Wednesday, October 28, 2009

The Stock Market and a Jobless Recovery

I've been thinking. This isn't a fully formed argument; it's more of a realization.
I've never been a fan of the 'jobless recovery' predictions, because jobs are a lagging indicator - they're the last things to go down, and the last things to come back up. It's possible we're just in that transition stage when other stuff has risen but jobs haven't. But it's possible that this really is a jobless recovery, and here's why.
This earnings season, the ratio of the number of companies that exceeded analyst estimates to those who have missed is 81:13 as of this afternoon (that's about 6.2 : 1). The average company that has reported so far (halfway through earnings season, now) has beaten by between 15 and 16 percent. Since earnings began, however, stocks have been dropping pretty heavily.
Two possible explanations come to mind: 1) analysts are behind everyone else and haven't updated appropriately, or 2) All of the beats are coming on cost-cutting and currency adjustments and not on revenue growth
If it's the former, this set of explanations doesn't matter.
If it's the latter, then a "jobless recovery" actually is possible - everyone downshifts consumption and production (the velocity of money drops) and we hit a new, lower equilibrium. This is the 'plateau' scenario.
The simplest solutions to jumpstart a jobless plateaued economy are a) credit and b) innovation.
We're actually contracting credit right now on an individual basis. Part of this was because the private sector was too levered in the first place, part of it is because the weaker banks are still hurting (and they were the ones providing the easiest credit before), and part of it has to be that the government is spending like a drunken sailor (crowding out the private sector, thanks to increased prices and inflation and taxation expectations),
Individual credit contraction is necessary (we're WAY above our heads) but doesn't help create jobs.
Sustained government spending isn't as good for job creation as sustained private sector spending, so if that continues, it will not help unemployment to drop.
Weaker banks can't really recover until a) unemployment drops and people start paying off their defaulted debt or b) all of the bad debt has been recognized already. part b has happened, to an extent, but not perfectly. The credit crisis makes part a a factor, while other recessions didn't have credit crises so a wasnt quite as big a problem.
Thus, if the beats are actually cost cutting and not revenue growth, we may have to foster serious innovation to get out of the quagmire. However, environments with a high minimum wage and difficult credit makes it very difficult to innovate because labor is expensive and capital is expensive. Except for jobs requiring highly-skilled labor and very few other inputs (software/light tech and biotech come to mind), it's going to be tough to foster innovation. High taxes and high inflation don't help the matter, either.
If software/light tech and biotech are the only industries that can handle this, and biotech is about to get smacked in the mouth with a healthcare bill that wrecks their ability to eventually break even, and software/light tech doesn't have a whole lot of excitement on the horizon (until cloud computing lets us start doing things we'd never done before) and heavy tech has largely shifted to Asia...
Then I can see why they're projecting a jobless recovery.
A weak dollar may actually aid the recovery - It'll screw over every consumer in the country (especially the poor, who can't trade down very much more than they already do), but increased US exports may be the best path out of unemployment.
There is no way the Obama administration has gone through this calculus (it's doubtful they believe their healthcare plan is gonna swipe the feet out from innovation as much as everyone else agrees it will), but weak dollar is a decent side effect. If only they'd stop spending and instead use the spending they've already done to delever the Federal balance sheet, the Bush (and now Obama) weak dollar policy may actually be a powerful way to protect US superiority long term.
Of course, dropping the minimum wage wouldn't hurt, either...

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