currently has 18,283,000 employees, created 499,000 new jobs this decade with a 3% growth rate. Employment statistics for industries in this sector are ranked by the number of jobs created between 1 Jan 2010 and 1 Mar 2012:

Manufacturing: 11,947,000 employees, 481,000 jobs created, growth rate 4%.
Mining and logging: 837,000 employees, 173,000 jobs created, growth rate 26%.
Construction: 5,558,000 employees, -96,000 jobs lost, growth rate -2%.

While manufacturing has improved over the last 28 months, it has a long way to go (see chart). Since the total employment of mining industries (oil & gas extraction, coal and minerals mining, logging) is only 7% the size of manufacturing, an increase of 173,000 jobs is significant with a two-year growth rate of 26% versus 4% for manufacturing (see: Jobenomics Mining Initiative). It also should be noted that the majority of the job gains in the goods-producing industries, including manufacturing, were created by small businesses with less than 500 employees.

Government Sector Statistics. The total government sector currently has 21,969,000 employees, lost 510,000 new jobs this decade with a negative 2% growth rate. Employment statistics for entities in this sector are ranked by the number of jobs lost between 1 Jan 2010 and 1 Mar 2012:

Local government: 14,077,000 employees, -424,000 jobs lost, growth rate -3%.
State government: 5,071,000 employees, -77,000 jobs lost, growth rate -1%.
Federal government: 2,821,000 employees, -9,000 jobs lost, growth rate -0.3%.

The government sector continued to lose jobs with 83.1% of all job losses occurring at the local level, 15.1% at the state level and 1.8% in the federal government. 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 (see: 5 Million Government Layoffs Ahead?).

The Jobenomics “20 by 20” goal is to create 20 million new private sector jobs by year 2020. To achieve 20 million jobs in a decade, the US needs to create 167,000 jobs per month (20 million/120 months). As of 1 May 2012, the US should have generated 4,676,000 private sector jobs. Measured against the Jobenomics benchmark of 167K jobs/month, America is producing jobs at a rate between 73% (3,434,000 jobs per ADP National Employment Report data) and 89% (4,180,000 jobs per Bureau of Labor Statistics data). Considering the sluggish US economy, this is a relatively good picture. However, the Jobenomics team is holding with its 2012 forecast that the US economy has a 50% chance of turning for the worse due to potential domestic and foreign disruptions, such as growing US unemployment, new conflicts (especially Iran), and energy crisis with Iran as well as continued issues in the Eurozone.

Of the 3,434,000 private sector jobs created per the ADP National Employment Report (the BLS does not report on small versus large business), 95.1% of all new jobs were produced by small businesses with less than 500 employees. Large businesses produced only 4.9% of all new jobs. Very small business with less than 50 employees accounted for 48.4% of new jobs.

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Unemployment Scoreboard: May 2012

Jobenomics tracks both employment (see: Employment Scoreboard: May 2012) and unemployment (this posting).

Highlights of this posting:

In reality, the unemployment rate has not dropped over the last year(s) since those who quit looking are no longer counted as unemployed.
If all the underemployed, unemployed and Not-in-Labor-Force people were calculated as “functionally unemployed”, the US unemployment rate would be 35%.
Since 2000, 20 million Americans quit looking for a job and joined the ranks of “Not-in-Labor-Force” according to the Bureau of Labor Statistics. Since 2010, 4 million Americans quit looking. These Americans are not included in the official unemployment figures.
Due primarily to the massive numbers of people who are not looking for work, the percentage of people (63.6%) in the US civilian work force is the lowest since 1981, and is decreasing at by greater numbers in recent years.
The downward trend in the US working population and the upward trend in the US non-working population pose a serious threat to America’s economy and way-of-life. Unfortunately, the vast majority of Americans are not aware of these trends.

Every month, the Bureau of Labor Statistics (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 “dumb down” the numbers to one statistic—the U3 rate or “official unemployment rate”. Jobenomics believes that a basic understanding of unemployment and employment statistics, rates and numbers is essential to good governance, which is the reason that these scoreboards are updated and posted monthly.

The Bureau of Labor Statistics uses the terms “unemployed” and “employed” to describe what Jobenomics calls the Working Population which represents less than a half of the US population. The majority of Americans who cannot or will not work are in a group that Jobenomics calls the Non-Working Population. A glass half-full analogy may provide a useful framework to describe the Working Population as contrasted to the Non-Working Population.

According to the 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 and those who are marginally employed 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 Not-in-Labor-Force.

These three categories comprise the “civilian noninstitutional population”[1], which equates to 242,784,000 people as of 1 May 2012. Since the total US population is 313,482,000 (US Census Bureau data[2]), there are 70,698,000 children, elderly, disabled, serving in the military, incarcerated, etc. who are not counted in the BLS’ civilian noninstitutional population. These uncounted 70 million are in a category named All Others by Jobenomics.

Therefore, from a Jobenomics perspective:

Working Population = Employed + Underemployed + Unemployed = 154.4 million.
Non-Working Population = Not-in-Labor-Force + All Others = 159.0 million.

As shown on the graphic above, 154.4 million are in the Working Population, which includes 132.0 million employed and 22.4 million people who have a marginal job, no job, or are looking for work. 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 159.0 million in the Non-Working Population include 88.9 million Not-in-Labor-Force and 70.1 million others not included in the labor force (i.e., the difference between the total population and the BLS’ civilian noninstitutional population). Those who have no job and are not looking for one are counted by the BLS as Not-in-Labor-Force. Many who are not in the labor force are going to school or are retired. However, many more have simply quit looking and are living at home, occupied with illegal pursuits, or on welfare. To truly understand the magnitude of the unemployment problem, America needs deeper insight into the vagaries of its non-working population that now represents more than half of all Americans.

The downward trend in the US working population and the upward trend in the US non-working population pose a serious threat to America’s economy and way-of-life. These trends are shown in the following two graphs.

Over the last three decades the number of people working as a percentage of the working population (civilian noninstitutional population) increased steadily to a peak in year 2000 as shown above. After year 2000, the US working population suffered a serious decline. While the Great Recession in 2008/09 exacerbated the situation, the decline started in the millennium’s boom years. Today, only 63.6% of our citizens are in the labor force, which is the lowest it has been since December 1981. The primary reason for the dramatic drop is largely due to those that simply have quit looking for work and are now categorized as Not-in-Labor-Force.

Those in the Not-in-Labor-Force category have grown consistently since year 2000. Since 2000, this category grew by 20 million people. Since 2010, it grew over 4.6 million people—a rate 30% higher from the decade of the ‘00s. When a discouraged worker quits looking for work, he/she is eventually moved into the 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. 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 calculated as “functionally unemployed”, the US unemployment rate would be a whopping 35%. The Bureau of Labor Statistics (BLS) calculates six unemployment categories (U1 through U6) every month. 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.

As of 1 May 2012, the U1/U3/U6 rates equated to 4.5%/8.1%/14.5% or 6.9/12.5/22.4 million people respectively. These rates and numbers are calculated as a percentage of the US Civilian Labor Force, which currently stands at 154.4 million Americans–less than half of the US population. The Jobenomics “functionally unemployed rate” equates to 35% of the US population or 111.3 million people. 111.3 million is calculated by adding the BLS’ U6 number (22.4 million) and the BLS’ Not-in-Labor-Force number (88.9 million). Dividing 111.3 million by the total US population of 313.5 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 numbers indicated by the U3 “official” unemployment rate that is most often watched and reported.

As of 1 May 2012 (April data), the U3 Rate was 8.1% — 0.9% lower than the September 2011 rate of 9.0%. Each consecutive month, these incremental drops made headlines around the world as signs of US economic recovery. However, buried in the newsprint, millions of Americans were reported to have “simply quit looking for work”. Where did these people go? As discussed earlier, they went to Not-in-Labor-Force limbo.

The table above is derived from the US Bureau of Labor Statistics, Table A-1, Employment Status of the Civilian Population. It shows from September 2011 through April 2012 the official unemployment rate (U3) dropped from 9.0% to 8.1%, which equates to a decline of 1,397,000 people. However, the table also shows that 2,812,000 people joined the Not-in-Labor-Force category over the same period of time—an increase of 1,415,000.

If the “official unemployment rate” was adjusted for these 1,415,000 workers joining the Not-in-Labor-Force, the official unemployment rate would be 9.0% as opposed to 8.1%, which is currently being heralded as a “significant sign” of economy recovery. In other words, the unemployment rate has not dropped over the last year(s) since those who quit looking are no longer counted as unemployed.

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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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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

Big Business Profitability

Employment Scoreboard: May 2012

Unemployment Scoreboard: May 2012

Nation of Shopkeepers

Big-3 Potential 2012 Disruptors

Recent US Employment Trends

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