business creation | Jobenomics

Jobenomics U.S. Unemployment Analysis: Q2 2016

Jobenomics U.S. Unemployment Analysis: Q2 2016

By: Chuck Vollmer

Contact information: [email protected]

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Jobenomics U.S. Unemployment Analysis - Q2 2016 - 6 August 2016

6 August 2016

Jobenomics reports on U.S. unemployment and employment size, characteristics and trends. This Analysis focuses on how the U.S. government reports on unemployment and income statistics, why Americans who can work chose not to work, and the impact of 109.8 million non-working able-bodied citizens are having on the U.S. labor force and economy. The Jobenomics Employment Analysis focuses on the U.S. labor force, business and job creation, and transformative trends—with emphasis on 60 million workers in the rapidly growing contingent workforce.

Executive Summary

According to the U.S. Bureau of Labor Statistics (BLS), the U.S. labor force has three statistical categories: Employed, Unemployed and Not-in-Labor-Force. Understanding the dynamics between these categories is required to understand the American labor force and ultimately the U.S. economy.

From an unemployment perspective, policy-makers, decision-leaders and the American public must address three major trends: (1) growing voluntary workforce departures, (2) contingent workforce expansion, and (3) below average wage earner issues that are becoming more pervasive.

Sooner or later, the American public will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be looking for work. Able-bodied Americans who quit looking and voluntarily depart the workforce are classified in a nebulous and obscure Not-in-Labor-Force category that few people comprehend.

Six unemployment categories (U1 through U6) are reported monthly by the BLS. Each category requires that an individual must be actively looking for work. These categories are calculated as a percent of the Civilian Labor Force (Employed + Unemployed). The BLS also calculates the number of able-bodied adults who can work, but are not looking for work, in a category entitled Not-in-Labor-Force, which is not part of the Civilian Labor Force (159 million), but part of the larger Civilian Noninstitutional Population (254 million), which is a subset of the entire U.S. population (324 million).

The latest BLS Employment Situation Summary[1] reports that 122.1 million Employed Americans work in the private sector[2] versus 109.8 million citizens who are Unemployed (U6, defined as total unemployed and underemployed people who are looking for work) and Not-in-Labor-Force (NiLF, defined as able-bodied adults who are capable of working but not looking for work for a variety of reasons). From 1 January 2000 to 1 July 2016, the working population (Private Sector Employed) increased by 11% compared to a 40% rise in the non-working population (U6/NiLF). The non-working population briefly exceeded the working population during the 2007-2009 Recession and is likely to outnumber the working population by 2024 if current trends exist, or earlier if an economic downturn occurs.

The U6 population includes the long-term unemployed (U1), job losers and temporary workers (U2), total unemployed workers (U3), discouraged workers (U4), marginally attached workers (U5) and underemployed workers who work part-time because they can’t find a full-time job. It is important to remember that a person must be actively looking for work to be counted as unemployed in any of the six BLS unemployment categories. In January 2000, the U6 population was 9,953,000. The height of the Great Recession, U6 peaked at 26,440,000 April 2010, an increase of 166% since the turn of the Century. Since peak through Q2 2016, the U6 dropped by 11.2 million people to 15,252,000 today. Despite all the political fanfare, 15,252,000 unemployed, underemployed and marginally-attached citizens still represent 53% more people out of work than existed 16 years ago.

Able-bodied adults who are neither employed nor unemployed are not in the labor force. Those who have no job and are no longer looking for a job are accounted by the BLS in the Not-in-Labor-Force category. From 2000 through Q2 2016, the Not-in-Labor-Force cadre grew from 68,655,000 to 94,517,000, an increase of 26 million citizens who more often than not are dependent on public/familial assistance.

Since the post-recession April 2010 U6 peak in Q2 2010, the Not-in-Labor-Force cadre grew by 11.8 million, which offset the 11.2 million people that were no longer part of the U6 population. Today, the Not-in-Labor-Force exceeds the U6 Unemployed cadre by 6-times (94,517,000 versus 15,252,480) and 12-times the number of people enrolled in the U3 Unemployment category that is generally referred to as the “officially unemployed”. This great disparity is rarely addressed by policy-makers, analyzed by decision-makers or mentioned by the media’s talking-heads, all of whom focus almost entirely on the “Official U3 Unemployment Rate” that is now at a post-recession low of 4.9%.

The ability to work should be the determining factor for unemployment as opposed to whether or not a person is looking for work. Jobenomics contends that all able-bodied Americans who can work, regardless if they are looking or not, should be considered “functionally” unemployed. Functional is defined as capable of working. An able-bodied adult who is capable of working but chooses not to work should be considered unemployed for the same reason that “discouraged”, “marginally attached” and “part-time workers for economic reasons” are included in the U4, U5 and U6 Unemployment categories.

This chart shows U3, U6, NiLF and the Jobenomics Functionally Unemployed numbers in relation to the Civilian Labor Force. The 4.9% U3 and 9.6% U6 are percentages of the Civilian Labor Force that consist of Employed and Unemployed workers who are currently employed or looking for work.

Hypothetically, if compared to the Civil Labor Force, the Not-in-Labor-Force cadre would equate to 59.5%, and the Jobenomics Functionally Unemployed (NiLF & U6) would be 69.1%, which gives one a sense of how large a challenge that the Not-in-Labor-Force cadre presents to the U.S. labor force and the American economy.

In order to achieve a sustainable economy and labor force, U.S. policy-makers and decision-leaders must shift their attention from an U3/U6 unemployment focus to understanding the reasons that able-bodied Americans who are capable of working are no longer looking for work and joining the ranks of those no longer in the U.S. labor force. When as many people drop out of the labor force as enter it, the U.S. economy cannot grow as it should.

Most economists believe that economic growth depends on job and GDP growth. The ideal rate for U.S. GDP growth is 2% to 3%. For the United States, a mature economy, sustained GDP growth significantly over 3% tends to led to overheating and bubbles. Anything below 2% is considered sclerotic growth and makes the economy vulnerable to financial downturns. During the post-WWII recovery, U.S. GDP grew at an average rate of 3.5% which created tens of millions of new jobs each decade. Since 2000, U.S. GDP averaged 1.76%. During the post-recession recovery period to today, U.S. GDP averaged 2.0% but is now slowing significantly. In Q1 2016, U.S. GDP grew by an abysmal 0.8%. Q2 2016 is estimated to be not much better at 1.2%. Consequently, the combined GDP rate for 2016 is only 1.0%—an alarmingly low rate of growth.[3]

As far as the future, many economists feel that a recession (two quarters below 0% GDP growth) is likely. The United States averages 3 financial downturns and 1.7 recessions per decade over the last 7 decades. This decade (2010s) has been recession-free largely due to government deficit spending, increasing money supply, low interest rates, stimulus packages, bailouts, buyouts and foreign investment. Now that the era of easy money is coming to an end, an anemic U.S. economy will have to operate under its own steam.

The period of frail GDP growth from 2000, has dramatically impacted the American middle-class and the U.S. labor force that gained 13,395,000 workers but lost 25,862,000 through voluntarily departures. To make matters worse, the U.S. population grew by 44 million citizens since year 2000, which places a greater burden on taxpaying workers. For most American workers, real wages (purchasing power) have not increased for decades and are not projected to improve soon.

Another alarming trend involves the dramatic rise in the contingent workforce, which now stands at 60 million employed workers, or 40% of the Private Sector Labor Force. The BLS defines the contingent workforce as the portion of the labor force that has “nonstandard work arrangements” or those without “permanent jobs with a traditional employer-employee relationship”. The Jobenomics U.S. Contingent Workforce Challenge Report estimates that the contingent workforce could be the predominant source (over 50%) of employed U.S. labor by 2030, or sooner, depending on economic conditions and seven ongoing labor force trends.[4]

The contingent workforce is comprised of two general categories: core and non-core. Core contingency workers include agency temps, direct-hire temps, on-call laborers and contract workers. Core workers generally represent low wage earners that have nonstandard work arrangements out of necessity, often subjected to exploitation, and usually not entitled to traditional employer-provided retirement and health benefits. The non-core category includes independent contractors, self-employed workers and standard part-time workers who work fewer than 35 hours per week. Non-core workers generally seek nonstandard work agreements as a matter of choice.

Jobenomics views the non-core workforce as a positive economic force that will grow significantly via the emerging digital economy. On the other hand, Jobenomics views the core contingency as a major labor force challenge as more and more citizens work for substandard wages, become frustrated, and seek alternative sources of income. The contingent workforce is addressed in this analysis from a Not-in-Labor-Force perspective and discussed in detail from an overall employment perspective in the Jobenomics Employment Analysis.[5]

Contingent work, low wages and the attractiveness of the U.S. welfare/means-adjusted earnings programs are fueling the rapid and increasing exodus of citizens from the U.S. labor force. In 2014, 86% of all Americans (including workers with earnings, Not-in-Labor-Force and those that cannot work, such as children, caregivers, disabled, elderly, etc.) made below average income. Out of a total of 160.1 million full-time and part-time American workers with earnings, 115.2 million workers (72%) make less than the U.S. mean (average) income of $54,964.

As shown, the demographics with the greatest need and potential are women, minorities, new workforce entrants and the growing cadre of poor white males. 96% of new workforce entrants aged 15 to 24, 85% of Hispanics, 82% of Blacks, 80% of Females, 68% White Non-Hispanics, 65% of Males and 60% of Asians earn below average wage. The good news is that both women-owned and minority-owned firms have been growing at rates far greater than the national average.

A major reason for Not-in-Labor-Force growth is due to the growing attractiveness of welfare and entitlement benefits. The U.S. federal government funds 126 separate programs targeted at low income people. State, county, and municipal governments offer additional welfare and public assistance programs. Combined welfare benefits pay more than minimum wage jobs in 35 states—in many cases, significantly more. 35 U.S. states offer welfare packages (not including Medicaid) more generous than the most lavish and liberal European countries. 39 states pay welfare recipients more than the starting wage for a secretary and in 11 states more than the first year wage for a teacher.

Once a person becomes dependent on welfare, transition to workfare becomes difficult. Loss of critical workforce skills increase proportionally to the length of time a person is not working. Most of the 5 million open employment positions in the United States are due to a deficit of skills and the capability to perform effectively in a working environment. Prolonged dependency generates anger, grievances, activism, violence and counter-cultural lifestyles.

In today’s consumption-based and market-driven society, there is never enough public or familial assistance to satisfy the financially disaffected. Consequently, those who need additional income often turn to temporary jobs, barter, the underground economy as well as illicit lifestyles (gangs, drugs and crime) rather than legitimate forms of long-term employment. Jobenomics contends that workfare is the only reasonable alternative to welfare. The problem is how to motive and facilitate this transition.

The solution to growing America’s economy, healing the middle-class and strengthening the labor force involves putting the U.S. small business engine into over-drive. Energizing existing businesses and creating new small and self-employed businesses could create 20 million net new jobs within a decade. To this end, Jobenomics is working with a number of cities to implement Jobenomics Community-Based Business Generators to mass produce startup businesses.

Jobenomics Community-Based Business Generators mass-produce startup businesses by: (1) working with community leaders to identify high-potential business owners and employees, (2) executing a due diligence process to identify potential high quality business leaders and employees, (3) training and certifying these leaders and employees in targeted occupations, (4) creating highly repeatable and highly scalable “turn-key” small and self-employed businesses, (5) establishing sources of startup funding, recurring funding and contracts to provide a consistent source of revenue for new businesses after incorporation, and (6) providing mentoring and back-office support services to extend the life span and profitability of businesses created by the Jobenomics Community-Based Business Generators.

Starting a notional pool of 10,000 candidates, Jobenomics will work with local civic organizations (churches, non-profits, sports teams, etc.) to identify and nominate the top 10% to 25% candidates, who they know, for the Jobenomics Community-Based Business Generator program. This is the first stage of the due diligence process to separate the proverbial wheat from the chaff. These nominees will then be subjected to standard aptitude and attitude tests in order to willow the list down to several hundred trainees who we believe that could become high-quality employees and business leaders. Approximately 10% would undergo business school training and certification (goal is to startup a locally-owned business) and 90% some form of skills-based training and certification that would be needed in our new startup businesses. If each startup employed 10 people, 20 to 30 new small businesses would be created.

While the overall goal is to mass-produce small businesses, the Jobenomics Community-Based Business Generator will help all people who enter the program to find meaningful employment. Many of the initial candidates are likely to prefer working for existing companies rather than going through the Jobenomics process. Anticipating this, Jobenomics will implement a “pipeline” to connect these individuals who have undergone some level of due diligence to companies that are hiring. A common complaint that Jobenomics often hears from companies is that they have a very hard time finding good people who want to work and who have the right attitudes/aptitude for work. Consequently, Jobenomics Community-Based Business Generators will utilize a nationally recognized pipeline system that has recently matched hundreds of thousands veterans with employers.

In summary, the U.S. economy cannot be sustained by only 35% of the population that is eroding in terms of size, wages and income potential.

The private sector labor force produces the majority of American jobs, goods, services and revenue needed to sustain economic growth. 112 million private sector workers support 32 million government workers and contractors, 95 million able-bodied people who can work but chose not to work, 70 million who cannot work and the 15 million unemployed and underemployed. Of the 112 million employed Americans in the private sector, approximately 60% are standard full-time workers and 40% are part-time and independent continent workers.

If American policy-makers and decision-leaders are serious about revitalizing the eroding middle-class, they must address the growing voluntary workforce departures, contingent workforce and below mean income issues. Jobenomics believes that the place to start is with demographics with the greatest need and potential (i.e., women, minorities, new workforce entrants and the growing cadre of poor white males). Jobenomics suggests that the 2016 Presidential candidates, in both parties, should make solutions to these labor force issues their top priority.

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

[2] Government workers pay taxes just like private sector workers. However, government relies on tax revenue to pay salaries. Hence, Jobenomics often uses private sector figures when discussing the relative strength of the U.S. labor force and the economy.

[3] U.S. Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2016 (Advance Estimate)

Annual Update: 2013 through First Quarter 2016, 29 July 2016, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[4] http://jobenomicsblog.com/wp-content/uploads/2016/05/U.S.-Contingent-Workforce-Challenge-4-April-2016.pdf

[5] http://jobenomicsblog.com/jobenomics-u-s-employment-analysis-Q2-2016/

Jobenomics U.S. Employment Analysis: Q2 2016

Jobenomics U.S. Employment Analysis: Q2 2016

By: Chuck Vollmer

31 July 2016

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Jobenomics U.S. Employment Analysis - Q2 2016 - 31 July 2016

Jobenomics reports on U.S. employment and unemployment size, characteristics and trends. This Employment Analysis focuses on the U.S. labor force, business and job creation, and transformative trends—with emphasis on the 60 million workers in the rapidly growing, and underreported, contingent workforce. The companion Unemployment Analysis focuses on how the U.S. government reports on unemployment and income statistics, why Americans who can work chose not to work, and the impact of 109.8 million non-working able-bodied citizens are having on the United States.

Executive Summary

Current U.S. employment and job gains/loss statistics since the beginning of the decade are shown above. Between 1 January 2010 and 1 July 2016, the United States has created 14,401,000 new jobs with a net gain of 14,764,000 in the private sector and a net loss of 363,000 in government employment. 81.1% of all new jobs this decade were produced by four service-providing industries (Professional & Business Services; Education & Health Services; Trade, Transportation & Utilities; Leisure & Hospitality). Manufacturing and Construction industries contributed 5.6% and 6.7%, respectively. 77.9% of all Americans are now employed by small businesses that created 77.7% of all new jobs this decade. In June 2016, small businesses created 85.4% of all new jobs with micro-businesses (1-19 workers) employing 69% more Americans than all large corporations with over 1000 employees.

While these employment statistics are positive, they are offset by three trends that threaten economic growth and stability. These disturbing trends include voluntary workforce departures, contingent workforce growth and sclerotic GDP growth.

Voluntary Workforce Departures. In Q2 2016, the U.S. labor force lost 593,000 more workers than it gained due to the exodus of frustrated job-seekers and able-bodied workers to welfare and alternative lifestyles. Since year 2000, 25,862,000 able-bodied workers departed versus 13,395,000 workers who joined the labor force for a net loss of 12,467,000 workers. This net loss does not include the number of unemployed (2.1 million more people are unemployed in 2016 than 2000) or population growth (42 million additional Americans today compared to 2000).

Contingent Workforce Growth. Contingent workers are defined by the U.S. government as “non-standard” workers who work part-time by necessity (temps and day workers) or by choice (free lancers and self-employed). Today, the contingent workforce is approximately 60,000,000 employed Americans or 40% of the total employed workforce. By 2030, this number will grow to 80,000,000 or 50% of the U.S. employed workforce—a trend that is largely unknown to U.S. policy-makers and the American public.

Sclerotic GDP Growth. Most economists believe that economic growth depends on job and GDP growth. The ideal rate for U.S. GDP growth is 2% to 3%. Since 2000, U.S. GDP averaged a sclerotic 1.76%. During the post-recession recovery period to today, U.S. GDP averaged only 2.0%. In Q1 2016, U.S. GDP grew by an abysmal 0.8%. Q2 2016 is estimated to be not much better at 1.2%.

Job creation is the number one issue facing U.S. in regard to economic growth, sustainment and prosperity. Jobs do not create jobs, businesses do, especially small businesses. Unfortunately, America is focused on big business and government employment solutions that have not been very effective growing the U.S. labor force. In fact, the U.S. labor force is in a state of decline as evidenced by the eroding middle-class and the transformation from full-time to contingency workers.

35% of all Americans financially support the rest of the country. As of 1 July 2016, out of a U.S. population of 324 million, 112 million private sector workers support 32 million government workers and government contractors, 95 million able-bodied people who can work but chose not to work, 70 million who cannot work, and 15 million unemployed and underemployed. The U.S. economy is not sustainable with only 35% supporting an overhead of 65%. The growing contingent labor force, which consists of mostly lower paid wage earners, makes the overhead burden even more precarious. More people with livable wages and greater discretionary income must be productively engaged in the private sector labor force for the U.S. economy to flourish.

Workforce Education/Training Challenge

www.Jobenomics.com

By: Chuck Vollmer

1 August 2016

An 11-page Workforce Education/Training Challenge White Paper is available at: Workforce Education versus Training Challenge 1 Aug 2016

Executive Summary. The Father of American Education, Horace Mann, stated that “Education then, beyond all other devices of human origin, is the great equalizer of the conditions of men, the balance-wheel of the social machinery.” While Jobenomics agrees, the educational paradigm required for yesteryear’s workforce development may not be appropriate for many in today’s workforce. Today the U.S. labor force is increasingly characterized by income inequality, an eroding middle class and a growing contingent workforce that traditional degree-oriented educational programs have not been able to mitigate. More skills-based training and certification programs are needed.

The bifurcation of American society into haves and have-nots, skilled and unskilled, and hopefuls and the hopeless is a major educational/training challenge. To those at the top of the American economic pyramid, the old paradigm of “get a degree to get a job, get a better degree to get a better job” is more important than ever. On the other side of the ledger, to those at the bottom of the economic pyramid, more workforce technical and social skills training are needed to stem the increasing exodus to welfare and alternative lifestyles. For many at the bottom getting a postsecondary degree is a bridge too far. Earning a high school degree no longer guarantees a livable wage or viable career.

Education is defined as the process of imparting or acquiring general knowledge, developing powers of reasoning and judgment, and generally of preparing intellectually for mature life. Education generally involves learning theory. In the United States, there are four levels of education: pre-primary, primary, secondary and tertiary. Pre-primary education includes kindergarten, nursery schools, preschool programs and child/day care centers. Primary refers to first through eighth grades. Secondary usually refers to the last four years of high school (ninth through twelfth grade). Tertiary, also called postsecondary, refers to academic pursuit undertaken after high school. Primary and secondary education are compulsory (required by law), whereas pre-primary and postsecondary education is not. Postsecondary undergraduate programs, generally include associate and bachelor (baccalaureate) programs. Postsecondary post-baccalaureate pursuits generally include masters and doctorate programs. Primary, secondary and tertiary/postsecondary are degree-oriented.

Training involves teaching a person a particular skill, knowledge or type of behavior that is related to specific competencies. Training has targeted goals of improving an individual’s capability, capacity, productivity and performance. While some training programs are degree-oriented (such as technical colleges), most training programs (such as skills training, on-the-job training, occupational training, apprenticeships and internships) are certificate-oriented.

From a Jobenomics perspective, understanding the difference between education and training is fundamental to U.S. labor force development. Education is foundational and generally measured by tenure. Training is specific and measured by what one can do once completed. Educational degree-oriented programs are measured in years and are usually expensive. Training programs are often as short as weeks or months, and are relatively inexpensive. For people seeking careers, degree-oriented programs are usually the best choice. For the underprivileged, unskilled and poorly educated segment of society, certificate-oriented skills-based training provides the most effective way to getting a good job, the first step towards a meaningful career.

Jobenomics City & State Initiatives

Jobenomics City & State Initiatives

www.Jobenomics.com

By: Chuck Vollmer

29 July 2016

Download 16-page white paper at

Jobenomics City State Initiatives 29 July 2016

Jobenomics is now working directly with community leaders to develop business and job creation initiatives to mass-produce small businesses and jobs. Emphasis is placed on demographics with the greatest need and potential—women, minorities and youth. Jobenomics New York City, Jobenomics Delaware and Jobenomics Baltimore City initiatives are underway with other city and state efforts in progress.

Jobenomics New York City’s employment goal is for 1,000,000 net new jobs by 2026 in the five boroughs of New York City. Jobenomics New York City is led by a Harlem community leader who is also running for Mayor of New York City. [1]

Jobenomics Delaware’s employment goal is for 150,000 net new jobs by 2026 across the three counties and three major cities in Delaware. Jobenomics Delaware is led by a Dover business executive who is running for Lt. Governor. [2]

Jobenomics Baltimore City’s employment goal is for 100,000 net new inner-city jobs by 2026. Jobenomics Baltimore City is currently being led by a Commissioner of the Governors Workforce Investment Committee and inner-city Baltimore community leader. [3]

These community leaders are working with other community, government and business leaders to develop detailed plans, with actionable milestones, for citizens who desire meaningful jobs or want to start a business.

PowerPoint presentations for Jobenomics New York City, Jobenomics Delaware and Jobenomics Baltimore City are available as footnoted.

[1] Jobenomics New York City presentation: http://jobenomicsblog.com/jobenomics-new-york-city/

[2] Jobenomics Delaware presentation: http://jobenomicsblog.com/jobenomics-delaware/

[3] Jobenomics Baltimore City presentation: http://jobenomicsblog.com/jobenomics-baltimore-city/

Jobenomics Delaware

Jobenomics Delaware Initiative (JDI)

By: La Mar Gunn, Candidate for Lt. Governor

30 June 2016

Download presentation and white paper at:

Jobenomics Delaware Presentation - 23 June 2016

Jobenomics Delaware White Paper 30 June 2016

After ten years of effort, hundreds of meetings with policy-makers, thousands of meetings with business and community leaders and an outreach effort to over two million people, many Americans believe that the Jobenomics Plan for America is the most mature and comprehensive business and jobs creation plan in the United States. Chuck Vollmer, author and founder of the Jobenomics national grassroots movement (http://Jobenomics.com/), has joined my campaign for Delaware Lt. Governor.

Together, we developed an actionable plan to create triple the current rate of new job creation to create 150,000 net new jobs in Delaware within the next ten years.

While JDI addresses big business and government employment, its principal focus is on highly-scalable small and self-employed businesses that employ 80% of all Americans and have produced 80% of all new jobs this decade. Specifically, JDI will focus on (1) women, minorities, new workforce entrants and other hopefuls with the highest need and growth potential, (2) mass-producing startup businesses via community-based business generators, (3) attracting new highly-scalable businesses to Delaware with emphasis on filling open job positions and exploiting emerging and new employment opportunities, (4) forming alliances with countries, cities, corporations and entrepreneurs, and (5) identifying sources of investment in order to achieve the JDI business and job creation goal.

The initial JDI notional framework includes nine job creation areas for depressed urban (with emphasis on Wilmington, Dover and Newark), rural (with emphasis on agriculture and aquaculture) and coastal communities. JDI will focus on filling current open jobs and exploiting emerging opportunities in caring services, construction, urban mining, the energy technology revolution and the fast growing digital economy. This notional framework will evolve as community stakeholders adopt new areas for development.

The solution to growing Delaware’s economy and labor force involves putting Delaware’s small business engine into over-drive. Therefore, the JDI team will work with community leaders to implement community-based business generators (CBBGs) that will mass produce startups, extend the “life span” of fledgling firms and accelerate existing businesses by (1) working with community leaders to identify and train high potential small business owners and employees, (2) implementing highly repeatable and highly scalable “turnkey” businesses with emphasis on the service-providing industries, (3) establishing sources of startup funding, recurring funding and follow-on contractual work to provide a consistent source of revenue for new businesses after incorporation, and (4) providing ongoing mentoring and support services.

A 50-page JDI presentation is available at www.GunnForUS.com. If interested in joining JDI or setting up a meet to discuss this initiative, contact me at (302) 218-640.

Jobenomics Baltimore City

Jobenomics Baltimore City

By: Dr. Alvin C. Hathaway, Commissioner of the Maryland Governor’s Workforce Investment Board, and Chuck Vollmer, Jobenomics Founder and President

23 June 2016

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Jobenomics Baltimore City Presentation - 23 July 2016

Jobenomics is pleased to announce a partnership with leading community leaders, led by Dr. Al Hathaway, Commissioner of the Maryland Governor’s Workforce Investment Board. Jobenomics Baltimore City’s goal is to restore the inner-city labor force by creating 100,000 net new jobs in Baltimore City within the next 10 years with emphasis on minorities, women, new workforce entrants and the contingent workforce. Jobenomics Baltimore City will institute local Community-Based Business Generators to mass-produce inner-city businesses in order to achieve the 100,000 new job goal.

Jobenomics Baltimore City’s New Job Framework is tailored to the demographics of Baltimore City. As shown, emphasis is being given to lower skill zones that tend to be more predominant in the poor sections of the inner-city. To date, the Jobenomics Baltimore City plan has been endorsed and lead by community leaders who are now getting endorsement and support from major corporations (Under Amour for manufacturing) and major medical institutions for the healthcare and social assistance programs. The team is also working with non-profits, the State and City managers to finalize and implement an actionable plan.

2016 State of the U.S. Labor Force

2016 State of the U.S. Labor Force

By: Chuck Vollmer

11 January 2016

Download a copy of this report at:

2016 U.S. Labor Force State-of-the-Union 11 Jan 2015

Executive Summary. To get a true picture of the 2016 state of the U.S. labor force, one must examine all three labor force categories reported by the U.S. Bureau of Labor Statistics (Employed, Unemployed and Not-in-Labor-Force) as opposed to focusing on the “official” Unemployed rate known as the U3 rate, which represents only 2% of the U.S. population or 5% of the U.S. civilian labor force. While Americans should be pleased that the U3 rate has dropped from its post Great Recession 10% peak to 5% today, America should concentrate on the combined non-working Not-in-Labor-Force and total unemployed (U6) population that encompasses 34% of the U.S. population.

From January 2000 to January 2016, the number of citizens Employed rose by 11%, Not-in-Labor Force by 37% and U6 Unemployed by 57%. Since the end of the Great Recession in 2010 through 2015, Unemployment dropped by 40% but voluntary workforce departures continued a steady exodus reaching a high watermark of 94 million able-bodied adults who choose not to work. If this trend remains unabated, Jobenomics forecasts that America’s able-bodied, not-working population could equal its working population by the mid-2020s, or sooner if the United States slips into recession.

By not including the able-bodied, not-working population in State of the Union deliberations, policy-makers play a statistical shell game with American citizens who cannot be expected to comprehend the intricacies of labor force statistics. Sooner or later, the American people will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be looking for work. Able-bodied Americans who quit looking and voluntarily depart the workforce are accounted in the Not-in-Labor-Force category—a category that is generally never mentioned in politics or the media.

While Americans should be pleased that employment is gradually increasing and the unemployment rolls are dropped significantly from Great Recession highs, they should be alarmed by exodus of tens of millions of able-bodied American adults to the netherworld of public/familial dependency and alternative lifestyles that harm economic growth and place greater burden on working and taxpaying Americans.

Jobenomics 2016 State of the Union’s Labor Force Assessment.[1] As of 1 January 2016, out of a total U.S. population of 322,810,000[2], there are 70,874,000 citizens that cannot work (22% of the population consisting mainly of children, caretakers, retired, disabled, institutionalized and active duty members of the armed forces) and 251,936,000 citizens in the Civilian Noninstitutional Population (78% of the population consisting of all persons in the Civilian Labor Force and Not-in-Labor-Force categories that are 16 years of age and older and not inmates of mental or penal institutions or military active duty).

The Bureau of Labor Statistics (BLS) calculates the number of citizens in the Civilian Labor Force (persons classified as Employed or Unemployed) at 157,833,000 (49% of the U.S. population) and in the Not-in-Labor-Force citizens at 94,610,000 (29% of the population).

Within the Civilian Labor Force, the BLS reports on the total number Employed—currently 149,929,000 or 46% of the population—and six unemployment categories as shown below. The most highly reported unemployment category is the U3 “Official” Unemployment category of 7,891,000 unemployed Americans (5.0% of the Civilian Labor Force or 2% of the overall population). For this report, Jobenomics typically uses, for reasons explained herein, the U6 Unemployment category that consists of 15,625 000 citizens (9.9% of the Civilian Labor Force or 5% of the overall U.S. population).

According to BLS, the basic concepts involving the U.S. labor force are relatively straightforward:

People with jobs are employed.
People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Marginally employed and underemployed personnel, who are actively looking for work, are reported as a subset of the Unemployed, and generally include part-time workers who work less than 35 hours per week.
Able-bodied adults who are neither Employed nor Unemployed are not in the labor force. Those who have no job and are no longer looking for a job are accounted in the Not-in-Labor-Force category that includes people (over 16 years and older), or so-called “discouraged” workers, who choose not to work.

From a Jobenomics perspective, Not-in-Labor-Force personnel should be classified as unemployed in the same manner that marginalized and underemployed citizens are included in the U6 Unemployment category. Determination whether a person is counted as unemployed should not depend on subjective, and often whimsical, survey questions used to appraise people’s employment intensions.

The four survey questions that government interviewers use to record a person as unemployed include (the bolded words are emphasized when read by the interviewers according to the BLS): [3]

Do you currently want a job, either full or part time?
What is the main reason you were not looking for work during the last 4 weeks?
Did you look for work at any time during the last 12 months?
Last week, could you have started a job if one had been offered?”

If a person answers yes to all four questions, that person is considered Unemployed. If the answer is no to any of these questions, that person is enrolled in the Not-in-Labor-Force category.

Jobenomics’ 2016 State of the Union’s Labor Force Assessment. To get accurate numbers in today’s labor force, Jobenomics uses a combination of Total Employed, U6 Unemployed and Not-in-Labor-Force obtained from the BLS Employment Situation Summary Report, Tables A-1 and B-1.

Jobenomics contends that able-bodied Americans who can work but don’t work, regardless if they are looking or not, should be considered unemployed for the same reason that “discouraged”, “marginally attached” and “part-time workers for economic reasons” are included in the U6 unemployment category. The reason why the Not-in-Labor-Force and U6 categories should be examined collectively is for governmental transparency and accountability. Sooner or later, the American public will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be actively looking for work. Able-bodied Americans who are no longer looking are accounted in the obscure, under-reported and arbitrary Not-in-Labor-Force category. A combination of the two categories gives policy-makers and the public a truer picture of the “functionally” unemployed.

In terms of the President’s State of the Union Address on 12 January 2016 and the Republican response, it will be interesting to hear if the dialogue revolves around the U3 “official” unemployment rate and the rate of employment expansion during the post-recession recovery period. From a Jobenomics perspective, resolving the Not-in-Labor-Force challenge is a much more important issue regarding the state of our union, the health of our economy and vitality of our labor force.

Year 2000 Through 2015 U.S. Labor Force Gains/Losses. From the beginning of year 2000 through 2015, the net loss to the U.S. labor force totaled 18.7 million people.

Employment grew from 130.8 million to 143.2 million for a gain of 12.5 million workers.

During the same period, the combined cadre of unemployed and voluntary departures increased from 78.6 million to 109.7 million for a loss of 31.1 million potentially productive workers.

It is also important to note that the U.S. population grew by 40 million people since year 2000—a 15% increase from 2000 through 2015. To understand the effect of population growth, one must look at the BLS’ Employment-to-Population Ratio that is at its lowest level in 30 years. The Employment-to-Population Ratio would be much lower if not for working women who were not engaged in the U.S. labor force in the 1970s as they are today. For more information on this, go to http://Jobenomics.com.

The principle source of employment growth since the beginning of this century has been in the private sector that created 11.0 million new jobs (88% growth or 5.5% growth rate per year) followed by government that created 1.5 million new jobs (12% growth or 0.75% growth rate per year).

Within the private sector, the seven service-providing industries (professional and business services; education and health services; trade, transportation and utilities; financial activities; leisure and hospitality; information; and other services) produced 100% of the jobs growth during the period with 15.9 million new jobs, or growth rate of 1 million new jobs per year. The three goods-producing industries (manufacturing, construction and mining/logging) lost 4.9 million jobs during the period. Jobenomics forecasts that the goods-producing industries will not produce a significant amount of net new jobs in the foreseeable future regardless of amount attention it receives and political rhetoric. For more information why, see http://Jobenomics.com.

Year 2010 Through 2015 U.S. Labor Force Gains/Losses. From the beginning of year 2010 through 2015, the post Great Recession recovery period managed by the Obama Administration, generated a net gain of 13.8 million people in the U.S. labor force.

Employment grew from 129.7 million to 143.2 million for a gain of 13.6 million workers. During the same period, the combined cadre of unemployed and voluntary departures remained virtually the same (110.0 million in year 2010 versus 109.7 million as of December 2015) with reductions of the number of unemployed being replaced by voluntary departures.

The principle source of employment growth year 2010 through 2015 has been in the private sector that created 14.0 million new jobs (13% growth or 2.2% growth rate per year) followed by government that lost 0.5 million new jobs (a negative 2% growth or 0.37% growth rate per year).

Within the private sector, the seven service-providing industries produced 87% of the jobs growth during the period with 12.2 million new jobs, or growth rate of 2 million new jobs per year. The three goods-producing industries also generated 1.9 million new jobs during the period, or 13% of the new jobs generated during the period.

Private sector service-providing industries and small businesses have been work horses of the economic recovery and principle sources of new jobs. Today, private sector businesses employ 85% of the U.S. labor force, of which 100,590,000 Americans (70.9%) have service-providing jobs and 19,651,000 (13.7%) have goods-producing jobs. As reported by the ADP National Employment Report[4], which surveys 400,000 U.S. businesses each month, small businesses created over 3.5 times as many jobs as big businesses in the last six years, 10.5 million versus 3.0 million respectively.

Over the last six years, the highly publicized “official” U3 unemployment rate was cut in half, from 10% to 5%, with a lot of fanfare. Similarly, the “total” U6 unemployment rate fell by 43%, from 17.3% to 9.9%, with a reduction of 10.6 million people in the U6 category. However, many of these formerly unemployed simply quit looking for work and were recounted in the BLS Not-in-Labor-Force category that grew by 10.3 million people, essentially wiping out the positive U6 gains.

From a policy-making perspective, the 94.1 million Americas who are no longer looking for work needs significantly more attention than the 15.6 million Americans who are still looking or are underemployed. The current BLS Employment Situation Summary Report states that 95% of the Americans in today’s Not-in-Labor-Force “do not want a job now”.[5] Why should they? America provides generous welfare and means-adjusted programs that are not tied to workfare like the most generous European nations require. Rather than hiring, U.S. corporations are preoccupied using profits on mergers and acquisition, expanding overseas and relocating corporate headquarters in foreign countries as a tax-saving measure. Learning new skills to compete for 5.1 million open America jobs[6] takes lots of effort, making it much easier to drop out of the labor force, go on the dole and pursue alternative ways of living.

Year 2015 U.S. Labor Force Gains/Losses. In 2015, the U.S. labor force suffered a net gain of 3.3 million.

Employment grew from 140.6 million to 143.2 million workers for a gain of 2.7 million jobs, which was supplemented by a gain of 0.6 million in the combined U6/Not-in-Labor-Force cadre, which remained at relative the same level from the beginning of the year, 110.0 million to 109.7 million respectively. While the U6 unemployment rolls decreased by 1.9 million people, 1.2 million people quit looking for work and voluntarily departed the U.S. labor force. Private sector service-providing industries and small businesses continued to the dominant forces in labor force expansion producing 2.4 million (90%) and 1.9 million (70%) of the 2.7 new jobs created during the year.

From policy and economic growth perspectives, 2016 State of the Union deliberations should contain an order of magnitude more labor force programs oriented to service industry vitality, small business hiring incentives and small business creation than programs for big businesses and government jobs that are unlikely to create a meaningful number of new jobs. In fact, big business is likely to downsize even further in 2016 consider the historically high number and value of corporate mergers and acquisitions, international pursuits and corporate inversions—all of which have negative consequences for U.S. labor force expansion and prosperity. Small business expansion provides the most bang for the buck for strengthening the U.S. labor force and stemming the erosion of the American middle class.

[1] Labor force data in this document is taken from the latest U.S. Bureau of Labor Statistics (BLS) Employment Situation Summary Report unless otherwise footnoted. The majority of BLS data used is from Table A-1, Household Data, http://www.bls.gov/news.release/empsit.t01.htm, and Table B-1, Establishment Data, http://www.bls.gov/webapps/legacy/cesbtab1.htm.

[2] U.S. Census Bureau, U.S. and World Population Clock, http://www.census.gov/popclock/

[3] BLS, Who is not in the labor force?, http://www.bls.gov/cps/cps_htgm.htm#nilf

[4] ADP Research Institute, National Employment Report, December 2015, http://www.adpemploymentreport.com/

[5] BLS, Table A-38, Persons not in the labor force by desire and availability for work, age and sex, retrieved 10 January 2016, http://www.bls.gov/web/empsit/cpseea38.htm

[6] BLS, Job Openings and Labor Turnover Report, Table 7, Job openings levels and rates by industry and region, retrieved 10 January 2016, http://www.bls.gov/news.release/jolts.t07.htm

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.

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.

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.

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.

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.

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.

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.

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.

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.

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%.

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.

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.

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.

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.

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.

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 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.

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.

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.

Income Inequality versus Opportunity

PDF Version: Income Inequality versus Opportunity 26 November 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 that America was divided prior to the American Civil
War. The media are also polarized. America has reached a crossroads where the left wing no longer believes anything the right as to say, and vice versa. Now that the 2012 elections are history, the world is anxiously watching to see if America can reverse course and unite as a nation to address our strategic challenges. If we continue to focus on income inequality, America will continue to divide politically, socially and economically. The word “inequality” is
divisive, implying inadequacy and disparity. We cannot unify by using words, slogans and data that create dissension.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[7] Ibid

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

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

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

Manufacturing Industry Forecast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[2] Ibid.

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

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

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

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

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

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

Jobenomics

A National Grassroots Small Business and Job Creation Movement

Tag: business creation

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Nation of Shopkeepers