Unemployment, the Downgrade, the Stock Rout, and Productivity
Thursday, August 11th, 2011
It was an interesting weekend, with Standard and Poors downgrading U.S. long-term debt (but not changing short-term debt ratings) to just a small notch under AAA. Why was everyone surprised? It was telegraphed for weeks, and everyone had access to the same Congressional Budget Office baseline data they were using in their forecasts. No matter which baseline you selected, which was a bone of contention with the Treasury Department, it showed the same thing. In the press, they kept saying that S&P made a $2 trillion mistake… ten years from now. The trajectory was the same, with debt as a percentage of GDP constantly increasing. There seemed to be more interest in blaming the umpire for something everyone already seemed to know.
The odd nature of things was displayed in the market trading of Monday, August 7, when Treasury bonds actually went up in price. Why? Because the U.S. dollar is still a reserve currency, and still needed in international trade. Since everyone else’s currency is either too thinly traded, or in worse condition than that of the U.S., the long-term nature of the downgrade did not affect what’s happening right now in other countries. The rating is not the issue, the behavior of the market is.
The worst possible rebuttal to the S&P downgrade was the insistence that the U.S. would never default on its obligations because it could inflate its way out of any problems by expanding the money supply, or by devaluing the currency (sure, they are related, of course). If there is any reason to downgrade U.S. debt, it’s not because you won’t get paid, but that you’ll get paid in dollars that have no purchasing power. S&P’s analysis really involved none of that consideration. Buyers beware, but we knew that anyway.
Stocks took a horrible beating on the same Monday, but that is more from the constant drumbeat of an economic slowdown. The downgrade actually had little to do with it. What probably worried the markets is that they’ll have to grow on their own, without any supposed new stimulus or any further expansion of the money supply by the Federal Reserve. The Fed will find creative ways to engage in more quantitative easing without making a big deal about it. Don’t expect any new stimulus of great size, but watch for extensions of unemployment benefits to be regularly proposed.
Last week’s unemployment report was rather horrid, but the press could not seem to figure that out. Just look at these lowlights that are easily gleaned by reading past the headlines:
- -193,000 workers left the workforce since last month
- -38,000 fewer people are employed
- the labor participation rate fell to 63.9%
- those no longer in the workforce was +374,000
- the broadest measure of unemployment, which includes discouraged workers and part time workers who can’t find full time work, went down to 16.1% from 16.2%
At this time that the unemployment rate was 9.5%, and now it’s 9.1%. The reason that the rate looks better is that there are -695,000 FEWER people employed today than this time last year. So many people have left the workforce that unemployment looks like it is improving.
A report like that alone could send stock prices down.
The latest productivity data were released, and they continue to show that productivity is growing faster than GDP. That means, in the total economy, the trend is to fewer workers, and the number of employees does not have to rise to increase output. Since the recovery began in mid-June 2009, GDP has grown an average of +1.5%, and productivity has grown by +1.9%. When GDP grows faster than productivity, hiring expands because businesses can’t keep up otherwise.
The trends still emphasize efficiency and not expansion. Expanding operations does not appear to offer paybacks that are larger than their risks. This is not uncertainty, as it is often described in the business press. Businesspeople are certain that their costs and their taxes as they relate to employment are going to rise, they are certain that the raw materials they use will be increasing in price, and that the regulations that affect them are going to increase. They’re behaving in the way they are because they are certain that these things are happening because they see evidence of it every day. It’s not uncertainty: to claim it’s uncertainty is to assert that businesspeople are foolish and ignorant. You can’t survive for long as an entrepreneur that way.
The latest National Federation of Independent Business report details some important aspects of small business’ current plight:
Low interest rates and expensing incentives do not appear to be enough inspiration to spur investment. The percent of owners planning capital outlays in the next three to six months fell 1 point to 20 percent, a recession level reading that has typified the recovery to date. While money is available to borrow, most owners are not interested in a loan to finance the purchase of equipment they will not need until there is marked economic improvement... A path to economic recovery is clearly not visible to many small-business owners.
Nonetheless, it is the entrepreneur’s task to navigate the environment they face, creatively address the opportunities they find, and to be on the lookout for opportunities beyond that. Ideas should never be in short supply.