Comstock Partners, Inc.January 06, 2005
Employment Picture Still Dreary
Whatever the December payroll employment report shows tomorrow, it can’t come close to making a dent in the serious jobs shortfall of the current economic expansion. Here’s why. The NBER officially designated November 2001 as the bottom of the last recession, meaning that the November report marked the third anniversary of the upturn. During this 36-month period total non-farm payroll employment increased only 0.9%, a number that pales in comparison to past cycles. Over the last seven economic expansions the average rise for a comparable period was 8.7%. If that were the case on the current cycle there would have been 10.2 million more jobs than the total number reported for November, and the average monthly increase for the 36-month period would have been 316,000 per month. Instead the average monthly rise was a paltry 33,000, and even over the past 12 months when employment picked up somewhat, the average monthly increase came to only 171,000, a far cry from the typical cyclical increase. In fact only three months of the 36 showed increases of more than 300,000 jobs.
As one would expect from the dismal employment numbers, the rise in wage and salary income was also sub-par for the cycle. In the five previous upturns the growth in wages and salaries accounted for a robust 64% of the rise in consumer disposable income, but only 42% this time around. Still, despite the weak employment and compensation picture consumer spending has held up fairly well as a result of non-wage and salary factors such as two major tax cuts, record low short-term interest rates for a sustained period, a sharp drop in the savings rate, record debt accumulation, and the credit-induced rise in real estate prices enabling hundreds of billions of dollars in mortgage refinancing cash-outs. In our view these non-compensation sources of consumer cash flows have run their course, and the outlook for consumer spending is running into major headwinds.
Other factors that fueled the economy and stock market are also running out of steam or reversing course. The Fed is now raising interest rates rather than lowering them. The Federal government is now looking to cut the deficit rather than expand it. Foreign economies are experiencing significant slowdowns. It is also not likely that capital spending will come to the rescue. Capacity utilization rates generally are still fairly low, and a key tax incentive expired at year-end. Technology spending, too, is weakening with a large number of tech companies reporting disappointing revenues, customers not buying, excess inventories, and the failure of the usual year-end seasonal pickup. With year-over-year profit gains having passed their peak, and the stock market still highly overvalued, we think it’s likely that the post-election rally will give way to a continuation of the secular bear market. It's noteworthy that even with the vigorous year-end rally, both the S&P 500 and Nasdaq Composite finished 2004 below the levels reached six years earlier.