Jobenomics

Goal: Creating 20 Million Jobs By 2020

Jobenomics - Goal: Creating 20 Million Jobs By 2020

Jobenomics Employment Report: April 2014

Jobenomics Employment Report: April 2014

www.Jobenomics.com

By: Chuck Vollmer

10 April 2014

Jobenomics tracks both unemployment (see: Jobenomics Employment Scoreboard: April 2014) and employment (this posting).   Download PDF versions: Jobenomics Employment Report – 1 April 2014 and Jobenomics Unemployment Report – 1 April 2014.

Executive Summary.   According to the April 2014 Bureau of Labor Statistics (BLS) Employment Situation Summary[1], unemployment rate was unchanged at 6.7% in March 2013, and total nonfarm payroll employment rose by 192,000, which is less than the 250,000 needed for a sustained economic recovery.

Total New US Jobs By Decade

For six decades, the US produced tens of millions new jobs per decade.   Then the bottom fell out in the decade of the ‘00s with a loss of 1.2 million jobs.  It is critical that significant numbers of jobs are created this decade (’10s) for the US economy to recover.  20 million new jobs by year 2020 is a reasonable goal.  Not only has 20 million been historically achieved, but is the number needed to accommodate 16 million new labor force entrants per decade and to reduce 4 million unemployed in order to achieve the so-called “full employment” rate of 5%.  Based on this Jobenomics goal, the US should have produced 12.75 million jobs by 1 April 2014.  We have only produced 8.56 million—a 33% shortfall.

The US private sector created 9,194,000 jobs this decade, and the public sector lost 639,000 jobs.  Today, service-providing industries employ 70.4% of all Americans, the goods-producing industries employ 13.7% and government (federal, state and local) employs 15.8%.

83.5% of all new jobs this decade were produced by four service-providing industries: professional and business services; trade, transportation, utilities; education and health services; and leisure and hospitality.  As discussed herein, the much touted goods-producing manufacturing and construction industries are not likely to create a significant amount of jobs in the foreseeable future.

Small, emerging and self-employed business creation is essential for jobs creation and a healthy economic future.   Small business employs 77.4% of all Americans and has produced 71.4% of all new jobs this decade.  Unfortunately, the vast majority of government stimulus funds have been directed at financial institutions and large corporations with little for small business—the US economic engine.

Total US Employment

US Employment.   Today, 137,928,000 Americans are employed in government and the private sector.  97,146,000 (70.4%) work in seven private sector service-providing industries.  The seven service industries are: Professional and Business services, Education and Health services, Financial Activities, Trade/Transport/Utilities, Leisure and Hospitality, Financial Activities, Information, and Other services.   18,941,000 (13.7%) are in private sector goods-producing industries that include Manufacturing, Construction and Mining/Logging that includes oil and gas extraction.  21,841,000 (15.8%) Americans work for government at the federal, state and local levels.  Since government employment is services-related, a total of 86.3% of all Americans work in service-related industries.

30-Year US Employment TrendsThe 30-year trend in US employment has overwhelmingly been in the service-providing industries with a 30-year growth rate of 82%.  Government has also grown significantly at a rate of 36%.  However, as discussed in this posting, government employment has decreased in the last several years and is likely to continue to do so.  US goods-producing industries have declined 17% during the last thirty years.

Total Jobs Creation In The ‘10s

While the US has enjoyed some employment growth since the beginning of this decade, America is only producing 67% (33% shortfall) as many jobs as needed.  The US produced only 8,555,000 jobs compared to the 12,750,000 jobs needed as measured against the traditional benchmark of 250,000 jobs per month (250,000 x 51 months = 12.75 million).   Of the three employment sectors reported by the Bureau of Labor Statistics, the private sector’s service-providing industries created 8,039,000 jobs, the private sector’s goods-producing industries created 1,155,000 jobs, and the government sector lost 639,000 jobs—with 67.3% (430,000) of all government jobs lost at the local level.

Industry Employment Growth This Decade ('10s)

83.5% of all new jobs this decade were produced by four industries (Professional and Business Services, Trade/Transportation/Utilities, Education and Health Services, and Leisure and Hospitality) in the service-providing sector.  Manufacturing only contributed 7.2% to US employment growth.  Construction contributed 3.5%.  The non-internet information industries (such as publishing and news print) and government lost jobs this decade.

Job Openings By IndustryAccording to the most recent BLS Job Openings and Labor Survey[2], there were 4.0 million job openings. This survey includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by geographic region.   As shown above, the four occupations that had the largest number of openings are: Professional & Business Services (831,000), Healthcare (610,000), Retail & Wholesale Trade (557,000), and Accommodation & Food Services (536,000).  The primary reason for the large number of job openings is due to the lack of job skills and the effects of computerization.  Regarding computerization, according to a recent Oxford University study[3], 47% of current US employment is potentially automatable within the next two decades.

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.

US Private Sector Employment by Company Size

Today, small businesses (those companies with less than 500 employees as defined by the US Small Business Association) employ 77.4% of all private sector Americans with a total of 89.8 million employees—almost 5 times the amount of large corporations (1000+).  Very small businesses with less than 19 employees employ 65% more than all large corporations combined (30.3M versus 18.4M).

US Jobs Created This Decade by Company Size

Since the beginning of this decade, small business produced 71.4% of all new American 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 business creation.

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 $16.6 trillion (see: Stock Markets and The Fed posting) worth of federal government stimuli, bailouts and buyouts since the Great Recession, as many as five million more Americans would be employed today as estimated by Jobenomics.

According the US Small Business Association[4], startups, minus closures, create about 67% of American net new jobs.  Also according the SBA, about half of all new businesses survive five years or more, and about one-third of these start-ups survive 10 years or more.

Post Recession Employment by Company Size

It is a common misperception that small businesses, especially very small (1-19 employees), are the most fragile.  The chart (above) indicates that very small businesses have been the most resilient of the five 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.

Industry Employment by Company Size

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

Thomson Reuters/PayNet Indices provide valuable insight into the health of small business.  The Thomson Reuters/PayNet Small Business Lending Index (SBLI)[5] measures the volume of new commercial loans and leases to small businesses.  To create the SBLI, PayNet tracks the new borrowing activity by millions of US businesses as reported by the largest lenders.  The Thomson Reuters/PayNet Small Business Delinquency Index (SBDI)[6] measures small business financial stress and provides early warning of future insolvency.  The most recent SBLI and SBDI are shown.

Thomson Reuters-PayNet

The SBLI (lending) indicates that new loan originations to small businesses have increased slowly since the end of the recession and may now be at the point of significant small business expansion, which is very good news for 2014.  The SBDI (delinquencies) shows that loan delinquencies (31 to 90 days past due) are at their lowest point since 2005.  This is very good news for future economic growth.  Small business creditworthiness is critical to business expansion and jobs creation.

Jobenomics asserts that the solution to growing America’s economy involves putting our small business economic engine into over-drive.  Energizing existing small businesses and creating new small and self-employed businesses could create millions of new jobs within a decade.  To prove the validity of this assertion, Jobenomics is working with a number of US cities to implement Jobenomics Community-Based Business Generators to create thousands of new-start businesses.  The objective of a Jobenomics Business Generator is to increase “birth rates” of start-up businesses, extend the “life span” of small businesses, and increase the number of employees per business, which has decreased by approximately 30% since the Great Recession.  Jobenomics is focused on four demographics with high growth potential:  Generation Y-, Women-, Minority-, and Veteran-Owned Businesses.

If Jobenomics can help create thousands of highly-scalable small businesses, America writ-large can facilitate creation of millions of small businesses that would transform our economy.  2014 could be a break-out year for small businesses that traditionally have been the primary source of employment for entry-level workers and the long-term unemployed.

Service-providing sector.  The US service-providing sector has grown 82% over the last three decades.

US Service-Providing Industry Sector Growth

Since year 2010, the US service-providing sector averaged 82% growth with 7,388,000 new jobs created.  Today, the US service-providing sector employs a total of 97,146,000 people across the seven industries.

US Service-Providing Industry Sector Employment

Employment statistics for industries in the service-providing sector are ranked by the number of new jobs created between 1 January 2010 and 1 April 2014 (51 months):

  • Professional and Business Services: 2,554,000 new jobs
  • Trade, Transportation, Utilities: 1,739,000 new jobs
  • Education and Health Services: 1,611,000 new jobs
  • Leisure and Hospitality: 1,574,000 new jobs
  • Other Services: 169,000 new jobs
  • Financial Activities:  167,000 new jobs
  • Information (non-internet, like publishing): -79,000 jobs lost

US Service-Providing Industry Employment GrowthOf the seven service-providing industries, only the Information (non-internet companies like broadcasting and publishing, such as newspapers) industry lost jobs (-2.9%) during the post-Great Recession recovery period starting in January 2010.  The top three industries are Professional and Business Services (15.5%), Leisure and Hospitality (12.2%) and Education and Health Services (8.2%).

Goods-producing sector.  The US goods-producing sector includes Manufacturing, Construction and Mining/Logging industries and has declined 23% since its peak in March 2000.

US Goods-Producing Industry Sector Growth

US goods-producing sector has grown by 1,147,000 since its post-recession low in February 2010, but has a long way to go to reach peak employment.   Today, the goods-producing sector employs a total of 18,941,000 people across the three industries shown below.

US Goods-Producing Industry Sector EmploymentEmployment statistics for industries in this sector are ranked by the number of jobs created between 1 January 2010 and 1 April 2014 (51 months):

  • Manufacturing:  602,000 new jobs
  • Construction: 310,000 new jobs
  • Mining and Logging: 235,000 new jobs

US Goods-Producing Industry Employment Growth

The fastest growing industry in the goods-producing sector is Mining/Logging (35.4%), followed by Construction (5.5%) and Manufacturing (5.2%).  The explosive growth in the Mining/Logging industry is largely due to oil and natural gas extraction, and related exploration and support activities.

US Manufacturing Assessment.  While manufacturing has added 600 thousand 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 38%.

US Manufacturing Employment Since WWII

Today, US manufacturing employs 12,079,000.  While the addition of 602,000 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.

Manufacturing Employment Last 12 Months

Within the last 12 months, manufacturing has had 7 up-months and  5 down-months in terms of employment with a disappointing net increase of only 72,000 jobs in the last year.

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 high-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 as well as automating many higher level positions in marketing, accounting, machinists and administration.  As of the most recent BLS Job Openings and Labor Survey, US manufacturers have 237,000 open high-tech jobs that currently are unfilled out of a total of 4 million unfilled jobs.  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.

US Construction Industry Assessment.  Even though the construction industry is showing signs of growth, the construction sector continues to struggle after a rapid rise (69%) during the go-go years in the 1990s and the housing bubble in the early 2000s.

US Construction Industry Employment

In the 2006-07 time period, peak construction employment was 7.73M.  Today, it is 5.96M, a loss of -23%.  The good news is that construction employment stopped its decline and has increased for its post-recession low of 5.44M in January 2011.

US Construction Industry LayoffsResidential construction employment was hardest hit segment 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 still down from its peak by 35% with a total employment of 2.24 million.   Nonresidential construction fared slightly better with losses of  -24% from peak and -19% today with 2.82 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 -11% with a total of 904,000 employed.

Construction Employment Last 12 Months

Within the last 12 months, construction has had 10 up-months and 2 down-months in terms of employment with a net increase of 151,000 jobs in the last year.  As of the most recent BLS Job Openings and Labor Survey, US construction companies have 104,000 open jobs (mainly higher skilled jobs) that currently are unfilled out of a total of 4 million unfilled US jobs.  While these number are positive overall, the bulk of job hires occurred last year or early in 2013.  The construction industry had a downturn occurred during peak summer construction months.  In addition, increasing mortgage rates coupled with an eroding middle-class will hamper new home construction starts for the future.

New Residential Construction

Construction usually leads economic recoveries.  However, this recovery is different.  As shown above, according to US Census Bureau Data[7], new residential starts dropped from a peak 2.068 million in 2005 to a low 554,000 in 2009.  In 2014, new residential construction starts was 923,000, an increase of 40% from the 2009 low but still 55% below the 2005 high.

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 $65 billion infusion of cash form the federal government.  However, these bright spots will not make up for stagnancy in US GDP and US employment.

US Mining/Logging Industry Assessment.  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 235,000 jobs, with an impressive growth rate of 35.4%.  With proper private and public sector support, this industry has significant upside potential.

US Mining (Oil, Gas, Minerals, Coal)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.

The Government Employment Sector.  Total government sector employment currently is 21,841,000.  Since 1 January 2010, government has lost 641,000 jobs, a negative 2.9% growth rate.  Employment statistics in this sector is shown in the following chart.

Government Layoffs

The government sector continued to lose jobs with 67.3% of all job losses occurring with local government (mainly teachers, police and firefighters), 13.5% at the state level, and 19.2% in the federal government (not including military, which is also downsizing).  Jobenomics predicts that government job losses will continue to decline due the effects of sequestration as well as debt and deficit spending.  In addition, if the US economy suffers an economic disruption due to either domestic or foreign events, government spending will likely decrease further.

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 two charts are about as simple as Jobenomics can make it.

US Labor Force Gains-LossesAccording to the April 2014 Bureau of Labor Statistics (BLS) Employment Situation Summary[8], unemployment rate was unchanged at 6.7% in March 2013, and total nonfarm payroll employment rose by 192,000, which is less than the 250,000 needed for a sustained economic recovery.  Also according to the BLS, people in the “not in the labor force” declined by 428,000 (good news) for a net gain of 620,000 as shown above.  Since year 2000, over 3 times as many people departed the US labor force than entered it, with 7,150,000 people entering as opposed to 22,739,000 who departed.  These numbers do not include the 20 million people that are unemployed.

318 Million

Today, out of a total population of 318 million Americans, the US has 107 million taxpayers (34%) working in the private sector who support: 31 million government workers (including 10 million government contractors), 20 million unemployed or underemployed (BLS U6 rate) workers who are looking for work, 91 million able-bodied people (Not-in-Labor Force category) who can work but are not looking, and 69 million (mainly children, retired and disabled) who cannot work.   The US economy cannot be sustained by 34% supporting an overhead of 66% via a combination of welfare, entitlement, familial and charitable programs.

The solution to growing America’s economic base involves engaging our small business economic engine.  Even though severely constrained by limited financing and restrictive government policies, small businesses created 71% of all new jobs in the US since the end of Great Recession.  Jobenomics believes that new small, emerging and self-employed businesses could create 20 million new jobs within a decade, if properly incentivized and supported.  Consequently, Jobenomics is focused on four demographics with high growth potential that include Generation Y (via monetizing social networks), Women-Owned Businesses (via direct care business creation), Inner-Cities (via urban mining and related service businesses) and Veteran-Owned Businesses.  If Jobenomics can help create thousands of highly-scalable small businesses, America writ-large can facilitate the creation of millions of small businesses that would transform our economy.


 

[1] US Bureau of Labor Statistics, Employment Situation Summary, http://www.bls.gov/news.release/empsit.nr0.htm

[2] BLS, Job Openings and Labor Survey (November 2013), http://www.bls.gov/news.release/jolts.htm

[3] Oxford University, The Future of Employment: How Susceptible Are Jobs To Computerisation?, Page 37,  17 September 2013, http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

[4] 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

[5] Thomson Reuters/PayNet Small Business Lending Index, retrieved 23 Dec 2013, http://paynetonline.com/SmallBusinessInsights/ThomsonReutersPayNetSmallBusinessLendingInde.aspx

[6] Thomson Reuters/PayNet Small Business Delinquency Index, retrieved 23 Dec 2013, http://paynetonline.com/SmallBusinessInsights/ThomsonReutersPayNetSmallBusinessDelinquency.aspx

[7] US Census Bureau, Business and Industry, Time Series/Trend Charts, New Residential Construction, Annual Rate for Housing Units Started, http://www.census.gov/construction/nrc/historical_data/

[8] US Bureau of Labor Statistics, Employment Situation Summary, http://www.bls.gov/news.release/empsit.nr0.htm

Jobenomics Unemployment Report: April 2014

Jobenomics Unemployment Report: April 2014

www.Jobenomics.com

By: Chuck Vollmer

9 April 2014

Jobenomics tracks both employment (see: Jobenomics Employment Scoreboard: April 2014) and unemployment (this posting).   Download PDF versions: Jobenomics Unemployment Report – 1 April 2014 and Jobenomics Employment Report – 1 April 2014.

US Labor Force Gains-Losses

Executive Summary.  According to the April 2014 Bureau of Labor Statistics (BLS) Employment Situation Summary[1], unemployment rate was unchanged at 6.7% in March 2013, and total nonfarm payroll employment rose by 192,000, which is less than the 250,000 needed for a sustained economic recovery.  Also according to the BLS, people in the “not in the labor force” declined by 428,000 (good news) for a net gain of 620,000 as shown above.  Since year 2000, over 3 times as many people departed the US labor force than entered it, with 7,150,000 people entering as opposed to 22,739,000 who departed.

These numbers indicate that while improving slightly, the US economy is not sustainable due to massive exodus of people from the US labor force resulting in 30-year low labor participation rates and employment-to-population ratios.  As reported by Jobenomics for the last three years, the official unemployment rate is a misleading statistic.  It is theoretically possible for the US to have a zero rate of unemployment while simultaneously having zero people employed in the labor force.  To be counted in the “Officially Unemployed (U3)” category, people have to be looking for work.   When a person stops looking, the BLS moves them into the “Not-in-Labor-Force” category that is reserved for those who can work but are no longer looking.

Today, out of a total population of 318 million Americans, the US has 107 million taxpayers (34%) working in the private sector who support: 31 million government workers (including 10 million government contractors), 20 million unemployed and underemployed (BLS U6 rate) workers who are looking for work, 91 million able-bodied people (Not-in-Labor-Force category) who can work but are not looking, and 69 million (mainly children, retired and disabled) who cannot work.   The US economy cannot be sustained by 34% supporting an overhead of 66% via a combination of welfare, entitlement, familial and charitable programs.   The solution to growing the tax-base involves business creation.  Jobenomics advocates small, emerging and self-employed business growth.  Small businesses employ 77% of Americans and have created 71% of all new jobs this decade.   

Understanding Employment and Unemployment Statistics.   According to US Department of Labor, 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 a job 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 are moved into the NiLF category.

US Work Force Demographics

Therefore, as shown:

  • Working Population = Employed + Underemployed + Unemployed = 157.7 million.
  • Non-Working Population = Not-in-Labor-Force + All Others = 160.1 million.

The Working Population includes 137.9 million employed and 19.8 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 91.0 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 69.1 million children, elderly, disabled, serving in the military, incarcerated, etc.

Unemployment Rate Categories.   Every month, the BLS publishes unemployment and employment statistics for economic, policy and public decision-making.  Unfortunately, few policy-makers, opinion-leaders, or American citizens truly 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 chart below 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.

U Rates

The BLS calculates six unemployment categories (U1 through U6[2]) 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 317.8 million[3].

Unemployment Rate History During Obama Administration

As of 1 April 2014, the U1 category is currently 3.5% with 5.3 million unemployed longer than 15 weeks.  The U3 category is 6.7% with 10.5 million “officially” unemployed.  The U6 category is 12.7% with 19.8 million under-employed or unemployed citizens.

Labor Force Trends Since Year 2000

The official unemployment rate (U3 Rate) is a relatively poor indicator of the overall employment situation in the United States.   In comparison to those employed and those that can work but don’t (Not-in-Labor-Force), the official unemployment rate, called the U3 rate, is a relatively small number, undeserving of the amount of attention it receives.  As shown above, since the beginning of year 2000 to today, the U3 has increased by 4.8 million people compared to employment growth of 11.2 million and Not-in-Labor-Force growth of 22.4 million.

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 Not-in-Labor-Force 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 Not-in-Labor-Force.

Jobenomics contends that Americans need to focus on increasing employment with emphasis on small businesses that currently employ 77% of the US work force, and reducing the vast exodus of people leaving our labor force—many to a netherworld of perpetual unemployment and welfare.  By shifting our focus to business creation, especially small businesses the mainstay of the US economy, the number of the unemployed would decrease correspondingly.

Recent US Employment History

The chart above shows the recent US employment history[4].  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 137.9 million employed in government and the private sector.  Consequently, 8.7 million jobs were lost from peak to low.  From the low to present, 8.6 million jobs were created.  From the start of the Obama Administration, the US produced 0.9 million net new jobs.  From the start of this decade, the Jobenomics starting point, 8.6 million jobs were created—all in the private sector, whereas each level of government (federal, state and local) lost jobs.   The good news is that the USA has almost recovered all the jobs lost during the Great Recession.

Labor Force Participation.   Another way to look at our employment/economic situation is via the Labor Force Participation Rate[5].

Labor Force Participation Rate

The labor force participation rate is the percentage of working-age persons who are employed or unemployed but looking for a job.   Since year 2000, the US working population suffered a serious decline from a high of 67.3% to 63.2% today—a 6.1% decline from peak and rate that was last seen in July 1978.   Today’s labor force participation rate would be much lower if not for working women who did not participate in the US labor force in 1978 as they do today.

The primary reason for the dramatic drop in the labor force participation rate 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 Not-in-Labor-Force category currently do not want a job now.

Labor Force Participation By Age

The American workforce is getting grayer.  Economic uncertainty is keeping older Americans on the job and delaying retirement.    As shown above, the BLS projects that the percentage of older Americans in the US civilian labor force will increase 40% from 1990 to 2020 while the percentage of younger Americans, aged 16 to 24, will shrink by 25%.  BLS data also shows that once older workers are out of work, they have a much harder time finding employment than a younger worker.

Employment-Population Ratio

The BLS’s Employment-Population Ratio[6] is another statistic that is not widely used, but is very useful in a strategic context.   This ratio answers the question, “what portion of the working-age population is employed?” and is useful in understanding how our economy is performing.  Since 1 May 2000, 9.1% fewer Americans are engaged in the US work force.  Unless this trend is reversed, America will increasingly be a nation of haves and have-nots due to an eroding middle-class.

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.

Not-in-Labor-Force versus Labor Force Trends

From January 2000 until today, the Not-in-Labor-Force has grown 33% compared to 5% growth in the private sector work force.  At the current rate of Not-in-Labor-Force growth, those than can work but choose not to work will outnumber those working sometime in 2025.

Not-in-Labor-Force Growth

According to BLS data[7], those in the Not-in-Labor-Force category (those that can work but don’t) has surged consistently since year 2000 by 22.7 million people.  Since 2009, the start of the Obama Administration, it grew by 10.9 million.  Since 2010, the beginning of the decade, it grew by 7.4 million people.  In the last 12 months, it grew by 1.1 million.   Last month, the trend reversed itself with 428 thousand less people voluntarily leaving the US work force.

Not-in-Labor-Force Demographics

In terms of demographics, the Not-in-Labor-Force includes 50 million people 55 years or older (55.0%), 24 million 25 to 54 year olds (25.6%), and 18 million 16 to 24 year olds (20.0%).  In terms of gender, NiLF includes 55 million women (59.8%) and 37 million men (40.2%).  Recent trends have been most unfavorable to those over 55 years old, who once out of work tend to stay permanently out of work.

The “Functionally Unemployed”.   Jobenomics defines “functionally unemployed” as the total number of people that have no job and are capable of working—110.9 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 an astounding 35%.

Functionally Unemployed

The Jobenomics “functionally unemployed rate” is 35% or 110.9 million people.   110.9 million is calculated by adding the BLS’ U6 number (19.8 million) and the BLS’ Not-in-Labor-Force number (91.0 million, the BLS’s seasonally adjusted number).   Dividing 110.9 million by the total US population of 317.8 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 6.7% “official” U3 unemployment rate that is most often watched and reported.

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.

318 Million

34% of all Americans are financially supporting the rest of the country.  107 million workers in the private sector are supporting 31M that work for government (including contractors), 91M that can work but choose not to work, 69M that cannot work (children, retired, disabled, etc.) and 20M that are looking for work (officially unemployed and unemployed).  For the American economy to prosper in the 21st Century, we must place more emphasis in growing the private sector labor force and reducing the overhead with emphasis on stemming the exodus of people looking for work to not looking for work.

US Jobs Created This Decade by Company Size

The solution to growing America’s economic base involves engaging our small business economic engine, which is discussed in detail in the Jobenomics Employment Report: April 2014.  Even though severely constrained by limited financing and restrictive government policies, small businesses created 71.4% of all new jobs in the US since the end of Great Recession.  Jobenomics believes that new small, emerging and self-employed businesses could create 20 million new jobs within a decade, if properly incentivized and supported.



[1] US Bureau of Labor Statistics, Employment Situation Summary, http://www.bls.gov/news.release/empsit.nr0.htm

[2] BLS, Table A-15. Alternative measures of labor utilization, http://www.bls.gov/news.release/empsit.t15.htm

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

[4] BLS, Table B-1, Total Nonfarm, Seasonally Adjusted,  http://data.bls.gov/timeseries/LNS12300000,

[5] BLS, Labor Force Participation Rate, http://data.bls.gov/timeseries/LNS11300000

[6] BLS, http://data.bls.gov/timeseries/LNS12300000

[7] BLS,  Table A-16, Persons not in the labor force and multiple jobholders by sex, not seasonally adjusted, http://www.bls.gov/webapps/legacy/cpsatab16.htm

Jobenomics 2014 Economic Forecast

Download PDF Version: Jobenomics 2014 Economic Forecast- 29 Dec 2013

Jobenomics 2014 Economic Forecast

www.Jobenomics.com

By: Chuck Vollmer

29 December 2013

Jobenomics predicts 2014 will be a pivotal year for the US economy.  Most economists and government agencies are cautiously optimistic.  For example, starting in 2014, the Congressional Budget Office predicts[1] “a virtuous cycle of faster growth in employment, income, consumer spending and business investment over the next few years.”  Jobenomics holds a contrarian point of view.  As shown below, Jobenomics assesses the following probabilities for the 2014 US economy:  5% chance that the economy will get much better, 18% chance that it will get a little better, 27% chance that it will continue to muddle along, 39% chance that it will get worse, and 11% chance that it will get much worse for reasons discussed in this analysis.

 Jobenomics 2014 Economic Forecast Matrix

Jobenomics versus Macroeconomics.   Most economists foresee the dawn of a new era of wealth creation evidenced by record highs in stock markets and corporate profitability, dropping unemployment rates, growing energy independence and the bottoming of the housing market.  While Jobenomics agrees with the upward power of these trends, Jobenomics asserts that the American economy is on an unsustainable path due to a number of structural flaws such as an eroding middle-class, gridlocked fiscal policy, massive increase in able-bodied Americans that can work but are no longer looking, low labor participation rates, decreasing employment-to-population ratios, growing entitlement and welfare subsidies, growing laissez-faire attitude towards government dependency, declining competitiveness in the international marketplace, as well as the growing inability of government to provide security from  extremism, terrorism, militancy and conflicts.

Most economists use microeconomics and macroeconomic indicators to forecast the future.    Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources, and prices of goods and services within a specific industry.   Macroeconomics focuses on national-level behavior and indicators.  A macroeconomic indicator is a statistic, such as the official unemployment rate or stock market indices, that measure how well the economy is doing.  Economic indicators and statistics are useful in measuring changes to the status quo, but often fall short identifying strategic inflection points and change states in a rapidly changing and interdependent world.   The Jobenomics 2014 Economic Forecast attempts to balance strategic issues with macroeconomic indicators with special attention on potential disruptive factors, technologies and events.   Analyzing macroeconomic indices and rates within a strategic geo-economic/political/military/social-religious context allows a forecaster to envision multiple outcomes, as opposed to one based on the existing state of affairs.

Small Business.  Jobenomics assesses the following probabilities in the strategic area entitled, Small Business:  20% chance that it will get much better, 40% chance it will get better, and 40% that it will muddle along.

  Small Business

Jobenomics believes that small business vitality is a leading macroeconomic indicator.  No major political or economic prognosticator includes small business vitality in their repertoire of macroeconomic indicators.   After numerous meetings on Capitol Hill and Wall Street, Jobenomics concludes that the dearth of small business leaders and serial entrepreneurs in political office or major financial institutions leads to a lack of understanding and appreciation of this vital component of the US economy.

Small business is the engine of the US economy.  According to the US Small Business Administration[2]  there are 18,500 big businesses and 27.9 million small businesses with less than 500 employees.  These small businesses created the majority of new US jobs over the last two decades—60% by existing small businesses and 40% from the churn of startups minus closures.  About half of all new small businesses survive five years or more and about one-third survive 10 years or more.   As reported by the ADP National Employment Report (published monthly by the ADP Research Institute in close collaboration with Moody’s Analytics), ADP data indicates that small business is the dominant economic force in terms of employment and job creation.  For example, from January 2005 to December 2013, small businesses produced 4,436 million net new jobs, compared to a loss of 727,000 jobs for big businesses.

US Private Sector Employment by Company Size

Today, small businesses employ 77.4% of all private sector Americans with a total of 88.7 million employees—5 times the amount of large corporations (1000+ employees).  Very small businesses with less than 19 employees employ 65% more than all large corporations combined (29.7M versus 18.0M).

 US Jobs Created This Decade by Company Size

Since the beginning of this decade, small business has produced 70.6% of all new American jobs.  This is an amazing statistic, considering the adverse lending environment by financial institutions, mounting government regulation, and the pittance of federal government stimulus funds allocated to small businesses. 

 Post Recession Employment by Company Size

It is a common misperception that small businesses, especially very small (1-19 employees), are the most fragile.  The chart (above) indicates that very small businesses have been the most resilient of the five business categories following the Great Recession of 2008. 

 Industry Employment by Company Size

It is also a common misperception that small businesses are only involved in service-providing industries, whereas large major corporations dominate goods-producing industries.  The above chart indicates that small businesses play a major role in both goods-producing and service-providing industries.

Thomson Reuters/PayNet Indices provide valuable insight into the health of small business.  The Thomson Reuters/PayNet Small Business Lending Index (SBLI)[3] measures the volume of new commercial loans and leases to small businesses.  To create the SBLI, PayNet tracks the new borrowing activity by millions of US businesses as reported by the largest lenders.  The Thomson Reuters/PayNet Small Business Delinquency Index (SBDI)[4] measures small business financial stress and provides early warning of future insolvency. 

 Small Business Lending Index

The most recent SBLI and SBDI are shown above.  The SBLI indicates that new loan originations to small businesses have increased slowly since the end of the recession and may now be at the point of significant small business expansion, which is very good news for 2014.  The SBDI shows that loan delinquencies (31 to 90 days past due) are at their lowest point since 2005.  This is also very good news for 2014.  Small business creditworthiness is critical to business expansion and jobs creation.

Jobenomics believes the solution to growing America’s middle-class involves putting our small business economic engine into over-drive.  Energizing existing small businesses and creating new small and self-employed businesses could create 20 million new jobs within a decade.  To prove the validity of this assertion, Jobenomics is working with a number of US cities to implement Jobenomics Business Generators to create thousands of new-start businesses.  The objective of a Jobenomics Business Generator is to increase “birth rates” of start-up businesses, extend the “life span” of small businesses, and increase the number of employees per business, which has decreased by approximately 30% since the Great Recession.  Jobenomics is focused on four demographics with high growth potential:  Generation Y (see Network Technology Revolution discussion in next section), Women-Owned Businesses (http://jobenomicsblog.com/jobenomics-women-owned-business), Minority-Owned Businesses (http://jobenomicsblog.com/minority-owned-businesses and http://jobenomicsblog.com/urban-mining) and Veteran-Owned Businesses (http://jobenomicsblog.com/jobenomics-veterans-centers).

If Jobenomics can help create thousands of highly-scalable small businesses, America writ-large can facilitate creation of millions of small businesses that would transform our economy.  2014 could be a break-out year for small businesses that traditionally have been the primary source of employment for entry-level workers and the long-term unemployed. 

Technology Revolution.  Jobenomics assesses the following probabilities in the strategic area entitled, Technology Revolution:  17% chance that it will get much better, 67% chance that it will get better, and 17% chance that it will continue to muddle along.

  Technology Revolution

The military technology revolution (MTR) was one of the deciding factors in winning the Cold War and creating the largest and most competitive economic superpower on the planet.  The information technology revolution (ITR) in the latter part of the 20th century ushered in a new era of prosperity and international commerce.  The emerging energy technology revolution (ETR) and network technology revolution (NTR) have the potential to reshape the global economy.  Like the MTR and ITR, the ETR and NTR will likely lead to the creation of tens of millions of new productive jobs, as well as enhance American economic security.

Energy Technology Revolution (ETR).  The ETR involves energy independence and energy assurance that incorporates a wide spectrum of transportation and electrical power technologies and systems: vehicle fuel economy, alternative fuel vehicles, alternative fuels, exotic technologies, domestic oil/gas production, renewables, and energy infrastructure and efficiency.

Economies cannot grow without a reliable source of energy.  Fortunately, America has abundant sources of energy.  Our main challenge is to exploit these resources in an economically and environmentally-friendly way.  Our second challenge is to protect our supply of foreign energy resources and mitigate the risks of disruption.  Our final challenge is to upgrade our transportation and electrical infrastructure to be economically competitive throughout the 21st Century.

 US Primary Energy Production

According to the US Energy Information Administration[5], America’s primary energy production is on the rise, which is very good news for the economy.  More importantly, this rise appears to be sustainable and very marketable both domestically and internationally.  The biggest rise is in natural gas technology due to new hydraulic fracking and horizontal drilling technology.  The second largest rise involves renewables (hydro-electric, bio-mass, wind, solar/photovoltaic and geo-thermal).  The third involves crude oil production and oil made from natural gas plant liquids. According to the US Department of Energy[6], US crude oil production is expected to approach the historical high achieved in 1970 of 9.6 million barrels/day through 2016, the US Energy Information Administration said in an early release of its Annual Energy Outlook 2014. Energy produced by coal and nuclear power is on the decline.

In 2013, American energy consumption was dominated (82%) by fossil fuels (coal, natural gas, and petroleum), followed by renewables (10%) and nuclear (8%).   In the 10% renewables category, the EIA reports[7] that bio-mass was the biggest contributor with 48%, followed by hydro-electric with 30%, wind with 17%, solar/photovoltaic with 3% and geo-thermal with a 2% contribution.  

Contrary to popular opinion, highly advertised and politicized wind and solar energy together account for only 2%, versus 82% for fossil fuels.   Consequently, the path for US energy independence and economic security will depend on fossil fuel production and consumption for decades to come.   New fossil fuel technology will make fossil fuel production much more environmentally-friendly.  For example, modern gasification technology can turn even the dirtiest coal into gasoline, diesel and aviation fuels with near-zero emissions.

Regarding energy assurance, according to the US Department of Energy[8], 40% of the oil the US now uses is imported, costing $300 billion annually.   Increased domestic oil production from shale formations and improved fuel economy standards have decreased oil imports over the past few years, but America will continue to rely on imports for 35% to 40% of our petroleum needs in the future.  Approximately 72% of the world’s oil reserves are concentrated in the Middle East and are vulnerable to disruption.   Oil price shocks and price manipulation by OPEC have cost the US economy about $2 trillion from 2004 to 2008.  Considering the conflicts and extremism is the Mid-East and Africa, the probability of a global energy disruption is high.

Today, approximately 10 million people are directly and indirectly employed by the US energy sector.   Jobenomics believes that the US could produce millions of new domestic jobs if we exploit human and natural resources via the energy technology revolution that is occurring today in the United States.  The early release of EIA’s Annual Energy Outlook 2014 forecasts historically high projections in the US energy sector including lower energy prices, increased crude oil and natural gas production, better vehicle efficiency, less dependency on foreign imports, increased efficiency in residential and transportation sectors, lower CO2 emissions, increased industrial and manufacturing output, and increased contribution to US GDP—all good news for the US economy in 2014.

Network Technology Revolution (NTR).   For most people who casually use the Internet, their digital world is expressed in terms of kilobytes (103) and megabytes (106).  For IT professionals, the digital world is now represented by zettabytes (1021).  The age of “big data” is here.   In 2013, the World Wide Web passed the 4 zettabyte threshold.   So what does the zetta-flood mean to the world’s digital future?  Managing gargantuan levels of data is increasingly frustrating due to the complexities and costs of maintaining internal information technology environments.   By 2020, the number of data files is projected to grow as much as 75 times, compared to 1.5 times growth of the available pool of IT professionals.  As a result, organizations are looking to the promises of cloud computing to help solve issues related to big data and proliferation of the Internet of Things. 

Cloud computing is as big a paradigm shift away from personal computers (PCs) as PCs were from mainframes in the 1990s. Cloud computing is the practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server or personal computer.  To most people, cloud computing is as amorphous as its name suggests.  It is not hard to comprehend that most zetta-data will be stored in the “cloud” due to economies of scale and the decreasing cost of virtualized mega-servers in super data centers.  However, the “cloud” is much more than storage alone.  It also entails security, connectivity, portability, access, and other issues including privacy, legal and regulatory. 

Outsourcing of data to massive, centralized data centers seems to be the answer in a world where more things are connected to the Internet than people.  The number of Internet of Things is projected to reach 50 billion devices by 2020, which equates to more than six devices for every person on earth.  To help interface the zetta-information stored in the cloud with billions of personal digital assistants (smart phones, pads and tablets), service providers are developing a myriad of applications and semantic-web technologies. 

The semantic web enables machines to interpret “meaning” in the cloud much in the way humans do.  In the beginning, the World Wide Web (WWW) was comprised of non-semantic, read-only websites that focused on data retrieval.   Today’s WWW 2.0 websites are semi-semantic, read-write websites that facilitate data sharing as evidenced by social media (Facebook, Twitter, etc.) and blogging.   In the near future, WWW 3.0 will introduce fully semantic read-write-execute websites.  WWW 3.0 will perform functions for humans in merged virtual/physical worlds represented by physically persistent virtual clouds (avatars) and virtually enhanced physical realities (3D game worlds). 

Upgrades to legacy systems, like the 50-year-old Internet, and legacy processes will not work.  A new, holistic approach is needed for the zetta-data era, as well as the rapidly approaching yottabyte (1024) era.  This new, holistic approach will be defined by the ongoing, highly disruptive and competitive Network Technology Revolution (NTR) that will have a dramatic impact on the world-wide economy and the American way of life.

As a result of the NTR, 2014 will usher in the death of the personal computer.   Smart phones, pads and tablets are rapidly replacing personal computers and their related peripherals.  These new devises cost hundreds of dollars versus thousands of dollars for personal computers.  Billions of dollars that are lost in personal digital equipment sales will be offset by billions of dollars made in subscription services by cloud and application providers.  It is not inconceivable that competition will drive the cost of smart devices (phones, pads, tablets) to near zero as an incentive for long-term contracts for services, much in the same way telephone companies do today with cell phone services. 

The field of NTR providers and vendors is growing exponentially.  The dominant player will likely be the one with the most integrated, secure, low-cost, and digitally portable solution.   NTR competition will be fierce between content providers (such as Verizon and Comcast), equipment manufacturers (such as Cisco, EMC, Intel and IBM), software providers (such as Microsoft and Apple), social-networking giants (such as Facebook, Google and Twitter), service providers (such as Amazon and Salesforce.com) as well as niche and emerging players.   In the last 18 months, over a dozen niche players have gone public, fetching tens of billions of dollars’ worth of investment capital. 

Jobenomics predicts that the Network Technology Revolution will present huge revenue opportunities that will, in turn, help the US economy grow in 2014.  Competition will force out weak companies and elevate strong ones.  Organization disruptions will be commonplace.  Dominant NTR companies currently reside in the US and will have an advantage in the global market place. 

Jobenomics also predicts that the NTR will spur the growth of small business.   The NTR could be the great business equalizer that allows home-based, self-employed businesses to compete globally.  Today, WWW 2.0 social-networks focus mainly on media, entertainment and shopping.  Tomorrow’s WWW 3.0 social-networks may be able to monetize the World Wide Web, creating tens of millions of new jobs.   eBay, a WWW 2.0 new start in 1995, is now a multi-billion dollar enterprise located in over 30 countries, with 31,500 employees that enable millions of global micro-businesses.   If properly planned and supported, WWW 3.0 could create dozens of eBay 3.0-like enterprises.  

Stock Markets & Corporate Profitability.  Jobenomics assesses the following probabilities in the strategic area entitled, Stock Markets & Corporate Profitability:  14% chance it will get better, 29% that it will muddle along, 43% chance that it will get worse, and 14% that it will get much worse.

 Stock Markets & Corporate Profitability

The most watched daily metric of US economic health is the US stock market indices, especially the Dow Jones Industrial Average (DOW, top 30 US companies), the Standard & Poor’s 500 (S&P 500, top 500 US companies) and NASDAQ (4000 US stocks).  US stock markets are now at historical highs due to a five-year bull market.  From the low point during the Great Recession in March 2009, the DOW, S&P 500 and NASDAQ have posted gains of 139%, 161% and 212% respectively.  According to most economists and market watchers, US stock markets are poised to go much higher in 2014 based on the inertia of the extraordinary US stock market performance in 2013.  Over the last twelve months, the DOW, S&P 500 and NASDAQ posted gains of 21%, 27% and 36% respectively, overcoming tax increases, sequester, Federal Reserve tapering concerns, government shutdown and debt ceiling brinkmanship. 

 US Stock Market Performance

Most economists believe that 2014 will be a banner year for stocks due to less fiscal drag in Washington, the nascent housing recovery, recapitalized banks, reduced household debt, and corporate profitability.   While all this is true, Jobenomics is not so sure that 2014 will be a banner year for a number of strategic reasons, including ending of federal stimulus programs, increased competition from foreign equity markets, and changing nature of the US markets. 

The big questions facing economists, policy-makers, opinion-leaders and investors are (1) whether this bull market will continue, (2) can stock markets operate under their own power, and (3) how chaotic will the markets become during tapering of US government subsidies? To answer these questions, one must first consider the level of involvement of the US government, especially the actions of the US Federal Reserve Board–the single most important government agency in relation to the stock markets.

Ending of Federal Stimulus Funds.  The US Federal Reserve System’s, also known as the Federal Reserve or simply the Fed, engagement on monetary and credit policy has immediate consequences for financial institutions, investors and economic recovery. 

 US Government Financial Bailouts, Buyouts & Stimuli Since 2008

As shown, the US government has been stimulating publically-traded financial institutions and corporations to the tune of $16.6 trillion since 2008.  Federal Reserve programs totaled $10.9 trillion, mostly for banks, financial institutions, insurance companies and government-sponsored enterprises (Fannie Mae and Freddie Mac—holders of 77% of all 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 $306 million, mostly for homeowners via the Federal Housing Administration.  Since the Federal Reserve is responsible for 66% ($10.9 trillion out of $16.6 trillion), it has been the most influential organization in regard to the US economic recovery, as well as the 5-year bull market run. 

After 5 years of aggressive engagement via printing money, buying securities and manipulating interest rates, an increasing number of investors fear that disengagement by the Fed may have dire consequences regarding the attractiveness of stocks vis-à-vis other investment opportunities, such as commodities, bonds or even cash.  Moreover, many investors fear that the US stock market has been artificially inflated by government involvement and that any tapering by the Fed is likely to cause the stock market bubble to deflate, or burst.  Economists, policy-makers and strategic planners are also worried that adverse consequences created by Fed cutbacks could destabilize the global economic balance of power.

In December 2008, the Fed launched a massive liquidity effort by pouring trillions of dollars in short-term lending into financial firms and corporations.  A host of new programs was created, including repurchase agreements, term auction credits, commercial paper funding facility, liquidity swaps and various other loans and bailouts.  This liquidity effort was designed to be temporary in nature with a minimum risk to inflation.  The liquidity effort worked.  It saved a number of banks and corporations (such as the automotive industry) from insolvency without creating inflation.  This liquidity, coupled with near-zero interest rates, has found its way into the US stock markets, which have now recovered their losses since the recession. 

Effects Of Fed’s Stimulating theh S&P 500  

The effect of the Fed’s quantitative easing programs can be seen on the performance of the S&P 500 stock market, which is comprised of America’s top 500 publically-traded companies. As shown on the graph above, every time the Fed initiated a quantitative easing program, the S&P 500 grew significantly.   The opposite effect happened when the quantitative easing programs ended—the markets declined. The same happened with other US and foreign stock markets.                

QE1 (Quantitative Easing #1) occurred between December 2008 and March 2010 and involved a total of $1.75 trillion dollars’ worth of purchases of toxic mortgage-backed securities ($1.25 trillion) and debt ($200 billion) from Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, and $300 billion of long-term Treasury securities. The main purpose was to support the housing market, which was devastated by the subprime mortgage crisis.

QE2 (Quantitative Easing #2)occurred between November 2010 and June 2011 and involved $600 billion dollars’ worth of purchases of long-term Treasuries at a rate of $75 billion per month.  Treasuries include treasury bonds, notes, and bills. The Fed buys treasury securities when it wants to increase the flow of money and credit, and sells when it wants to reduce the flow.  In essence, after the Fed purchases treasury securities, it adds a credit to member banks, which increases the amount of money in the banking system, and ultimately stimulates the economy by increasing business and consumer spending because banks have more money to lend at lowered interest rates.

OT1/2 (Operation Twist #1 & #2)occurred between September 2011 and December 2012 and involved a total of $667 billion.  Operation Twist was a plan to purchase bonds with maturities of 6 to 30 years, and to sell bonds with maturities less than 3 years, which pressured the long-term bond yields downward and extended the average maturity of the Fed’s own portfolio.

QE3/4 (Quantitative Easing #3/#4) started in September 2012 and continues today, open-ended until the economy recovers and the official employment rate drops below 7%.  QE3 provided for an open-ended commitment to purchase $40 billion of agency mortgage-backed securities per month until the labor market improves “substantially”.  QE4 authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities.  In December 2013, QE4 was reduced from $85 billion to $75 billion/month.

The old adage “make hay while the sun shines” is applicable to corporations and their investors in the stock markets.  The Fed Chairman recently indicated that the era of low interest rates, excessive borrowing and quantitative easing is about to end.  In other words, the era of easy money is about over and the markets will have to operate with less and less government subsidies.  It is clear that the stock markets are addicted to these subsidies and are averse to any withdrawal.    On 20 June 2013, the Dow Jones and the S&P 500 had their biggest point losses in more than a year and a half after Federal Reserve Chairman Ben Bernanke hinted that the Fed “could” begin dialing back (tapering) or even ending its economic stimulus in 2014.  However, on 18 December 2013, Chairman Bernanke announced that the Fed will reduce QE4 by a modest $10 billion in January 2014, continue “further measured steps” if the economy warrants, and “keep short-term interest rates low” for the foreseeable future.  The next day, stocks dipped initially and then closed at record highs.  Hopefully, the stock markets will continue to react this way as the Fed continues to slowly wean the markets off the government’s financial milk.

The view held by most economists is that the markets will undergo a period of turbulence but will recover due to structural soundness and historical precedent.  Jobenomics asserts that the US economy is not structurally sound.  America’s emphasis on investing and speculating, as opposed to manufacturing and producing, has caused the largest creditor nation in the world to decline to the world’s largest creditor nation that is more significantly dependent and less competitive internationally.   Jobenomics also asserts that the $16.6 trillion spent by the federal government was not well spent, as evidenced by the low rate of US GDP growth, high unemployment, exponential growth of people leaving the US labor force, our dwindling middle class, and a hundred million US citizens dependent on handouts and welfare payments.    

In conclusion, today’s stock market success may be more of an illusion than reality.  At some point in time, US federal government subsidies to financial institutions and corporations will end.  If the Fed begins tapering its quantitative easing program, interest rates could spike and weigh heavily on stock prices.  When that time happens, we will find out if the markets can operate under their own power. 

Increased Competition from Foreign Equity Markets.  American stock exchanges were once perceived as omnipotent.  This is no longer true.  There are now several hundred stock exchanges around the world, all competing for global investment dollars.  Times are changing.

 Market Value of  Stock Markets  by Country

According to The World Bank[9], the market value of the entire world’s stock exchanges is $53.16 trillion.  Market value (market capitalization) is determined by the share price times the number of shares outstanding of all incorporated companies listed on the country’s stock exchanges at the end of year. Investment companies, mutual funds, or other collective investment vehicles (like derivatives, discussed in next section) are not included.  US stock exchanges account for $18.67 trillion, or 35% of the total.  In 2001, US stock exchanges accounted for 50% of the world total—a drop of approximately 3% per year.

Stock Market Growth Rate Last Decade

The growth rate of all foreign stock exchanges (excluding the US) over the last decade (2002 through 2012) averaged 178% compared to US growth of 68%.  The BRICs (Brazil, Russia, India, and China) grew between 604% and 893%.  Mexico grew 409%.  Based on the data in these two charts alone, it is clear that US stock exchanges may no longer be the dominant player in the global equities marketplace.  

US companies face the highest corporate tax in the world and are subjected to the most complex set of government regulations and oversight.  By contrast, countries like the United Arab Emirates (UAE) are aggressively pursuing a strategic approach to attracting investment dollars and relocation of foreign companies.  Both Dubai and Abu Dhabi founded exchanges in 2000 that now list thousands of companies.  The Dubai and Abu Dhabi exchanges are now growing at rates as much as 80% per year.  NASDAQ Dubai opened in late 2005 and is rapidly listing high tech companies around the world with support of 500,000 regional and thousands of institutional investors[10].   In addition to these exchanges, the UAE created major financial centers in Dubai (2004) and Abu Dhabi (September 2013) to promote domestic growth and access to Asia and Middle-East markets.  After nine years in operation, the Dubai International Finance Center has 14,000 professionals working with 940 companies.

In November 2013, the ruler of Dubai, Sheikh Mohammed bin Rashid, announced an aggressive plan to be “the new economic centre of the world,” becoming the central East-West-Africa hub for 2 billion people in Europe, Asia, the Middle East and Africa.   Abu Dhabi has similar global ambitions to become the world’s go-to financial center.  The Abu Dhabi World Financial Market is a financial free zone that: is exempt from federal civil codes; has its own legal structure, financial regulator and courts; offers 50-year tax-free status and full foreign ownership of companies; and has financial support from the Abu Dhabi Investment Authority, the second-largest wealth fund in the world, and Mubadala, the state investment fund.  Dubai and Abu Dhabi’s vision of becoming the world’s financial center may not be as farfetched as many believe.  Their state-sponsored airlines will soon have the world’s largest passenger fleet supported by the world’s most modern infrastructure and world-class tax-free industrial and business zones.

From a US stock market perspective, international competition is not only on the rise but is exploding.  Emerging markets are now competitive for global investment dollars (and other currencies).  New stock exchanges, like those in the UAE, are aggressively and strategically luring companies to list on their exchange, as well as relocating operations on foreign soil.

Changing Nature of the US Markets.  The American stock market started in 1792 when a small group of men started the New York Stock Exchange to sell shares of companies to raise capital and share risk with outsiders, thereby creating a financial relationship between owners and stockholders.  This empowered millions in the middle-class who could own a piece of the “rock” and provide a source for retirement.  This owner/stockholder relationship remained relatively constant until the 1980s when exotic financial instruments, called derivatives, were introduced.  Powered by the information technology revolution, derivatives skyrocketed.  Today, the nominal value of derivatives ($800 trillion) exceeds the market value of all the world’s equities ($52 trillion) by a factor of 16 to 1.  The traditional owner/stockholder relationship has largely been replaced by institutional traders who “bet” on the underlying value of stock.  In many ways, the tail now wags the dog.

When people invest in a derivative, they are placing a “bet” that the value derived from the underlying asset will increase or decrease by a certain amount within a certain period of time.  At the time of purchase, this person signs a binding contract to buy or sell an asset at some point in the future, but pay for it in the present at a locked-in price.  To make a bet, the investor or trader does not have to own the asset.  To make this point clear, a sports analogy might be useful.  A bookie does not have to own a football team to make a bet on the outcome of the game.  Nor does an advertising agency, television or radio, all of whom benefit from the underlying asset, in this case the football team.  By the time of the Super Bowl, more money is made on the side bets and sideshows than the actual game itself.  The same is true on derivatives, which are good for economic growth and hedging risk, unless the game is cancelled, which happened during the subprime mortgage crisis.

Since derivatives have no value themselves, they depend on the value of another asset, called an underlying asset.  Underlying assets include mortgages, equities (stocks), commodities (corn, gold, oil, etc.), loans, bonds, interest rates, exchange rates, indices, a host of other assets, and unusual items like the weather.  A weather derivative acts as a financial instrument that helps to reduce the amount of risk in the event of bad weather, which is an important risk factor in the agriculture industry.  Much in the same way, credit derivatives provide insurance regarding defaults on loans, credit cards, mortgages and other credit products.  Investment banks, hedge funds and insurance companies are parties that frequently agree to assume risk associated with credit products.

Warren Buffet has referred to derivatives as “time bombs” and “financial weapons of mass destruction.”  Regardless of all the rhetoric and new regulations (Dodd-Franks), the derivatives market has grown since the subprime mortgage crisis that involved “betting” on the underlying value of mortgages owned largely by people with poor credit ratings.  On the other hand, there are a small group of economists and financial engineers, like Robert Shiller, who think that derivatives can be beneficial to the common man.  Shiller’s Case-Shiller Home Price Indices was designed to help homeowners hedge against risk of declining home prices.  Unfortunately, Shiller’s novel ideas of using derivatives for social engineering are still in their infancy.

The equities market is increasingly becoming the playground of the rich and the super-rich.   As such, any discussion regarding stock markets should emphasize that fewer and fewer average Americans are playing in this sandbox due to small size, limited capital and adequate tools, like high-frequency trading technology.  In addition, most major US companies make more money today on trading secondary markets than they invest in future growth. To see if this statement is accurate for your favorite company, check the Statement of Cash Flows in their annual report.  If their Investing Activities and Financing Activities are greater than their Operating Activities it is likely that they are making more money on money than on the products and services that they sell. 

Jobenomics believes that as long as the big game in town involves speculation in derivatives (hedging and side bets), rather than investing in the underlying asset (companies), stock markets are more risky than most commonly used macroeconomic indicators would reveal.  Today’s stock markets are more suited for high-risk/high-reward casino capitalists than the average John or Jane Doe whose main interest is securing their retirement.   The financial engineering used in derivatives could be used to benefit many more Americans.   For example, the value of an individual’s income and assets (homes and property) are worth many times the value of the stock markets.  Using modern information and network technology (à la the ITR and NTR), derivatives and other financial instruments could be used to reduce the risk of income and asset loss of average Americans.  If Wall Street continues to focus its energy on the top 1% and large institutional investors, stock markets will become increasing irrelevant to the general public and social good.

GDP & Consumption-Based US Economy.  Jobenomics assesses the following probabilities in the strategic area entitled, GDP & Consumption-Based US Economy:  67% chance that it will muddle along and 33% chance that it will get worse.

GDP & Consumption-Based US Economy

 Gross Domestic Product.  Gross Domestic Product (GDP, the sum of the value of all goods and services) is a major macroeconomic indicator for a nation.  Modern economies have to grow in order to prosper.   Since the end of the Great Recession, the US economy has grown by an anemic rate of 2.2% per year with 2013 being one of the weakest at 2.0% due to myriad challenges with the federal government over fiscal policy and structural weakness in the private sector.

Most economists believe that the headwinds of 2013 have largely subsided and a new era of American prosperity is likely to commence in 2014.   These economists point to a number of positive trends including stronger banks, corporate profitability, bull stock markets, increasing household disposable income, improved housing market conditions, more energy independence, better export conditions due to a weaker dollar, reduced cost-cutting by state and local governments, reduced economic brinksmanship in Congress, Eurozone emerging from recession, and increased trans-Pacific partnerships.  Based on these positive trends, these economists and policy-makers anticipate that US GDP growth will be in the 2.5% to 3.0% range.  

On the other hand, a small number of macroeconomists are not so optimistic.  For example, Lawrence Summers, former Secretary of the Treasury and almost Chairman of the Federal Reserve, stated in a speech to the International Monetary Fund on 8 November 2013 that the US could be entering a period of “secular stagnation” where the economy fails to create enough demand (consumption) and needs bubbles (stock market) to achieve full employment.  He also stated that “conventional macroeconomic thinking leaves us in a very serious problem” given the Fed’s inability to effectively grow the economy since the nation’s “natural interest rate” is now substantially below zero percent (see discussion in next section entitled Monetary Policy).

Jobenomics agrees that the headwinds of 2013 have largely subsided, but 2014 will usher in a number of new challenges limiting US GDP growth to 1.5% to 2.0%.  2014 will be a make or break year for the Patient Protection and Affordable Care Act (ObamaCare), the healthcare industry, as well as the President himself.  2014 is likely to be the year where the federal government’s $17 trillion dollars’ worth of bailouts, buyouts and stimuli will end and the US economy will have to operate under its own power.  

2014 could be the year where US structural economics flaws reveal that Americans are not as competitive as they once were due to education, labor force, innovation, business and capital constraints.  For these reasons, plus other strategic reasons addressed in this forecast and on the Jobenomics website (www.Jobenomics.com), Jobenomics believes that 2014 will be a pivotal year for the US GDP in terms of producing value-added and competitive goods and services.

When it comes to US GDP growth predictions, the US Federal Reserve System (the Fed) is the ultimate authority.  Not only does the Fed have the necessary analytical tools, it can establish monetary policy, increase or decrease the money supply, raise or lower interest rates, and provide forward guidance to economists, policy-makers and opinion-leaders. 

So just how accurate has the Fed been in forecasting US GDP growth?   Not very, according to the meeting minutes of the Fed’s Federal Open Market Committee (FOMC) that conducts quarterly meetings to review economic conditions, determine monetary policy, assess risks to sustainable economic growth, and make projections on US GDP growth.

 Change In Real GDP Projections Federal Reserve

This chart, created by Jobenomics, is a snapshot of US GDP projections by the Federal Reserve Governors and Reserve Bank Presidents[11] as recorded by their past Federal Open Market Committee meeting minutes. The last 20 FOMC meetings are shown on the left column and their US GDP projections for the current and future years are shown for years 2009 through 2016.  Actual US GDP growth is shown in yellow at the bottom of the chart.   Let’s take a look at the Fed’s US GDP projections over the last three years:

  • For year 2011, the Fed forecast a high GDP growth rate of 5.0% in January 2009, which was revised down to 4.5% in January 2010, and revised down again to 3.9% in January 2011.  The actual 2011 GDP growth was 1.8% according the US Bureau of Economic Analysis[12]. 
  • For year 2012, the Fed forecast a high of 4.8% in November 2009, revised down to 4.5% in January 2010, revised down to 4.4% in January 2011, revised down to 2.7% in January 2012, and revised down to 1.8% in December 2012.  The actual 2012 GDP growth was 2.8%. 
  • For year 2013, the Fed forecast a high of 4.6% in November 2010 and again in January 2011, revised down to 3.2% in January 2012, revised down to 3.0% in December 2012, and revised down to 2.3% in September 2013.  The estimated 2013 GDP growth is 2.0% as of December 2013.

As evidenced by these consistent downward revisions, the Fed has been consistently more optimistic than realistic about the US GDP and the US economic recovery since the Great Recession.  Consequently, the Fed’s latest FOMC (September 2013) projection for 2014 US GDP growth is in the 2.9% to 3.1% range (down from a high of 3.9% in November 2011), which may be overly optimistic.  

Outside of the FOMC projections, the Federal Reserve Bank of Philadelphia (one of the 12 regional Federal Reserve Banks) conducts an annual survey of 42 leading private sector economic forecasters.  Survey of Professional Forecasters[13] (the oldest quarterly survey of US macroeconomic forecasters started in 1968) projects US GDP growth in 2014 at 2.6%[14].  Jobenomics asserts that 2.6% is also optimistic since many of these forecasters use the Fed’s projections as their baseline and make adjustments based on a variety of macroeconomic indicators that are influenced by the Fed.  Consumer confidence, retail sales, and industrial production are macroeconomic indices that are largely influenced by the Fed’s handling of interest rates and money supply. 

Another reason for the Fed’s optimistic projection has to do with unemployment, which is part of the Federal Reserve’s charter.  The Fed pledged not to increase interest rates until the official unemployment rate drops to 6.5%.   In order to increase hiring, the Fed must encourage personal consumption and expenditures that are the driving forces of the consumption-based US economy.  According to Lawrence Summers, this might not be possible in today’s period of “secular stagnation”.

Consumption-Based US Economy.  Consumption is defined as the value of all goods and services bought by people.   Leading economists determine the performance of a country in terms of consumption level and consumer dynamics.  The underlying theory of a consumption-based economy is that progressively greater consumption of goods is economically beneficial.   Jobenomics believes that this theory is only partly true.  Production, not consumption, is the true source of wealth.  Production uses resources to create goods and services that are suitable for use or exchange in a market economy.   If America wants a healthy economy, we need to create the conditions under which producers (businesses, as opposed to governments) can accelerate the process of creating wealth for others to consume and finance future production.

 Personal Consumption Expenditures as a Percent of US GDP-3

The US is a consumption-based society where spending and consumption of goods and services are essential to economic health.  The overwhelming percentage of GDP is generated by personal consumption and expenditures as shown above.  The Fed reports monthly[15]  on the various components of the US GDP.  At the end of the third quarter of 2013, personal consumption and expenditures was $11.5 trillion out of a total GDP of $16.9 trillion, or 68% of the total.  Government consumption, expenditures and investments amount to $3.1 trillion, or 19% of the total.  Private domestic investment (mainly businesses and real estate investments) accounts for $2.7 trillion, or 16%.  The final component is net US imports/exports, which is a negative $500 billion (-3%) since foreign imports exceed US overseas exports in our consumption-based economy. US personal consumption rose over the last seven decades as a percentage of US GDP—ranging from a low of 62% to a high of 68% today. 

The strategic questions facing economists and policy-makers alike are: (1) can America sustain ever-increasing rates of consumption in an ever-changing geo-political/economic environment, and (2) what are the consequences of a reduced consumption-based economy?

Regarding the first question about the sustainability of our consumption-based economy, Jobenomics assesses the short-term outlook as favorable and the long-term outlook as unfavorable.  The long-term outlook could be made much more favorable if the American populace and their elected leaders exploit the advantages of the US labor force and solve a number of significant challenges facing US economic growth. 

American economic advantages include inertia, innovation, adaptability, natural resources, and the dollar as the world’s reserve currency.  Challenges include debt, political gridlock, financial disruptions, workforce exodus, eroding middle-class, and changing demographics (e.g., retiring baby boomers).  Regarding the second question about the consequences of a reduced consumption-based economy, Jobenomics believes it depends on how the US economy is managed or mismanaged; the consequences of reduced consumption can range from benign to malignant.  The longer the US waits to implement meaningful reforms to our long-term challenges, the more severe the consequences of reduced consumption.  For a more detailed discussion on sustainability, see http://jobenomicsblog.com/consumption-based-economy.

Unemployment is directly tied to consumption.  One can roughly calculate the consequence of a relatively minor drop of 5% in consumption and its impact on unemployment.  A 5% reduction in the US $16 trillion annual GDP would precipitate a loss of approximately 20 million jobs ($16 trillion GDP x 5% = $800 billion/$40,000 annual median personal income = 20,000,000 jobs).  Today, the US employs a total of 136 million citizens, so a reduction of 20 million jobs would equate to approximately 15% of the US work force.   If the layoffs were focused on the poor and the lower middle class making an average personal income of $20,000, the numbers could double.

As estimated by the US Bureau of Economic Analysis[16], personal consumer spending has reached an all-time high of $11.5 trillion in 2013.  From 1959 (earliest BEA records) to 1970, consumption of goods exceeded services.   After 1970, services rapidly exceeded goods.  Today, the US consumes $7.6 trillion worth of services and $3.9 trillion worth of goods.   In other words, the US is a services-oriented, consumption-based society by a factor of almost 2 to 1.

 What Americans Buy and Consume

Americans consume a vast variety of goods and services[17] with healthcare (21.0%), housing (18.8%) and transportation (10.2%) topping the list.   Surprisingly, Americans spend more on entertaining themselves (recreation and entertainment, 8.9%) than they do on groceries (food and beverages, 8%)—a sign of “conspicuous consumption”.

America has a consumption conundrum.   On one hand, the US economy is dominated by consumption (68%) that must be maintained in order for the economy to prosper.  On the other hand, conspicuous, unneeded or unessential consumption without the ability to repay results in spiraling indebtedness, inflation, higher interest rates, defaults, and even bankruptcy.  Approximately 50,000 businesses and 1 million individuals file for bankruptcy each year[18].  Bankrupt major cities, like Stockton CA, Harrisburg PA and Detroit MI, indicate that something is amiss. 

2014 will be a make or break year for healthcare reform.  Healthcare accounts for 21% of US personal consumption and expenditures, or approximately $2.4 trillion.  The Patient Protection and Affordable Care Act (ObamaCare) is off to a rough start and faces significant challenges in 2014 and 2015.  Its demise would be disastrous for GDP growth.  The healthcare industry, healthcare service providers, insurance companies and businesses have already implemented changes to be compliant with the new universal healthcare law.  Any major reversals in course would add uncertainty, increased costs, and the loss of consumer confidence.

2014 is likely to introduce major changes to the second largest consumer segment of housing, utilities and fuel that accounts for 18.8% of consumption.  While most economists emphasize positive trends in residential construction and lower energy prices, one cannot rule out negative effects caused by restrictive lending practices and disruption of foreign energy sources.  While the Fed promises to keep short-term interest rates near zero through 2015, Fed tapering of their $75 billion/month quantitative easing program could cause significant turbulence with banking and lending institutions.  Likewise, while the US is making significant progress on becoming energy independent, America is still largely dependent on imported foreign oil.  Escalation of ongoing Middle-East conflicts could cause a major disruption of foreign oil imports.  Any such disruption would also have a dramatic impact on the US transportation consumption, the third largest sector, accounting for 10.2% of consumption.                                                                       

Jobenomics concludes that consumption drives GDP and that most GDP indicators err on the side of increased consumption. To sustain a growing economy, government, financial institutions and corporations must motivate citizens to keep consuming to preserve our way of life.  Modern-day Americans are programmed to be good consumers.    It is estimated that an average American child watches 20,000 TV commercials per year.  By age 65, the average American has watched 2 million commercials.  We are programmed for excessive-consumption for special occasions, like Christmas that evokes $80 billion worth of gift-giving.  When an event like 9/11 or the Great Recession happens, the federal government steps in and encourages consumption.  The Monday following the 9/11 Trade Tower attacks, the White House encouraged Americans to continue shopping due to fears that Wall Street would falter if consumer confidence plummeted.  At the advent of the Great Recession, the federal government implemented $17 trillion worth of bailouts, buyouts and stimuli to keep financial institutions and corporations afloat in order to stimulate our consumption-based economy.  The bottom line is that the US may very well have a consumption bubble.  Reducing pressure will help the bubble deflate.  Continuing to increase pressure may cause it to pop.

From a Jobenomics perspective, there is only one overarching macroeconomic indicator that is paramount to growing our consumption-based economy.  That indicator is employment.  Only the employed have the ability to generate wealth and consume over the long-term.  Welfare and other government subsidies only provide sources of short-term capital.   Given the explosive rate of people becoming dependent on government handouts, these subsidies are not financially sustainable and pose a major drag on GDP growth.  As addressed in the Unemployment & Employment section of this report, the number of people currently leaving the US labor force exceeds the number entering by a factor of 4 to 1, which will not help in maintaining or growing our consumption-based economy.

Monetary & Fiscal Policy.  Jobenomics assesses the following probabilities in the strategic area entitled, Monetary & Fiscal Policy:  33% that it will continue to muddle along and 67% chance that it will get worse.

 Monetary & Fiscal Policy

In the US, monetary policy is the domain of the Federal Reserve, and fiscal policy of the US Congress (and the US Treasury).   Monetary policy relates to the supply of money, which is controlled via factors such as interest rates, reserve requirements for banks, printing and borrowing money, and acquiring toxic assets.  Fiscal policy relates to controlling economic growth via taxation and government spending.  Working together, monetary and fiscal policy-makers can expand economic growth during slow periods, or contract growth when the economy is overheating.  Unfortunately during this current period of slow economic growth, US fiscal policy-makers in Congress are gridlocked in a bitter ideological divide that is likely to remain unabated or grow worse in 2014.  Doing the job of a one-armed paperhanger, the monetary policy-makers at the Fed have been able to keep the economy growing slowly using every stimulus tool available.  However, 2014 will introduce two major challenges in the Fed, (1) the retirement of Chairman Ben Bernanke, who has piloted the US economy through the roughest financial era since the Great Recession, and (2) the likely tapering or cessation of trillions of dollars’ worth of economic stimulus. 

Monetary Policy.  As discussed in the book, entitled Jobenomics, and ongoing Jobenomics blogs, Jobenomics has been and continues to be a big supporter of Federal Reserve’s Chairman Ben Bernanke.  Jobenomics is also a supporter of Janet Yellen, the Vice Chair of the Board of Governors of the Federal Reserve System and nominee for the new Chairman to replace Ben Bernanke whose second term expires in January 2014. 

When confirmed, Chairman Yellen will face a number of significant challenges.  Her biggest challenge will be maintaining control of the Fed, both from within and without.  Chairman Bernanke had the advantage of being the captain of the ship prior, during, and after the Great Recession.   Few people challenged his leadership during this critical period.  Chairman Yellen will take the helm in a fragile US economy, with less power to stimulate and influence, and with increasing internal and external opposition.  

Many of the tools available to Chairman Bernanke will not be available to Chairman Yellen, who will have to play out the hand dealt to her by her predecessor: 

  • Chairman Bernanke lowered short-term interest rates to near zero to stimulate lending and spur a strong economic recovery.  Chairman Yellen will have to maintain near-zero rates until the economy improves.  Many economists feel that an early interest rate raise will choke recovery, cause a panic, and throw the global community back into recession. The ideal time for the Fed to raise rates is when the public generally perceives that the recovery is well in hand.  Conversely, Chairman Yellen cannot cut the nominal rate below zero because people will choose to hoard money instead of putting it in the bank.   If another downturn or recession hits, Chairman Yellen will have less power than her predecessor since rates are already at zero.
  • Chairman Bernanke’s aggressive policy of printing money and buying Treasuries is approaching unsustainable limits.   Chairman Yellen will have to manage the consequences of her bloated central bank’s books that have gone deeper in the red by over $3 trillion in the last five years.
  • Chairman Bernanke’s quantitative easing tools (QE1, QE2, OT1, OT2, QE3 and QE4) have run their course.  Chairman Yellen will be responsible for tapering and withdrawal of addicted financial institutions, stock markets and corporations.
  • Chairman Bernanke set expectations that the unemployment rate would fall below 6.5%.  It hasn’t and Chairman Yellen will have to make it happen.
  • Chairman Bernanke was fortunate that inflation did not spike.  Chairman Yellen is considering making inflation one of her top priorities.  She also has to face the prospect of deflation, which has plagued Japan for the last 30 years.
  • Chairman Bernanke was able to encourage private sector investment in an era of easy money.  This era is largely over and Chairman Yellen will face a significant challenge persuading investors if the economy does not significantly improve in 2014. 
  • Chairman Bernanke enjoyed a relatively stable membership in the policy-setting FOMC, which consists of 7 governors and 12 regional bank presidents.   Chairman Yellen will not only face the retirement of the legendary Bernanke, but will have to establish her leadership in the face of 10 new governors and bank presidents—a challenge no new chairman has ever faced.

 Corporate Profits After Tax

As shown, corporate profitability is at an all-time high.  It has tripled since the Great Recession.  Corporate profitability can be directly tied to the Fed’s involvement.  First, low interest rates encouraged investors to buy stocks as opposed to traditional investments like savings accounts, certificates of deposits (CDs) and money market accounts due to their low rates of return that are directly tied to the near-zero Federal Funds Rate.  Second, corporate bonds (even those rated as junk bonds status) offering meager dividends (compared to savings, CDs and money markets) sold briskly, allowing corporations to build up their cash reserves and profitability.  Rather than hiring or recapitalizing, many corporations used this cash for mergers, acquisitions and share buy-backs that increased their profitability.  In most cases, these corporate actions were wise financially.  Corporate officials know that the “era of easy money” stimulated by the Fed will eventually end, and building up cash reserves was fiscally responsible until the US economy shows real signs of recovery.  Whether this will happen in 2014 is a matter of speculation.   

Another important aspect of the “era of easy money” is its effect on the economies of emerging markets.  The phenomenal growth in the world’s largest emerging markets was largely due to binging on the large amount of money and cheap sources of credit (via low interest rates) that the Federal Reserve and other central banks dumped on the global economy.  Over the last five years, Chinese, Indian, Brazilian and Turkish financial institutions lent heavily to corporate high-risk projects and consumers with poor credit.  Now that their economies are cooling, the downturn in “easy money” could create a perfect storm for collapsing banks that are facing significant loan delinquencies and defaults.  The bottom line is that the central banks (with the US Federal Reserve being the biggest culprit) have caused bubbles in emerging markets akin to the US sub-prime mortgage crisis bubble, that was fueled by poorly qualified loans to people with the least ability to financially survive downturns.  The amount of money at risk is huge, averaging 20% to 30% of GDP in many of these major emerging markets.  If central banks taper stimuli or increase interest rates, investment capital will flee emerging markets, especially in those countries with large current-account deficits.   Financial crises around the world tend to infect other economies.

In 2014, corporate officials will have a laser-focus on Chairman Yellen’s transition and forward guidance.  Without a substantial 2014 GDP growth above 2.9% to 3.1% (the last FOMC projection), unemployment rates below 7% to 6.5% (Fed benchmarks), and stable rates of inflation, corporate officials are likely to remain bearish on hiring and recapitalization.  Financial institutions also likely will be as bearish on loans, especially to small businesses that employ 71% of US workers.

In summary, 2014 will be a crucial year for the Fed and its monetary policies.  The US is fortunate to have an experienced and qualified nominee like Janet Yellen.  Hopefully, the 10 new voting members will establish allegiance to the new chairman, but this is not a given.  Hopefully, the economy will improve and Chairman Yellen will not have to rely on exhausted tools that have kept the economy afloat, but this is not a given.  Hopefully, Chairman Yellen will no longer have to function as a one-armed paper hanger and the Congress will help with meaningful fiscal policy, but this also is not a given, considering the ideological divide in Congress.

Fiscal Policy.   US fiscal policy is largely the responsibility of the US House of Representatives, the “holders of the purse strings,” who regulate government spending and tax revenues. 

When leading economists cite “less government fiscal drag” as a key factor for their optimistic economic outlook, they believe that the political brinksmanship between Congressional Republicans and Democrats is largely in the past.   2013 was a year of tightening fiscal policy that resulted in a debt ceiling crisis and a government shutdown that generated anxiety and condemnation.   Most economists believe that a 2014 budget crisis is unlikely and expect faster growth from an improved policy environment.  The American public is not as optimistic.  According to a recent national poll of US adults[19], 65% believe that there will be another government shutdown in 2014.  This sentiment was shared equally amongst Democrats (66%), Independents (65%) and Republicans (66%).  The majority of those polled believes that the 2013 shutdown caused significant economic harm and that it will likely happen again in 2014.

While political brinksmanship may be less, the ideological divide continues unabated.  From a Jobenomics perspective, the focus has merely shifted from debt issues to the mid-term elections that involve all House members and 1/3 of the Senate.  Democrats and Republicans alike believe that they have a reasonable chance of winning both the House and Senate in 2014.  The Democrats need to take 17 seats to win the House and the Republicans 3 seats to win the Senate.  With so few seats at stake and the prize so high, it is unlikely that either party has much incentive to cooperate with the other party to pass meaningful legislation on the economy, as well as other major issues.   On the surface both parties will appear to be bipartisan for public consumption, but inside Washington, political maneuvering and mudslinging will likely rule the day.       

    Political Party Divisiveness                    

A recent New York Times article[20], 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 above) has grown to the point of political paralysis.  Washington has reached a crossroads where the left no longer believes anything the right has to say, and vice versa. The article also indicates that the US public is similarly divided, almost to the extent that America was divided prior to the American Civil War.  Political scientists Keith Poole and Howard Rosenthal[21] analyzed 13 million individual roll call votes spanning the two centuries since Congress began recording votes in 1789, and concluded that over 81% of Congressional voting decisions can be attributed to a consistent ideological position ranging from ultra-conservatism to ultra-liberalism.  They also concluded that members of Congress are now less likely to vote against their party than any time since the first decade of the 20th Century (1900 to 1910).

A study conducted by former Congressman Tom Davis[22] in November 2013 came to the same conclusion.   According to the Davis study, in 1982, 79% of the members of the US House of Representatives were considered moderates according to their voting record.  By 1994, this number shrunk to 58%.  By 2002, it was 31%. Today, it is only 4%.  The Senate also followed suit.  In 1982, 58% of the members of the Senate were moderates.  By 1994, this number shrunk to 34%.  By 2002, it was 7%. Today, it is 0%.    

GovTrack.us, a tool by Civic Impulse, LLC, is one of the world’s most visited government transparency websites that track bills in the US Congress, as well as each representative’s legislative record.   The chart below is GovTrack’s “Ideology Analysis of Members of Congress”[23] from 1 June 2006 to 20 December 2013.

 Ideology Analysis of Members of Congress

The ideology analysis assigns a liberal–conservative (left-right) score to each Member of Congress based on which bill they sponsored or cosponsored.  Data is updated daily and weekly and the charts (above) are interactive for citizens to check the Ideology Score for each representative.  The data shows that the Democrats vote en masse according to their left-leaning ideology and the Republicans likewise, except to the right.  It is clear from this data and other analyses cited above that the ideological divide in Congress is real and much worse than many people realize.  Consequently, it is hard to believe that any meaningful kind of ideological détente is happening. 

The reality is that political parties hold far more power than the members of Congress.  Party discipline, loyalty and control are paramount.  Rogue members risk sanctions and access to key committee and subcommittee positions.  Party ideology and party control dominates the House’s business.  As stated by Frances Lee[24], a political scientist, “Control of the institution enables a political party to further its member’s political goals of winning office and yielding power, as well as its ideological goals…It leads members of one party to support efforts to discredit the opposition party on the grounds of its incompetence and lack of integrity….to steer the congressional agenda towards issues that allow themselves to differentiate themselves from their partisan opposition.”           

In 2014, lawmakers will face a number of significant fiscal policy challenges to include reductions in spending, a continuing resolution that provides government funding (government shutdown in March) and a statutory limit on federal debt (debt ceiling increase in May).  The “Bipartisan Budget Agreement” cut in December 2013 by Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.) offered a glimmer of hope for bipartisanship, but reduced a $1 trillion deficit by only $23 billion over ten years—a 0.2% decrease.   In 2014 and 2015, the budget agreement actually adds $63 billion each year, which means the savings will be realized (maybe) sometime in the future.

To better understand long-term deficit reduction issues, Jobenomics created the following charts from data taken from current and historical White House fiscal documents[25].

  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 (deficit) than it received in eight years in office.  The Obama Administration reports that it spent $5.3 trillion more (deficit) than it received in first four years in office and projects a total deficit of $8.4 trillion over both terms in office.

 Obama Administration's Deficit Projections ($B)

As shown above, the White House’s future deficits projections have been significantly understated.  For example for 2013 highlighted in yellow, the initial Obama Administration’s FY10 budget projection was $512 billion compared to its FY14 Budget that showed the actual deficit at $919 billion—a $407 billion or 79% increase.   It is these kinds of gross disparities that infuriate fiscal conservatives who believe that the US is headed for fiscal collapse.  

US Federal Spending Deficit in FY13

While the latest figures for 2013 are still being tallied, the US federal deficit in 2013 is approximately $1 trillion with receipts of $2.7 trillion versus spending of $3.7 trillion.  Individual income taxes and social insurance and retirement receipts (FICA taxes) account for 81% of the federal government’s income.  On the spending side, mandatory spending for entitlements (mainly Social Security, Medicare and Medicaid) represents 60% of the total.  Appropriated spending (the money set aside each year for running the government and armed forces) accounts for 34% and interest payments on money borrowed by the federal government for the remaining 6%.  

In conclusion, the US fiscal policy sea state will remain largely unchanged in 2014.  Highly visible political headwinds of 2013 will be replaced by turbulent underwater currents.  The two parties will remain ideologically divided.  An aura of fiscal policy détente will be portrayed to the public with enhanced political positioning for the 2014 elections.  Consequently, Jobenomics predicts that little meaningful fiscal policy actions will occur in Congress to help the economy improve in 2014.  The lack of pain experienced in 2013 does not constitute healing in 2014.  2014 will be dominated by minority party (Republicans in the Senate and Democrats in the House) efforts to take control of their respective institutions.  It is highly likely that political rhetoric will become even more rancorous and belligerent as the November 2014 election date approaches.  If this happens, the US economy will suffer.

Unemployment & Employment.  Jobenomics assesses the following probabilities in the strategic area entitled, Unemployment & Employment:  11% chance that it will get better, 22% chance that it will continue to muddle along, 56% chance that it will get worse, and 11% chance that it will get much worse.

 Unemployment & Employment

Macroeconomists, as well as politicians and pundits, focus heavily on the official unemployment rate statistic, called the U3 rate.  Jobenomics tracks all six U-rates (U1 for long-term unemployed, to U3 for the “officially” unemployed, through U6 for the underemployed and unemployed), but focuses mainly on the number of employed—a truer indicator of economic health.  Jobenomics asserts that the U3 rate is widely misunderstood, misleading, and undeserving of the amount of attention it receives from economists, policy-makers and opinion-leaders.  Jobenomics asserts that there should be an equal emphasis on those Employed, Not-in-Labor Force, and Unemployed—the three major BLS labor force categories

Civilian Noninstitutional Population Labor Force Trends.  The Bureau of Labor Statistics reports monthly on three categories: Employed, Unemployed/Underemployed, and Not-in-Labor-Force.  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 a job are counted in the BLS’ Not-in-Labor-Force category.  These three categories comprise the Civilian Noninstitutional Population 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.  Today, the Civilian Noninstitutional Population equates to 246 million people out of a total population of 317 million.

 Labor Force Trends Since Year 2000

The growth of three categories in the Civilian Noninstitutional Population is depicted above from January 2000 to December 2013.  While the growth of the Officially Unemployed has grown by 5.3 million, it is a relatively small number compared to Employment growth of 9.9 million and a phenomenal growth of 22.6 million able-bodied Americans who can work, but don’t, and are now in the Not-in-Labor-Force category.  Rather than focusing mainly on the unemployed, Americans should focus more on stimulating employment growth and minimizing those who are voluntarily leaving the work force.  Consequently, taken alone, the U3 rate statistic is a very poor indicator of economic health. 

Not-in-Labor-Force.   When a discouraged worker stops looking for work, that person is no longer counted as unemployed by the BLS, and they moved into the NiLF category.  This accounting practice distorts the true number of unemployed.  From a Jobenomics perspective, a frustrated person who quits looking is as equally unemployed as one who is still looking.  Since Not-in-Labor-Force 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 Not-in-Labor-Force.  

 US Labor Force Gains-Losses

Another way to look at the employment/unemployment situation is by analyzing US labor force gains and losses, not including the ranks of the unemployed.  According to the Bureau of Labor Statistics (BLS) over the last year, total nonfarm payroll employment increased by 2,293,000 while the number of people voluntarily leaving the labor force and no longer looking for a job was 2,300,000—a net loss of 7,000.   Since the start of the Obama Administration in 2009, the US has suffered a net loss of 8,495,000 people.  Since the year 2000, almost 4 times as many people departed the US labor force as entered it, for a net loss of 16,501,000.  If these rates continue, Jobenomics calculates that those who choose not to work will outnumber those who work by the year 2020. These losses are in addition to the 22 million unemployed or underemployed.

Eroding Middle-Class.   A lot has been said in the media about the eroding American middle-class, but few use any metrics to measure this erosion.   Labor force participation rates and employment-to-population ratios are two indices rarely used by macroeconomists.  

The BLS’s labor force participation rate[26] is the percentage of working-age persons who are employed or unemployed but looking for a job.   The BLS’s Employment-Population Ratio[27] answers the question, “what portion of the working-age population is employed?” and is useful in understanding how our economy is performing.  Since the year 2000, the US labor force participation rate has suffered a serious decline from a high of 67.3% to 63.0% today—a 6.4% decline from the peak and rate that was last seen in March 1978.   During the same period of time, the Employment-Population Ratio dropped by 9.4%.  The primary reason for these dramatic drops is largely due to those who 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 Not-in-Labor-Force category currently do not want a job now. 

Over the last 40 years, according to a 2013 study by Cornell University[28] on the eroding middle class, the share of families living in middle-income neighborhoods declined from 65% to 42%.  At the same time, both affluent and poor neighborhoods doubled in size (7% to 15%, and 8% to 18%, respectively). 

Over the last dozen years, median household income has also declined[29] from an all-time high of $56,080 in 1999 to $51,017 in 2012—a decline of 9.0%.  Unless this trend is reversed, America will increasingly be a nation of haves and have-nots due to an eroding middle-class. 

Focus on Employment and Growing Industries.  For six decades, the US consistently produced tens of millions of new jobs per decade.   Then the bottom fell out in the decade of the 2000s with a loss of 1.2 million jobs.  It is critical that significant numbers of jobs are created this decade (2010s) for the US economy to recover.  20 million new jobs by the year 2020 is a reasonable goal.  Not only has 20 million been historically achieved, but this is the number needed to accommodate 16 million new labor force entrants per decade and to reduce 4 million unemployed in order to achieve the so-called full employment rate of 5%. 

 Total New US Jobs By Decade

While the US has enjoyed some employment growth since the beginning of this decade, America is only producing 63% (37% shortfall) as many jobs as needed.  The US produced only 7,392,000 jobs compared to the 11,750,000 jobs needed as measured against the traditional benchmark of 250,000 jobs per month.   Of the three employment sectors reported by the Bureau of Labor Statistics, the private sector’s service-providing industries created 7,052,000 jobs, the private sector’s goods-producing industries created 963,000 jobs, and the government sector lost 623,000 jobs.

The 30-year trend in US employment has overwhelmingly been in the service-providing industries with a 30-year growth rate of 88%.  Not surprisingly, government has also grown significantly at a rate of 37%.   The US goods-producing industries have declined 16% during the last thirty years.  

Today, 136,795,000 Americans are employed in government and the private sector.  96,159,000 (70.3%) work in private sector service-providing industries.  18,749,000 (13.7%) are in private sector goods-producing industries that include Manufacturing, Construction and Mining/Logging.  21,857,000 (16.0%) Americans work for government at the federal, state and local levels.

Industry Employment Growth This Decade (10s)

83.8% of all new jobs this decade were produced by four industries (Professional and Business Services, Trade/Transportation/Utilities, Education and Health Services, and Leisure and Hospitality) in the service-providing sector.  Much-touted manufacturing only contributed 6.7% of the US employment growth.   The non-internet information industries and government lost jobs this decade.  

Job Openings By Industry

According to the most recent BLS Job Openings and Labor Survey[30], there were 4.2 million job openings that are available but unfilled largely due to inadequate skill levels from applicants. This survey includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by geographic region.   As shown above, the four occupations that had the largest number of openings are Professional & Business Services (777,000), Retail & Wholesale Trade (625,000), Healthcare (593,000), and Accommodation & Food Services (517,000). 

  317 Million

Today, out of a total population of 317 million Americans, the US has 105 million taxpayers (33%) working in the private sector who support 32 million government workers (including 10 million government contractors), 21 million unemployed or underemployed (BLS U6 rate) workers who are looking for work, 91 million able-bodied people (Not-in-Labor-Force category) who can work but are not looking, and 68 million (mainly children, retired and disabled) who cannot work.   The US economy cannot be sustained by 33% supporting an overhead of 67% via a combination of welfare, entitlement, familial and charitable programs. 

In conclusion, Jobenomics believes that the U3 rate is a poor macroeconomic indicator.  Sooner or later, the American people will figure out that the current way our government calculates U3 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 Not-in-Labor-Force 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 Not-in-Labor-Force.   A strong and stable middle-class is core to the American dream where rewards come to those who work hard and each generation does better than the previous.   Therefore, emphasis needs to be on meaningful employment.  The more people we employ means less unemployed.  

Conflict Containment.   Jobenomics assesses the following probabilities in the strategic area entitled, Conflict Containment:  13% chance that it will continue to muddle along, 50% chance that it will get a little worse, and 38% chance of getting much worse.

Conflict Containment

Jobenomics forecasts that conflicts will continue unabated with the potential for some to escalate regionally and internationally in 2014.  These disruptions could have a deleterious impact on the US and global economies.  The question is how much?  A nuclear exchange between Israel and Iran could be calamitous enough to cause a shift in the global balance of power.  

Conflicts and Extremism.  Economic crises often give wing to extremist forces.  According to the Economist Intelligence Unit (EIU)[31], a sister unit to the prestigious The Economist newspaper, 80% of the 150 countries studied face very high, high or medium risk of social unrest in 2014.  Compared to five years ago, the high- and very-high risk nations have increased 40% from 46 to 65 countries.  The EIU believes that “economic distress is almost a necessary condition for serious social or political instability” that can metastasize across the globe.   World War I started with the 1914 assassination of the heir to the Austro-Hungarian throne that rapidly led to hostilities between the central powers of Europe.  By 1918, 65 million died from combat and disease.    World War II started in 1939 with the German invasion of Poland.  By 1945, 100 million fatalities occurred across four continents.  Many believe that World War III commenced on 9/11, ushering in an age of Third World and sub-nation state extremism empowered by global communications, and weapons of mass disruption and destruction.

Global Islamification Movement.  From a Jobenomics perspective, economic forecasters do not factor in the possibility of Islamist/Salafi/Jihadi extremists disrupting the global financial community in 2014. 

The global Islamification movement’s goal of a Sharia-controlled world spans the world from North Africa, the Levant, Middle East, Southeast and Central Asia, to East Asia.   As a means of comparison, WWI and WWII involved approximately 100 million people, whereas the conflicts regarding global Islamification involve over 1.5 billion people.  These conflicts have largely been local and regional, focused on the worldwide Islamic community (Ummah) with a limited number of direct attacks, like 9/11, on the West.  Other than oil spikes, the global financial community has avoided major disruptions by local and regional conflicts associated with the global Islamification movement. 

However, 2014 could be different.  The Arab Spring that once held great promise is now clouded with great uncertainty.  The Syrian civil war is evolving into a regional war encompassing the Levant and the Arab Gulf.  Iran is now a “nuclear threshold” country with infrastructure, fissile material and expertise to quickly build a nuclear weapon.  The ever-evolving al Qaeda and associated groups of terrorists are upping their game with cyber and other low-cost weapons of mass destruction or disruption. All of these threats are hard to define empirically in terms of macroeconomics.  However, one must conclude that the economic impact of a major disruption, or series of minor disruptions, could be severe. 

Pivot to Asia.  Jobenomics believes that China presents more of an opportunity than a threat to the US.  Unfortunately, the pivot to Asia has emphasized threat over opportunity.   The Obama Administration’s “pivot” to Asia was originally conceived as a political and economic strategy to focus on the fastest growing region of the world.  Unfortunately, the implementation of this strategy has caused great uncertainty and anxiety with China and key US regional allies, with military hedging taking the forefront. 

The US is fortifying US bases from Australia to Guam to Japan.  In response, China has upped the military ante with a plethora of military spending, cyber warfare and military posturing.  In November 2013, Chinese President Xi launched the “Chinese Dream” campaign that includes “a dream of a strong nation and a strong army.”  Also in November, China unilaterally established a new Air Defense Identification Zone (ADIZ) in the East China Sea that challenges Japanese, South Korean and Taiwanese economic and security interests.  The US challenged the ADIZ with two unarmed B-52 bombers as a show of force.  China responded with fighter aircraft patrols and the deployment of their new aircraft carrier, the Liaoning.  To monitor the Liaoning, the US Navy deployed a number of ships.  During the monitoring operation, one US guided missile cruiser, the Cowpens, almost collided with a Chinese naval ship, causing a serious diplomatic incident that was not reported to the general public until a week later.   Defense Secretary Chuck Hagel calls the Chinese Navy “irresponsible” in escalating tensions with the United States. According to Secretary of State John Kerry, the ADIZ is significantly increasing risk of a “dangerous miscalculation or an accident.”    In China, Mr. Xi’s “Chinese Dream” has swept the country, stirring a nationalist fervor not seen in decades.  This fervor is likely to escalate to greater provocations with the US and other Asian countries in 2014.

Asian nations are also upping the ante in response to China’s increased military spending that has hit $172 billion last year, up 64% since 2008.   Japan, South Korea, India, Indonesia, Philippines, Vietnam and Taiwan have collectively increased their military spending from $116 billion in 2008 to $145 billion last year—an increase of 25%.  In January 2014, Japan will release its new 10-year defense policy that is reportedly much more expeditionary and aggressive.  The draft document cites China’s rapid build-up, North Korea’s nuclear and missile programs, and Russia’s military modernization as prime concerns for Japan.  Japan’s Prime Minister Shinzo Abe will be traveling to other Asian nations to forge alliances in the region and to encourage military modernization —primarily in response to the growing Chinese threat. 

Barring any “dangerous miscalculation or an accident,” 2014 will likely be the year of continued diplomatic and military posturing between the US and China that will cause global economic tension that, in turn, will limit global growth potential.  America’s pivot to Asia will focus on shoring up relationships with the 11 Trans-Pacific Partnership nations.  China will focus on building their middle-class to reduce dependence on foreign consumption, as well as amplify its “de-Americanized world” and “new world reserve currency” global initiatives. 

In 2014, Jobenomics predicts that military and economic tensions between the US and China are likely to increase, forcing major Asian trading partners to choose between two economic superpowers.  Military rhetoric is likely to increase on both sides with nationalist Chinese arguing for increased anti-access systems and the Pentagon advancing the notion of the Chinese becoming a near-peer threat.   For the most part, most of this military rhetoric will be bluster.  In the near-term, China is inextricably linked to the US economically and militarily.  China’s economic miracle is largely due to manufacturing prowess.  The US is not only the largest consumer of these manufactured goods, but it has economic and military hegemony with most of the developed nations of the world.  Some argue that the Chinese could dump the $1.3 trillion of US Treasury bonds, signaling Chinese influence over the US financial system.  This too is largely bluster since the China manufacturing miracle is also their greatest Achilles’ heel.   Any major economic assault on the US would likely cause a global recession, thereby inflicting great damage on Chinese exports, trade and credibility.

Black Swans.  A black swan is an event that comes as a surprise and has a major impact that is recognized mainly after the fact, such as the 2008 sub-prime mortgage crisis that nearly brought the US financial system to the brink of collapse.  There are a number of known and unknown-unknown crises and Black Swan events that could propel the US economy into a prolonged period of decline.  Unknown-unknowns (unk-unks) have been a part of the US military wargaming community since the early 1980s.  Unk-unks acknowledge possibilities that are not conceived at a given point in time.  The 9/11 Trade Tower attack was an unk-unk.  The Eyjafjallajökull Icelandic volcano was an unk-unk that cost the airline industry three years of profits.  The BP oil spill is another unk-unk.  The response guide for unk-unks cannot be written, but only nervously anticipated.  It is not unusual for lives of individuals, as well as the future of nations, to pivot on an unanticipated or unintended event.

Black Swans can be a blessing as well as a curse.  World War II destroyed the economies of Europe and Asia, leaving the US and Argentina as the two largest industrial powers.  The US economy boomed during the three decades after WWII.  Argentina’s economy collapsed as the country turned inward favoring state control, large state-controlled enterprises, public sector interventionism and protectionism, and higher rates of public spending.  By the mid-1970s, Argentina’s industrial output and per capita income experienced a precipitous decline with inflation rates averaging 300% per year until the 1990s.  What happened to Argentina could happen to the US.  In the last three decades, the US has moved from the largest creditor nation in the world to the world’s largest debtor nation.  A few Black Swans could bring about an economic decline similar to the one experienced by the Argentines.

US Recessions Per Decade

While recessions are not truly Black Swan events, no one knows when the next one will hit.  On average, the US economy faces four economic crises and two recessions per decade.  So far this decade, we have been lucky.  Or, have we just powered our way through these four years with excessive stimuli and wishful thinking?  Year 2014 will likely tell the tale.  Jobenomics asserts in this report that many of the commonly used macroeconomic indicators do not present the whole story. 

Consequently, this Jobenomics 2014 Economic Forecast attempts to balance strategic issues with macroeconomic indicators, with special attention on potential disruptive factors, technologies and events.   Analyzing macroeconomic indices and rates within a strategic geo-economic/political/ military/social-religious context allows economic, political, corporate, and media forecasters to envision multiple outcomes in addition to those based on the existing state of affairs.


[1] Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023, The Economic Outlook for 2014 to 2018, 5 Feb 2013, http://www.cbo.gov/publication/43907

[2] US Small Business Administration, Office of Advocacy, http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf

[3] Thomson Reuters/PayNet Small Business Lending Index, retrieved 23 Dec 2013, http://paynetonline.com/SmallBusinessInsights/ThomsonReutersPayNetSmallBusinessLendingInde.aspx

[4] Thomson Reuters/PayNet Small Business Delinquency Index, retrieved 23 Dec 2013, http://paynetonline.com/SmallBusinessInsights/ThomsonReutersPayNetSmallBusinessDelinquency.aspx

[5] US Energy Information Administration, November 2013, Monthly Energy Review, http://www.eia.gov/mer

[6] US Energy Information Administration, 16 December 2013, Annual Energy Outlook 2014-Early Release Overview, http://www.eia.gov/forecasts/aeo/er/pdf/0383er(2014).pdf

[7] Ibid, Table 1.3 Primary Energy Consumption by Source

[8] US Department of Energy, Energy Efficiency & Renewable Energy, Reduce Oil Dependence Costs, http://www.fueleconomy.gov/feg/oildep.shtml

[9] The World Bank, Market capitalization of listed companies (current US$), http://data.worldbank.org/indicator/CM.MKT.LCAP.CD

[10] NASDAQ Dubai, Why list with us?, http://www.nasdaqdubai.com/listing/why-list-with-us

[11] Federal Reserve, Economic Projections of Federal Reserve Governors and Reserve Bank Presidents, Change In Real GDP, Central Tendency, Inflation Adjusted Percentages, Table 1 Years 2009 through 2013, http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm#2868

[12] US Bureau of Economic Analysis, Table 1.1.11, Real Gross Domestic Product: Percent Change From Quarter One Year Ago,  http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=310

[13] Federal Reserve Bank of Philadelphia, Fourth Quarter 2013 Survey of Professional Forecasters, 25 Nov 2013, https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2013/survq413.cfm

[14] Ibid.

[15] Federal Reserve, Flow of Funds Accounts of the United States,  Table F.6 Distribution of Gross Domestic Product, Page 12, 9 December 2013, http://www.federalreserve.gov/releases/z1/Current/z1.pdf

[16] US Department of Commerce, Bureau of Economic Analysis, Table 2.3.5U Personal Consumption Expenditures by Major Type of Product and by Major Function, 23 December 2013, http://www.bea.gov/itable/iTable.cfm?ReqID=12&step=1#reqid=12&step=3&isuri=1&1203=14

[17] US Department of Commerce, Bureau of Economic Analysis, Table 2.5.5 Personal Consumption Expenditures by Function, 7 August 2013, http://www.bea.gov/iTable/iTable.cfm?reqid=9&step=3&isuri=1&903=69#reqid=9&step=3&isuri=1&910=X&911=0&903=74&904=2004&905=1000&906=Q

[18] American Bankruptcy Institute, Annual Business and Non-business Filings by Year (1980-2012), Year 2012, http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&CONTENTID=66471&TEMPLATE=/CM/ContentDisplay.cfm

[19] Research America, Zogby Analytics Poll, November 2013, http://www.researchamerica.org/uploads/Nov13nationalpollwithASH.pdf

[20] 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 2012

[21] Ideology & Congress, by Keith T. Poole and Howard Rosenthal; Second, revised edition of Congress: A Political Economic History of Roll Call Voting.

[22] Thomas M. Davis III, Washington Today (Presentation), 20 November 2013.

[23] GovTrack.us, Ideology Analysis of Members of Congress,  https://www.govtrack.us/about/analysis#ideology

[24] Beyond Ideology: Politics, Principles, and Partisanship in the U. S. Senate, France E. Lee, 2009

[25] The White House, President Barak Obama, Office of Management and Budget, The Budget, Fiscal Year 2014 and Historical Tables (S-1, S-4), http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tables.pdf

[26] BLS, Labor Force Participation Rate, http://data.bls.gov/timeseries/LNS11300000

[27] BLS, http://data.bls.gov/timeseries/LNS12300000

[28] Cornell University, US2010 Study, Residential Segregation by Income, 1970-2009, Kendra Bischoff & Sean F. Reardon, 16 Oct 2013, http://www.s4.brown.edu/us2010/Projects/Reports.htm

[29] US Census Bureau, Historical Data, Median Household Income 2012, Table H-8, 2012 Dollars, http://www.census.gov/hhes/www/income/data/historical/household/

[30] BLS, Job Openings ad Labor Survey (November 2013), http://www.bls.gov/news.release/jolts.htm

[31] The Economist, The World in 2014, Risk of Social Unrest in 2014, page 80

Fastest Growing Occupations

Download PDF Version: Fastest Growing Occupations – 22 Oct 2013

22 October 2013

As discussed in the latest monthly Jobenomics Employment Report, 84.3% of all new jobs this decade have been created in four of the thirteen US industry groups.  The fastest growing industry is Professional and Business Services with 2.131 million new jobs followed by Trade, Transportation and Utilities with 1.498 million; Education and Health Services with 1.385 million; and Leisure and Hospitality with 1.278 million for a grand total of 6.292 million new jobs.  This report examines these four industry groups for the fastest growing occupations in terms of jobs added and growth rate this decade.  This data is offered as a guide for those entering the labor force or planning a career.

Industry Employment Growth This Decade (10s)

Professional and Business Services.  According to the BLS, Professional and Business Services supersector is part of the service-providing industries group and consists of these sectors: Professional, Scientific, and Technical Services (NAICS 54), Management of Companies and Enterprises (NAICS 55), and Administrative and Support and Waste Management and Remediation Services (NAICS 56).  NAICS (pronounced “nakes”) is the North American Industry Classification System that is used by business and government to classify business establishments according to type of economic activity in the United States, Canada and Mexico.  The following two charts show the number of jobs added and growth rate this decade for major occupations within the Professional and Business Services.

Professional and Business Services Jobs

Professional and Business Services Growth

 

Trade, Transportation, and Utilities.  According to the BLS, the Trade, Transportation, and Utilities  supersector is part of the service-providing industries group and consists of these sectors: Wholesale Trade (NAICS 42), Retail Trade (NAICS 44-45), Transportation and Warehousing (NAICS 48-49), and Utilities (NAICS 22).  The following four charts show the number of jobs added and growth rate this decade for major occupations within Trade, Transportation, and Utilities.

Wholesale and Retail Trade Jobs

Wholesale and Retail Trade Growth

Transportation and Utilities Jobs

Transportation and Utilities Growth

Leisure and Hospitality.  According to the BLS, the Leisure and Hospitality supersector is part of the service-providing industries group and consists of these sectors: Arts, Entertainment, and Recreation (NAICS 71) and Accommodation and Food Services (NAICS 72).  The following two charts show the number of jobs added and growth rate this decade for major occupations within Leisure and Hospitality.

Leisure and Hospitality Jobs

 Leisure and Hospitality Growth

Education and Health Services.  According to the BLS, the Education and Health Services supersector is part of the service-providing industries group and consists of these sectors: Educational Services (NAICS 61) and Health Care and Social Assistance (NAICS 62).  The following two charts show the number of jobs added and growth rate this decade for major occupations within the Education and Health Services.

Education and Health Services Jobs

Education and Health Services Growth

Debt Limit Catastrophe?

Download PDF Version: Debt Limit Catastrophe 11 Oct 13

11 October 2013

Executive Summary.  This posting addresses a potential national debt limit default that is a growing concern amongst politicians, economists, pundits and opinion-leaders—many of whom are predicting catastrophic scenarios.  While catastrophic scenarios are possible, Jobenomics forecasts that a default is unlikely.  However, Jobenomics predicts that the ideological divide between America’s political left and right will continue to worsen leading to an era of chronic uncertainty where threats of government shutdowns and defaults will reoccur on a regular basis.

National Debt.  National debt is government or public debt as opposed to private debt (mortgages, credit cards, etc.) and corporate debt.  National debt is debt owed by the US federal government via the sale of Treasury securities that are tradable financial instruments secured by the US government.

The practice of issuing and selling Treasury securities started in WWI when the US could not borrow from the larger wealthier nations that were also embroiled in war.  In order to meet wartime expenses, the US government decided to issue war bonds, which were called Liberty Bonds.  These bonds carried a reasonable interest rate and were backed by the full faith and economic power of the US government.  Liberty Bonds sold quickly and the US government met its financial obligations.  After WWI, when the Liberty Bonds reached maturity, the US government did not have enough surplus funds to pay the bonds, so it issued more bonds at an attractive rate.  The Treasury also issued several different types of bonds with varying maturity rates.  These bonds also sold quickly and were often traded on the open market at a higher price.  In 1929, the US Treasury adopted an auction process that let people and institutions bid on bonds.  The highest bidder was awarded the bond.  This process is still used today.

 Current National Debt Expanded

 As shown above, US Treasury bills, notes and bonds are the dominant components of national debt that has reached $16.738 trillion as of 30 September 2013. Treasury Bills (T-Bills) mature in 1 year or less.  Treasury Notes (T-Notes) mature in 1 to 10 years.  Treasury Bonds (T-Bonds or long bonds) mature in 20 to 30 years. Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds.  Other types of Treasury securities include; Foreign and domestic series certificates of indebtedness, notes and bonds, Savings bonds; Government Account Series (Social Security); State and Local Government series and special purpose securities.

National debt can be categorized in three ways:

  • Debt held by the public versus intragovernmental holdings.  Debt held by the public includes all debt held outside the government including debt held by individuals, corporations, pension funds, investment groups, the US Federal Reserve System, US states, US municipalities and foreign governments.  Intragovernmental holdings consist mainly of federal trust funds, such as Social Security, Medicare, Transportation, and Civil Service Retirement accounts.  $11.976 trillion or 72% of the US national debt is held by the public and $4.762 trillion or 28% by the US government.
  • Marketable versus nonmarketable.  Marketable means that these securities can be traded on the open market like stocks.  $11.596 trillion or 69% of the US national debt is marketable.
  • Internal debt versus foreign debt.  Internal debt is owed to lenders within the United States, and external debt is owed to foreign lenders (mainly foreign governments).  Foreign governments own $5.59T of US government Treasuries, or 48% of marketable securities, which provides foreigners tremendous financial leverage over the US.

Major Foreign Holders of US Treasury Securities

According to US Treasury data[1], China holds $1.277 trillion (23%) of US Treasury external debt, followed by Japan with $1.135 trillion (20%).  The next largest entity is Caribbean Banking Centers (Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, Panama) with $0.288 trillion (5%) followed by Oil Exporters (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Gabon, Libya, Nigeria) with $0,258 trillion (4.6%).   Brazil, Taiwan, Switzerland, Belgium, UK, Luxembourg and Russia hold between $0.256 trillion to $0.132 trillion each.  All other countries hold a total of $1.409 trillion combined.

 National Debt - Debt Ceiling

Over the last five years, the US federal government spent approximately $1 trillion per year more than it received in tax income revenue leading to an ever increasing national debt as shown above.  A significant portion of this overage is due to interest payments.  According to the President’s 2014 Budget Request[2], the interest on the national debt in 2013 was $220 billion a year and is projected to quadruple to $804 billion within a decade.   $220 billion is approximately equal to the combined total of Agriculture ($23B), Commerce ($8B) Education ($70B), Energy ($27B), EPA ($8B), Homeland Security ($40B), NASA ($18B) and Housing and Urban Development ($34B), and is about 42% of the 2013 Defense budget ($525B), according to the President’s 2014 Budget.  The US Treasury reports[3] a much higher number ($415 billion) for interest expense in Fiscal Year 2013.

National Debt Ceiling or Limit.  The debt ceiling is the total amount of money the US government can borrow (by selling Treasuries) to pay its obligations, including interest on the national debt, entitlements and discretionary spending (defense, education, energy, veterans, agriculture, etc.). The first debt ceiling was created by Congress to put an upper limit on federal borrowing during WWI. The debt ceiling has been extended (raised) approximately 90 times from 1917 to 2001.  Since 2001, it has been extended 14 times.

The 1995 debt ceiling crisis led to debate regarding the size of the federal government, which lead to the non-passage of the federal budget, and the federal government shutdown.

The 2011 debt ceiling crisis led to the first ever downgrade in the federal government’s credit rating and a massive drop in the stock market.

As of 30 September 2013, the US Treasury reported that the US breached its national debt ceiling limit of $16.7 trillion and would run out of cash reserves by 17 October 2013.  Consequently, a 2013 debt ceiling crisis is now underway with a stalemate between Democrat-lead Whitehouse and Senate versus Republican-lead House of Representatives.

Jobenomics Forecast.  Jobenomics predicts that the America political divide will continue to widen in the foreseeable future unless a major fiscal or physical disruption creates common cause.  Unless the political extremes find common ground, economic brinksmanship will likely continue in the House of Representatives—the holders of the purse—until the economy changes or the Democrat minority gains majority in 2014 or 2016.   The Democrat-lead Whitehouse and Senate are wedded to securing social programs for the growing number of financially distressed individuals and families.  The Republican-lead House of Representatives are equally committed to fiscal constraints that will secure future Americans from the ravages of a financial meltdown.  From a Jobenomics perspective, both are needed, but the dialogue needs to change from entitlements versus austerity to a monologue of growth (with emphasis on growth of small business that employs 77% of all Americans).

In the near-term, Jobenomics predicts that the Administration and Congress will avoid defaulting on debt payments.  However, the brinksmanship could continue until after the 17 October 2013 deadline with significant (but not necessarily catastrophic) consequences.

As of this posting a week before the 17 October deadline, both sides are moving towards an agreement to extend the nation’s borrowing limit for short period of time and creating a framework for broader deficit-reduction talks.  However, a short period of time to Congressional Republicans means weeks as opposed to months or a year for the Democrats.  Consequently, the brinksmanship is likely to continue until late October or early November.

If the 17 October deadline is breached, borrowing authority of the US would be exhausted but the US federal government would use tax revenues to pay for essential services and obligations.  Total federal tax revenue[4] in FY13 was $2.712 trillion, or $226 billion per month, that could be used to avoid defaulting on priority expenditures.  Total outlays for FY13 were $3.685 trillion, or $307 billion per month, which could create an $81 billion shortfall per month ($307B-$226B) based on current spending habits.  In other words, the US government would have only enough revenue to pay for ¾ of current services and obligations but would not have the ability to borrow for the remaining ¼.

While it is highly unlikely that the US government will default, significant damage would be caused to the US economy if the brinksmanship lasted more than a few days after the 17 October deadline.  In the aftermath of the 2011 debt ceiling crisis, the US government’s bond rating was reduced by one of the three major credit-rating agencies (Standard & Poor’s) for the first time in America history. Shortly thereafter, markets around the world experienced their most volatile week since the 2008-09 Great Recession.  While the markets have since recovered, faith in US government leadership has not.  Moreover, many foreign governments are beginning to question America’s extraordinary privilege of printing the world’s reserve currency as well as immunity to borrow imprudently.  America’s reputation for being the world’s economic safe haven is one of its most important assets.  Any downgrading, especially if self-inflicted, to our creditworthiness would cause significant damage to our economy and society.



[1] US Treasury, Major Foreign Holders of Treasury Securities, July 2013, http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

[2] The White House, Office of Management and Budget, The President’s Budget for Fiscal Year 2014, Tables S-4 & S-11, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tables.pdf

[3] Treasury Direct, Interest Expense on the Debt Outstanding, Interest Expense Fiscal Year 2013, http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

[4] The White House, Office of Management and Budget, The President’s Budget for Fiscal Year 2014, Tables S-1, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tables.pdf

 

Consumption-Based Economy

Download PDF Version: Consumption-Based Economy 2 Sep 2013

2 September 2013

The USA is a consumption-based economy and America is a consumption-driven society.  Neither fact is necessarily good or bad.  It is the way America has operated for a century.  The issues at hand are (1) whether America can sustain high rates of consumption in an ever changing geo-political/economic environment, and (2) what are the consequences of a reduced consumption-based economy?

Consumption is an economic function that is defined as the value of all goods and services bought by people.   Leading economists determine the performance of a country in terms of consumption level and consumer dynamics.  The underlying theory of a consumption-based economy is that progressively greater consumption of goods is economically beneficial.   Jobenomics believes that this theory is only partly true.  Production, not consumption, is the true source of wealth.  Production uses resources to create goods and services that are suitable for use or exchange in a market economy.   If America wants a healthy economy, we need to create the conditions under which producers (businesses as opposed to governments) can accelerate the process of creating wealth for others to consume and finance future production.

To better understand the dynamics of our consumption-based economy, let’s first examine US consumption statistics, and then address consumption-based economy sustainability, potential consequences of reduced consumption, and Jobenomics recommendations.

 

US Consumption Statistics.   The US is consumption-based society where spending and consumption of goods and services are essential to economic health.   In America’s pre-consumer era, the US economy was based on agriculture and cottage industries where citizens produced what they needed and traded the rest.  Non essential consumption was largely the privilege of an elite few.  Over the last century, consumerism was introduced to the masses as part of the American economic equation.  Today, consumption is no longer a privilege but a necessity.  Increased consumption is necessary to keep the economy growing.  Without increased consumption, the economy would falter.

To sustain a growing economy, government, financial institutions and corporations must motivate citizens to keep consuming to preserve our way of life.  Modern-day Americans are programmed to be good consumers.    It is estimated[1] that an average American child watches 20,000 TV commercials per year.  By age 65, the average American watches 2 million commercials.  We are programmed for mega-consumption for special occasions, like Christmas that evokes $80 billion worth of gift-giving.  When an event, like 9/11 or the Great Recession of 2008-09, happens the federal government steps in to encourage consumption.  The Monday following the 9/11 Trade Tower attacks, the White House encouraged American’s to continue shopping due to fears that Wall Street would falter if consumer confidence plummeted.  At the advent of the Great Recession, the federal government implemented a series of bailouts, buyouts and stimuli to keep financial institutions and corporations afloat in order to stimulate our consumption-based economy.  These federal stimuli continue today to the tune of $16.6 trillion (see http://jobenomicsblog.com/stock-markets-and-the-fed), which is in addition to the $3.5 trillion spent annually for federal goods and services.

 International Comparison of Consumption as a Percent of GDP

According to The World Bank[2], the United States is the largest and most conspicuous consumption-based economy in the world.   As shown, the US leads the world with 71% consumption as a percent of US gross domestic product (GDP, the sum of all goods and services produced in the US by Americans).  Other Western economies average about 60%.  Emerging economies average around 35%.

China, as true with many developing countries, depends on government-funded investment to encourage economic expansion.    Chinese household consumption expenditure is 34% where government investment is approximately 54%.  Most of this government investment comes from the Chinese government to large state-owned corporations that are granted easy access to capital for development of factories, real estate and infrastructure.

 Personal Consumption Expenditures as a Percent of US GDP-3

The overwhelming percentage of GDP is generated by personal consumption and expenditures as shown above.  The US Federal Reserve System (the central bank of the United States) reports monthly[3] on the various components US GDP.  For 2013, personal consumption and expenditures amounts to $11.4 trillion out of a total GDP of $16.0 trillion, or 71% of the total.  Government consumption, expenditures and investments amount to $3.0 trillion, or 20% of the total.  Private domestic investment (mainly businesses and real estate investments) accounts for $2.2 trillion, or 13%.  The final component is net US imports/exports, which is a negative $500 billion (-4%) since foreign imports exceed US overseas exports in our consumption-based economy.

 Personal Consumption Expenditures as a Percent of US GDP by Decade

US personal consumption rose over the last seven decades as a percentage of US GDP—ranging from a low of 62% to a high of 71% today.   It is interesting to note that the two recessions in the decade of the 2000s did not decrease the ever growing amount of consumer spending.

 Personal Consumption Expenditures by Major Product Type

As estimated by the US Bureau of Economic Analysis[4], personal consumer spending has reached an all time high of $11.4 trillion in year 2013.  From 1959 (earliest BEA records) to 1970, consumption of goods exceeded services.   After 1970, services rapidly exceeded goods.  Today, the US consumes $7.5 trillion worth of services and $3.9 trillion worth of goods.   In other words, the US is a services-oriented, consumption-based society by a factor of almost 2 to 1.

 What Americans Buy and Consume

Americans consume a vast variety of goods and services[5] with healthcare (21.0%), housing (18.8%) and recreation/entertainment (10.2%) topping the list.   Surprisingly, Americans spend more on entertaining themselves (recreation and entertainment, 8.9%) than they do on groceries (food and beverages, 8%)—a sign of “conspicuous consumption”.

Conspicuous consumption is generally defined as spending on goods and services mainly for the purpose of displaying income, wealth or social status.  Consumers naturally want the latest gizmos and to keep up with the “Jones”.  However, advertising, easy money (credit) and federal stimuli encourage consumption practices that far outstrip our ability to pay.  It is this inability to pay—both in government and the private sectors—that puts the American economy at risk.

America has a consumption conundrum.   On one hand, the US economy is dominated by consumption (71%) that must be maintained in order for the economy to prosper.  On the other hand, conspicuous, unneeded or unessential consumption without the ability to repay spiraling indebtedness risks defaults, ever higher interest rates, and bankruptcy.  Approximately 50,000 businesses and 1 million individuals file for bankruptcy each year[6].  Bankruptcies in major cities, like Stockton, Harrisburg and Detroit, indicate that something is amiss.

 

Consumption-Based Economy Sustainability.  Is our consumption-based economy sustainable?  Jobenomics assesses the short-term outlook as favorable and the long-term outlook as unfavorable.  However, the long-term outlook could be favorable if the American populace and their elected leaders exploit the advantages of the US labor force and solve a number of significant challenges facing US economic growth.

Americans have a number of advantages in regard to the global economy.  Primary advantages include inertia, innovation, adaptability, natural resources, and the dollar as the world’s currency—all of which will sustain the US economy in the short-term.

  • In physics, inertia is defined as a property of matter to retain its momentum in the absence of an external force.  The same is true of our consumption-based economy that has retained momentum over the last five decades as shown on the 1959 to 2012 Personal Consumption/Expenditures by Major Types of Product  chart .  Even the Great Recession of 2008-2009 caused only a temporary speed-bump in US personal consumption expenditures.  Even with all its challenges, the US economy is still the largest, most vibrant and the most stable in the world.
  • Innovation is part of the American fabric.  Historically, Americans have been the first to embrace disruptive technologies that transform life, business and the global economy.  US innovators and entrepreneurs have revolutionized our society many times in the last century from the military-technological revolution in the 1950s/60s, to the information-technology revolution in the 1980s/90s and todays energy-technology revolution.
  • Americans adapt to change.  Within the last 200 years, Americans transitioned from: pre-consumer to consumption-based, agriculturally-based to industrial-based, industrially-based to information technology-based, from dependence on goods to services, as well as rural to urban.   In 1810, only 6.1% of Americans lived in cities.  By 1910, 45.6% lived in cities.  Today, 80.7% of all Americans live are urbanites.
  • Unlike most countries, America has ample resources.  The most important resource is human.  When we run short of human resources, America has been able to attract and retain foreign talent.  The second most important resources is natural.  We have abundant supply of arable land, water and energy.  Our challenge is to husband these resources in an economically and environmentally balanced way.
  • The dollar is the world’s reserve currency. While there is a lot of talk about replacing the dollar with a new form of global currency based on a “basket” of currencies or commodities, the dollar should remain the world’s currency in near future.  Being the world’s reserve currency, allows the US federal government to print and borrow money to manage its cash flow needs.  This is not true of almost any other country on earth.

 

However, America has a number of significant challenges to include debt/deficits, fiscal/monetary policy, financial disruptions and demographics that could upend our consumption-based economy.

  • The US is now the greatest debtor nation in the world.  Over-consumption caused US private and public debt (the total of all US government, households, corporations and financial institutions) to surge upward to $45 trillion, or 300% of US GDP.  Eventually these debts will be reconciled via dollar devaluation, increased interest payments, defaults or high inflation.
  • The US Congress is responsible for fiscal policy (tax and spending) and the US Federal Reserve System is responsible for monetary policy (printing money and setting interest rates).  As long as the US Congress spends $1 trillion more each year than it takes in taxes and the Fed continues to stimulate the economy at an average of $1 trillion a year, consumption will continue unabated with copious amounts of “easy” money.   This rate of spending cannot last.  Hopefully, the US economy will strong enough to operate on its own when government stimuli end.
  • Domestic financial disruptions, like recessions and periods of inflation, and occur frequently.  Since WWII, the US averaged 1.7 recessions per decade.  So far in this decade (2010 to today), the US has been recession-free mainly due to infusion of trillions of dollars worth of government stimuli.   Inflation is also a major consideration.  So far in 2013, inflation has averaged 1.5%, which is in the normal range.  In 2008, prior to the Great Recession, it was 5.6%.  In 1980, it was 14.7%.  When government stimuli end, many fear that inflation will increase, perhaps significantly.  The next recession and/or an inflationary spiral could be very deleterious to consumption.
  • Global financial disruptions caused by political, economic, military or social malfeasance could trigger changes to US consumption.  Europe and Japan are in recession.  Conflicts in the Middle East continue.  Competition from China remains unabated.  It is unlikely that a single global disruption will have a significant impact on US consumption.  However, a global disruption may have a multiplying effect making a domestic financial disruption worse.  Multiple or cascading global disruptions, especially with our key trading partners, would certainly have an adverse affect on the US economy.
  • US demographic trends signal reduced consumption.   78 million baby-boomers just began to retire.  Retirees are generally fiscally conservative and less prone to large expenditures.  The other demographic group that is buying less is the middle class.  Since year 2000, the middle class has decreased by approximately 6%.  In the same period of time, the number of able-bodied Americans that can work but choose not to work has grown by 20 million people to a total of 90 million, not including 70 million people that cannot work, out of a total population of 316 million.

 

Potential Consequences of Reduced Consumption.    Depending how the US economy is managed or mismanaged, the consequences of reduced consumption can range from benign to malignant.  The longer we wait to implement meaningful reforms to our long-term challenges the more severe the consequences of reduced consumption.

Unemployment is directly tied to consumption.  One can roughly calculate the consequence a relatively minor drop of 5% in consumption and its impact on unemployment.  A 5% reduction in the US $16 trillion annual GDP would precipitate a loss of approximately 20 million jobs ($16 trillion GDP x 5% = $800 billion/$40,000 annual median personal income = 20,000,000 jobs).  Today, the US employs a total of 136 million citizens, so a reduction of 20 million jobs would equate to approximately 15% of the US work force.   If the layoffs were focused on the poor and the lower middle class making an average personal income of $20,000, the numbers could double.

As shown on the International Comparison chart at the beginning of this article, a 5% reduction in GDP would still make the US highest consuming society tied with the UK at 66%.  Given the volatility in today’s geo-political/economic environment, financial disruptions should be anticipated. Given the severity, duration and number of disruptions, a 5% (or greater) drop is certainly in the realm of the possible.

 

Jobenomics Recommendations.   Jobenomics believes that the best way to mitigate the effects of a potential consumption downturn is to promote small business growth as opposed to massive stimulus packages oriented to government jobs, big business and large financial institutions. Since the beginning of this decade (2010s), small business produced 71% of all new jobs.  Today small business employs 77% of the US labor force (see: Jobenomics Employment Report-August-2013).

Jobenomics also believes that a national initiative involving small, emerging and self-employed business creation would be an insurance policy against future economic downturns.  The creation of 20 million new jobs via small businesses—the engine of the US economy—would mitigate potential reduction of 20 million jobs as calculated above.

 Total New US Jobs By Decade

In the 1970s, 1980s and 1990s, the US created an average of 20 million new jobs each decade and can do so again. However, this amount of growth will not transpire using traditional methods.  Jobenomics believes that America needs to focus a model based on sustainability and self-sufficiency enabled by emerging information technologies and an improved national info-structure.  Jobenomics advocates a transition from dependency on large urban institutions to more independent small rural and virtual business networks.  This does mean that we abandon our current model but supplement it with alternatives that have the highest probability for scalability and growth.

Jobenomics is working on three highly-scalable, small business initiatives that could create millions of new jobs.  These initiatives include:  (1) a national effort for Generation Y to monetize social networks via a modernized info-structure, (2) a national direct-care effort to accommodate the aging and children via substantially increasing the number of women-owned businesses, and (3) a national effort to monetize waste streams via waste-to-energy and waste-to-raw materials that could rejuvenate depressed inner cities and the financially disadvantaged.

These three fledging initiatives are representative of the efforts of several hundred dedicated individuals—imagine what our nation could do writ-large.



[1] The Sourcebook for Teaching Science – Strategies, Activities, and Instructional Resources, Television Statistics, IV. Commercialism, http://www.csun.edu/science/health/docs/tv&health.html

[2] World Bank, Household final consumption expenditure, etc. (% of GDP), http://data.worldbank.org/indicator/NE.CON.PETC.ZS

[3] Federal Reserve, Flow of Funds Accounts of the United States, 2007-2013 Q1,  Table F.6 Distribution of Gross Domestic Product, Page 12, 6 Jun 2013, http://www.federalreserve.gov/releases/z1/Current/z1.pdf

[4] US Department of Commerce, Bureau of Economic Analysis, Table 2.3.5U Personal Consumption Expenditures by Major Type of Product and by Major Function, 7 August 2013, http://www.bea.gov/itable/iTable.cfm?ReqID=12&step=1#reqid=12&step=3&isuri=1&1203=14

[5] US Department of Commerce, Bureau of Economic Analysis, Table 2.5.5 Personal Consumption Expenditures by Function, 7 August 2013, http://www.bea.gov/iTable/iTable.cfm?reqid=9&step=3&isuri=1&903=69#reqid=9&step=3&isuri=1&910=X&911=0&903=74&904=2004&905=1000&906=Q

[6] American Bankruptcy Institute, Annual Business and Non-business Filings by Year (1980-2012), Year 2012, http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&CONTENTID=66471&TEMPLATE=/CM/ContentDisplay.cfm

Stock Markets and The Fed

Download PDF Version: Stock Market and The Fed 1 July 2013

1 July 2013

US stock market performance has been phenomenal since the depths of the Great Recession.  Since March 2009, all three major US indices (Dow Jones, S&P 500 and NASDAQ) have experienced a 4 ½ year bull market as shown below—up as high as 163%.

Stock Market Performance

The big questions facing economists, policy-makers, opinion-leaders and investors are whether (1) this bull market will continue, (2) can the stock markets operate under their own power, and (3) how chaotic will the markets become during tapering of US government subsidies to big business? To answer these questions, one must first consider the level of involvement of the US government, especially the actions of the US Federal Reserve Board—the single most important government agency in relation to stock markets.

The US Federal Reserve System’s, also known as the Federal Reserve or simply the Fed, engagement on monetary and credit policy has immediate consequences for financial institutions, investors and economic recovery.  After 4 ½ year’s of aggressive engagement via printing money, buying securities and manipulating interest rates, an increasing number of investors fear that disengagement by the Fed may have dire consequences regarding the attractiveness of stocks vis-à-vis other investment opportunities, such as commodities, bonds or even cash.  Moreover, many economists fear that stock market has been artificially inflated by government involvement and any tapering by the Fed likely to cause the stock market bubble to deflate, or burst, not only in the US but in fragile economies in Europe and Japan.  Finally, policy-makers and strategic planners are worried that adverse consequences created by Fed cutbacks will have a domino effect on the global geo-political/economic balance of power.

 USG Financial Bailouts to Private Sector

The US government has been stimulating publically-traded financial institutions and corporations to the tune of $16.6 trillion since 2008.  Federal Reserve programs totaled $10.9 trillion, mostly for banks, financial institutions, insurance companies and government sponsored enterprises (Fannie Mae and Freddie Mac—holders of 77% of all 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 $306 million, mostly for homeowners via the Federal Housing Administration.  Since the Federal Reserve is responsible for 66% ($10.9 trillion out of $16.6 trillion), it has been the most influential organization in regard to the US economic recovery as well as  4 ½ year bull stock market run.  Consequently, it is important to understand the role of the Fed and its actions in order to anticipate the future of the US stock markets.

The US Federal Reserve System is the central banking system of the United States.  The Fed is both the US government’s bank and the bankers’ bank.  As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President.  The Fed was created by Congress to be self-financed and is not subject to the congressional budgetary process. In this way, the Fed is considered to be “independent within government.”

The Federal Reserve System has a number of layers.  The top layer is the 7-member Board of Governors, who are appointed by the President and confirmed by the US Senate.  Ben Bernanke is the current Chairman of the Board whose term expires on 31 January 2014.  The second layer is comprised of 12 regional Federal Reserve Bank districts, each with a board of nine directors, 3 of whom are appointed by the Fed’s Board of Governors and 6 are elected by commercial banks in the district.  The third layer consists of approximately 4,900 member banks that are private institutions (mainly national and state-chartered banks). Each member bank is required to subscribe to non-tradable stock in its regional Federal Reserve Bank, entitling them to receive a 6% annual dividend.  While not officially part of the Fed, the Federal Deposit Insurance Corporation is a sister institution with 9,500 members.  The FDIC-insured lending institutions comprise the vast majority of all bank deposits in the US.  A very small number of small banks are neither an FDIC nor a Fed-member bank.

The primary responsibility of the Fed is the formulation of monetary and credit policy in pursuit of maximum employment, stable prices, moderate long-term interest rates, and economic growth.  The Fed normally accomplishes this by setting interest rates, controlling the money supply by printing money and trading government securities, and regulating the amount of reserves held by banks.

 Federal Reserve Funds (Interest) Rate

One of the first actions that the Fed initiated was lowering interest rates to almost zero to simulate the economy.  As shown above, the Fed lowered the Federal Fund Rate to near-zero prior the end of the recession—the lowest rate in 60 years.  Today, four and half years later, this rate remains at near-zero (0.11%).  To understand the role that the Federal Funds Rate plays in the banking system, one must first understand the four layers of interest.

  • Federal Funds Rate.  The federal funds rate (currently 0.11%) is the rate of interest at which federal funds are traded among banks, pegged by the Federal Reserve through its Open Market Operations.
  • Federal Reserve Discount Rate.  The discount rate (currently 0.75%) is the rate that the Fed charges its depository banks and thrifts who need to borrow money from the Fed.  The Fed directly sets the discount rate based on the economic/monetary policy it wants to achieve, as well as the underlying rates that banks charge one another.
  • Prime Rate.  The prime rate (currently 3.25%) is the interest rate offered by banks to their most valued customers.  The prime rate is based on the discount rate.
  • Bank Rate. Most consumers are familiar with the interest at their local bank when they apply for a mortgage, auto or other loan.  The bank rate (currently 4% to 6%) is based on the prime rate.

Consequently, the Federal Funds Rate sets the baseline interest rate that all other rates are based upon.   Since virtually every US bank sets its rates on underlying Fed rates, the magnitude of the Fed’s near-zero rate policy is profound.   Unfortunately this near-zero rate has not produced a robust US economic recovery as anticipated.  While stocks and corporate profits have soared, GDP growth, employment and lending have languished with dire impact on the American middle class.

When a near-zero Federal Funds Rate does not achieve the desired monetary effect (stimulating economic growth), the Fed turns to other measures since they are not able to reduce interest rates below zero.   Normally, the Fed stays out of the private sector, but these are not normal times.  As a result of the 2008-09 economic crisis, the Fed was compelled to enter the private sector in essentially three ways:

  • Printing money to increase liquidity to increase lending by banks,
  • Rescuing too-big-to-fail financial institutions, and
  • Buying mortgage-backed securities that are toxic to banks, major financial institutions and insurance companies.

After September 2008, the Fed launched a massive liquidity effort by pouring trillions of dollars in short-term lending into financial firms and corporations.  A host of new programs was created, including repurchase agreements, term auction credits, commercial paper funding facility, liquidity swaps and various other loans and bailouts.  This liquidity effort was designed to be temporary in nature with a minimum risk to inflation.  The liquidity effort worked.  It saved a number of banks and corporations (such as the automotive industry) from insolvency without creating inflation.  This liquidity, coupled with near-zero interest rates, has also found its way into the US stock markets, which have now recovered their losses since the Great Recession.

 Federal Reserve Balance Sheet

Since 2008 to today, the Fed has purchased approximately $3.5 trillion in toxic financial instruments from the private sector.  In essence, the Fed is now carrying the bad debt that formerly resided on the balance sheets of major financial institutions and corporations.

The Fed also launched an aggressive asset purchase program, called quantitative easing or QE.  Quantitative easing involves buying securities, which increases the money supply, which promotes increased liquidity and lending.  Over time, the Fed’s purchases of these assets was supposed to promote new business investment that, in turn, would bolster economic activity, create new jobs, and reduce the unemployment rate.  While QE has bolstered the stock markets, it has done little for business investment or unemployment.

 Effects of Feds Stimulating S&P500

The effect of the Fed’s quantitative easing programs can be seen on the performance of the S&P 500 stock market, which is comprised of America’s top 500 publically-traded companies.  As shown on the graph above, every time the Fed initiated a quantitative easing program the S&P 500 grew significantly.   The opposite effect happened when the quantitative easing programs ended—the markets declined. The same effects happened with other US and foreign stock markets.

  • QE1 (Quantitative Easing #1) occurred between December 2008 and March 2010 and involved a total of $1.75 trillion dollars worth of purchases of toxic mortgage-backed securities ($1.25 trillion) and debt ($200 billion) from Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, and $300 billion of long-term Treasury securities. The main purpose was to support the housing market, which was devastated by the subprime mortgage crisis.
  • QE2 (Quantitative Easing #2) occurred between November 2010 and June 2011 and involved $600 billion dollars worth of purchases of long-term Treasuries at a rate of $75 billion per month.  Treasuries include treasury bonds, notes, and bills. The Fed buys treasury securities when it wants to increase the flow of money and credit, and sells when it wants to reduce the flow.  In essence, after the Fed purchases treasury securities, it adds a credit to member banks, which increases the amount of money in the banking system and ultimately stimulates the economy by increasing business and consumer spending because banks have more money to lend at lowered interest rates.
  • QT1/2 (Operation Twist #1 & #2) occurred between September 2011 to December 2012 and involved a total of $667 billion.  Operation Twist was a plan to purchase bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, which pressured the long-term bond yields downward and extended the average maturity of the Fed’s own portfolio.
  • QE3/4 (Quantitative Easing #3/#4) started in September 2012 and continues today open-ended until the economy recovers and the official employment rate drops below 7%.  QE3 provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves “substantially”.  QE4 authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities.

 DOW versus Fed Assets

This graph shows the relationship between the Dow Jones Industrial Average (top 30 US publically-traded companies) and the Federal Reserve’s balance sheet.  The Fed’s purchase of toxic mortgage-backed securities from the private sector and Treasuries has bolstered stock markets worldwide, as well boosting US corporate profits to an all-time high as shown below.

 Corporate Taxes After Tax

Corporate profitability can be directly tied to the Fed’s involvement.  First, low interest rates encouraged investors to buys stocks as opposed to traditional investments like savings accounts, certificates of deposits (CDs) and money market accounts since their rate of return was low due to low Federal rates.  Secondly, corporate bonds (even those rated as junk bonds status) offering meager dividends (compared to savings, CDs and money markets) sold briskly allowing corporations to build up their cash reserves and profitability.  Rather than hiring or recapitalizing, many corporations used this cash for mergers, acquisitions and buy-backs of their own shares that increased their own net worth as well as their investors.  In most cases, these corporate actions were wise financially.  Corporate officials knew that the “era of easy money” stimulated by the Fed would eventually end, and building up cash reserves was fiscally responsible until the US economy showed real signs of recovery, which has not happened.

 Corporate Profits After Tax vrs Money in Circulation

What do we mean by the “era of easy money”?  The above chart is an exploded view of corporate profitability from 2008 to today (April 2013) that is overlaid by money in circulation that is controlled by the Fed.  During the period, corporate profits rose by $1.1 trillion versus a $2.2 trillion rise in money in circulation.  While rising about half the rate of the money supply, corporate profits generally followed the same upward path.  This generous supply of easy money allowed corporations to borrow at low interest rates for mergers, acquisitions and buy-backs.  In addition, easy money depressed the value of the US dollar relative to other currencies, which made US exports (the domain of big business) more competitive.

The old adage “make hay while the sun shines” is applicable to corporations and their investors in the stock markets.  The Fed Chairman has recently indicated that the era of low interest rates, excessive borrowing and quantitative easing are about to end.  In other words, the era of easy money is about over and the markets will have to operate with less and less government subsidies.  It is clear that the stock markets are addicted to these subsidies and are adverse to any withdrawal.    On 20 June 2013, the Dow Jones and the S&P 500 had their biggest point losses in more than a year and a half after Federal Reserve Chairman Ben Bernanke hinted that the Fed could begin dialing back its economic stimulus later this year.  After 4 1/2 years of Fed’s quantitative easing levitating stock markets and low interest rates, many investors are terrified by the prospect of market chaos without the underwriting of the Fed.

The probability of market chaos is a given.  However, there are two views.  The view that is held by most economists, policy-makers and opinion-leaders is that the markets will undergo a period of turbulence but will recover due to structural soundness and historical precedent.  Jobenomics takes the opposite view.  Jobenomics asserts that the US economy is structurally flawed because Americans, from Wall Street to Main Street, shifted emphasis from manufacturing and producing to investing and speculating over the last three decades.   Three decades ago, the US was the largest creditor nation in the world and commanded the lion’s share of global GDP.  Today, we are the largest creditor nation in the world and our share of GDP has diminished significantly—largely due emerging economies like China.   Jobenomics also asserts that the $16.6 trillion spent by the federal government was not well spent as evidenced by the low rate of US GDP growth, high unemployment, exponential growth of people leaving the US labor force, our dwindling middle class, and a hundred million US citizens dependent on government handouts and welfare payments.

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 keeping our economy from going over the proverbial fiscal cliff.  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 economic growth.  Private sector businesses are ultimately responsible for economic growth.  Unfortunately in this era of big government, private sector businesses have suffered.  Moreover, many Americans and politicians view businesses as a necessary evil or as a check book for social programs.  Until these negative attitudes change, American economic recovery will be tentative at best.

Jobenomics believes that the best prescription for economic prosperity lies with small business creation with emphasis on startup, emerging and self-employed businesses.

 US Jobs Created This Decade by Company Size

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 small business rather than providing generous subsidies to big business, Jobenomics estimates that ten million more Americans would be employed today if government focused on key next-generation business initiatives.   Jobenomics is working on three next-generation business initiatives that could potentially ten million new jobs.  These initiatives include:  (1) a national effort for Generation Y to monetize social networks via a modernized info-structure, (2) a national direct-care effort to accommodate the aging and children via substantially increasing the number of women-owned businesses, and (3) a national effort to monetize waste streams via waste-to-energy and waste-to-raw materials that could rejuvenate depressed inner cities and the financially disadvantaged.

In conclusion, stock market success may be more of an illusion than reality.  At some point in time, US federal government subsidies to financial institutions and corporations will end.  When that time happens, we will find out if the markets can operate under their own power.   Until then, America needs to diversify its investment strategy starting with small business, the engine of the US economy. Now is an ideal time to implement a new investment strategy to replace the old one that Chairman Bernanke says is about to end.

 

Long-Term Deficit Reduction

Download PDF Version: Long-Term Deficit Reduction 23 Jan 2013

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.

US Federal Spending Deficit in 2012

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.

US National Debt by President

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

Income Inequality versus Opportunity

PDF Version: Income Inequality versus Income Opportunity 26 Nov 2012

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 (81st to 90th 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

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:

  1. 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.
  2. Emerging economies with lower labor rates, less regulations, better technical skills, and greater government underwriting will continue to be competitive in global manufacturing.
  3. 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.
  4. The political ideological divide will prevent any meaningful pro-business policies, or significantly reduce the regulatory environment.
  5. 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 18th 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 19th Century.  The second industrial revolution (IR2) started in the early 20th 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

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/

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 16th 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.

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

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 21st 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.



 

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

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.

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.

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.