Kamis, 08 November 2012

Still no sign of labor market deterioration

As disappointed as I am with the reelection of Obama, I don't think the economy is likely to underperform the market's dismal expectations. Misguided monetary and fiscal policy have been behind the economy's sluggish growth, and I don't see that getting worse. Some argue that very slow growth such as we've had increases the risk of a recession, using the analogy of an airplane that approaches "stall speed" being at risk of falling out of the sky, but I don't believe that analogy works for an economy. Recessions happen when unexpected and unpleasant things happen; they don't happen just because growth is disappointingly slow. Besides, the U.S. economy has an inherent dynamism which you underestimate at your peril. Most people want to advance by working harder, smarter, and by taking on extra risk. Americans by nature are problem solvers, and love to overcome obstacles and undertake challenges. And boy do we live in challenging times: successful entrepreneurs and businesses today are more likely to be demonized than appreciated, while some who fail to succeed are bailed out. That's not fair, in my view, but it hasn't stopped people from working harder.

I've argued for years that even though the recovery would be sub-par, the economy was likely to outperform the market's expectations, and for the most part that has been exactly what has happened. Although it is hard for me to be optimistic about another four years of Obama, I still think the economy can generate enough growth (even if it's only 2% per year) to beat the expectations that drive people to buy 10-yr Treasuries with a measly 1.7% yield, and to eschew equities with an earnings yield of 7% in favor of cash yielding zero.

For those who hold cash to be rewarded, the economy has to deteriorate significantly. However, so far there is no sign of any deterioration. Sandy may have caused claims to be a bit lower than expected, but even if they were higher the story would still be the same: seasonally adjusted claims have been flat for almost the entire year.

The above chart takes the numbers from the first chart and compares them to the size of the workforce. What this tells us is that in the past 60 years there have been only about 10 years in which a smaller percent of those working were at risk of losing their job. The economy isn't adding a whole of jobs, but neither is it firing very many. The problem is not layoffs, it's the lack of new jobs.

As this next two charts show, the one thing that has been very different about the last recession and the current recovery is the unprecedented number of people who have received unemployment insurance, thanks to Congress' decision in mid-2008 to create an "Emergency Claims" benefit. That is now winding down, with the result that there are 20% fewer people today receiving unemployment insurance than there were a year ago. This is one of the biggest changes on the margin in today's economy, and it doesn't get the attention it deserves. It's a perfect example of how the influence of government in the labor market is declining to a meaningful degree. Whenever government intervenes in a market, it almost always creates unintended consequences: disincentives to work, corruption, crony capitalism, and bureaucratic waste. As government pulls back, market forces come more into play and things improve. More people now have a greater incentive to find and accept jobs, even though they don't pay as much as they would have liked to get. This isn't fun, but that is the best way for excess labor to be reabsorbed. This is a good indicator that jobs are likely to continue to grow, if only because government is no longer making it easy for people to stay home.

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