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Jobless Claims And The Issue Of "Full Employment"
Submitted by Lance Roberts of STA Wealth Management,
Last week, the number of first-time jobless claims dropped below 300,000 which has not happened since before the onset of the financial crisis. Not surprisingly, the media and economic analysis exploded with commentary that this is a sure sign that the economic recovery is afoot. Such a recovery will lead to stronger employment, higher wages, rising interest rates and a continuation of the bullish stock market cycle. However, is that really the case?
[Side Note: Just a quick observation suggests that when initial claims have previously been at these levels the economic cycle was closer to its end than its beginning.]
First, let's review exactly what constitutes an "initial" jobless claim. Each week the Department of Labor (DOL) releases the number of newly unemployed seeking jobless benefits from public institutions. In theory, only individuals who have been terminated by employers are eligible to file for an initial claim, although in recent years even employees voluntarily quitting employment are being approved for claims as well. The claimant receives a temporary source of income from the government while transitioning to a new job as a substitute for lost wages.
Historically, falling jobless claims have resulted in increased employment and is currently viewed as an important leading indicator of employment recovery. The chart below is a historical look at jobless claims (inverted) and full-time employment relative to the population from 1968-2007. Since all jobs created are not equal, I am using full-time employment which leads to household formation and sustainable economic growth.
As shown, historically when jobless claims have fallen to 300,000 or less full-time employment has been at 50%, or above, for the working age population. However, since the financial crisis that is no longer the case.
Despite falling jobless claims, full-time employment has remained a limited commodity. The good news is that there has been a relative pickup in full-time employment as a percentage of the population as of late. However, the bad news is that the ratio is increasing because the working age population is declining.
As I have discussed previously, much of the effect of the decline in jobless claims is not due to substantial increases in actual employment but rather to the effect of "labor hoarding." Since "initial" jobless claims are a function of "newly" terminated individuals filing for benefits it is logical that when companies cease terminations, and "hoard" their existing labor force, claims will fall. This is shown clearly below in the number of layoffs and discharges as compared to the level of initial jobless claims.
Despite many hopes that corporations will ramp up hiring, thereby reducing the excess slack in the labor force, it has failed to materialize to any great degree. As I stated above, the rate of employment remains closely tied to population growth. The chart below is the ratio of total non-farm employment growth to the growth of the working age population 16-64 years of age. A ratio of 1.00 means that employment growth is equal to population growth.
As you can see, the ratio has failed to climb above 1.00 since the turn of the century. Much of this has to do with the drive to manufacture corporate profitability in an environment of weaker topline revenue growth. During the recession businesses slashed costs, wages, and employment while boosting productivity. However, what businesses learned was that even as the economy began to recover they could continue to increase profits by focusing on productivity minimizing employment. One way that we can measure this is by looking at corporate profits on a per employee and wage basis. Currently, those ratios are at the highest/lowest levels on record.
As I said, business owners have learned their lesson. Productivity increases through technology is far better than hiring physical employees in excess of current demands. As such, there is currently little incentive to increase employment beyond current needs. This suggests that hopes of declining jobless claims leading to sharp ramps in employment and economic growth may be disappointing. More importantly, advances in technology are continually reducing the need for labor in the economy which increases the drag on both employment and wages. This is the dark side of e-commerce. In the retail world businesses need numerous employees to service physical customers. However, companies like Amazon can service thousands of customers instantaneously with no human interaction whatsoever - this is part of the "structural shift" in employment and remains focused on lower wage paying jobs.
"This is why the majority of hiring continues to focused on services related jobs and generally never exceeds the rate of population growth. As the population grows, demand on services increases incrementally. However, low wage paying and temporary service jobs do not foster higher levels of spending in areas that promote sustainable economic growth."
There is one other issue that is very critical to this analysis. As with investing, getting back to "even" is not a growth strategy. Each passing month is filled with analysis of the employment data and how close to pre-crisis levels the economy is. Yet, the damage is truly greater than realized. The chart below shows the "real" employment situation that currently exists in the U.S that is simply the deviation of employment from the long term growth trend.
The structural shift in the need "for" employment has caused a massive deviation from the long term employment trend in the economy. This is unlikely to be repaired during our lifetimes and has major implications for the economy in the long term.
The issue of "labor hoarding" is an important phenomenon that is likely obscuring the real weakness in the underlying economy. Without an increase in the demand part of the equation businesses are likely to continue resorting to further productivity increases to stretch the current labor force farther to protect profitability. Furthermore, we may be witnessing businesses reaching the limits of what they can do to continue increasing profits at the bottom line as topline revenue has begun to stagnate. (This also creates implications for the financial markets which are clearly negative.)
The "good news" is that for those that are currently employed - job safety is high. Businesses are indeed hiring, but prefer to hire from the "currently employed" labor pool rather than the unemployed masses. The "bad news" is that for those who remain unemployed, full-time work remains elusive and wages suppressed due to the high competition for available jobs.
The current detachment between the financial markets and the real economy continues. The Federal Reserve's interventions continue to create a wealth effect for market participants, however, it is unfortunate that such a wealth effect is only enjoyed by a small minority of the total population - and it is primarily those at the upper end of the pay scale that have jobs.
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"However, companies like Amazon can service thousands of customers instantaneously with no human interaction whatsoever"
Wait until you see what happens to employment when all the fast food restuarants switch over to robots!
They better start accepting snap cards, cuz there wont be anymore customers left.
We will never realize full employment of human resources until we discover the value of a life devoted to serving Obama. Praise him!
Record 20% of Households on Food Stamps in 2013 January 21, 2014 - 5:34 PM (CNSNews)
The USDA says that there were 23,052,388 households on food stamps in the average month of fiscal 2013, an increase of 722,675 from fiscal year 2012, when there were 22,329,713 households on food stamps in the average month.
http://cnsnews.com/news/article/ali-meyer/record-20-households-food-stam...
Forward!
Someday the Baby Boomers will start retiring or most likely die off. Who is going to be prepared to replace them? Guess what, nobody. Witness the soon collapse of US corporations.
Please don't give me that immigrant line of bull either....
Wait until you see what happens to profit margins when >50% of the population (low-skill portion) can't find a basic wage.
". . . when >50% of the population . . . "
The lazy bums! What's wrong with them? Why don't they borrow to buy plastic crap from China. They could do second mortgages on their homes? We need them. The economy needs them. Just no initiative, that's all.
Craig
I'll repeat what I've said before...
If no one had a job, the Initial Jobless claim number would be ZERO.
The King Liar in Chief has new clothes!
Jay Carney: "Due to the fact that looking for a job has been revised to "full employment", and, let's face it, giving up completely is hard work, we can now triumphantly proclaim that the unemployment rate is 0.00021%."
With the abundance of slave labor, indeed, "there is no incentive to increase employment"
It's not slave labor - it's called business friendliness. It comes in the forms of:
Fantastic, in-depth analysis. Thank you for that great contribution.
It's not so much advances in technology that is hurting employment, it is a desire by corporations to avoid supporting people and society. It's a complex form of Soylent Green, they're just not turning the bodies into food (yet).
Tapeworms and other parasites will eventually kill their host, but they keep on feeding.
Meanwhile, Microsoft unveils new larger tablet; they're calling it a "laptop".
um.. Duh. it's a Recovery. i will most likely be buying a New Car soon. :-) (or not)
Eliminating employment and income taxes will boost hiring and reduce dependence on the government resulting in reduced funds needed by the government, therefore less taxes needed to be stolen from working people and those that employ them. So, like I said, let’s eliminate the employment and income tax.
"So, like I said, let’s eliminate the employment and income tax."
So, isn't that what we're doing? By eliminating employment and income, viola! No Employment and Income Tax!!!
Craig
Start making the unemployed a protected hiring class and watch that avenue of avoidance fall down.
"[Side Note: Just a quick observation suggests that when initial claims have previously been at these levels the economic cycle was closer to its end than its beginning.]"
Truer words were never spoken.
This economy can only support so many workers under our new economic realities.
The rate of annualized profit growth is at a low as well. Companies are already beginning to right-size their expenditures and head counts for the new Amerikan Reality
I have to agree... Wall Street has, indeed, taught Companies well, that reducing labor is the way to increase share value.
My question is, who in the Hell are their customers?
Craig
That and borrowing billions to buy back shares.
Home Depot, disappointing the Street, annouces yet another multi billion dollar buyback.
Here is what no one else is telling you:
Home Depot had profits of 5.838 billion in 2005. Their long term debt was 2.672 billion
For 2013, they earned 5.385 billion and their long term debt is at 14.691 billion and climbing.
Frankly, I prefer the Home Depot of 2005 versuse the Home Depot of 2013. They will not be spending their future earnings on growth. It will be to repay debt.
Luckily no one needs worry about pesky profitability anymore. Now all income is derived from fictional stock evaluations, and buying back stock with what cash you can borrow accomplishes that nicely. The other great fortune in this ploy is that as we all know, the stock market always goes up...forever...so that stock option bonus is as good as gold!
"They will not be spending their future earnings on growth".
They have saturated that market and therefore their is no appreciable expectation for growth. Their are three HDs w/in seven miles of me.
" It will be to repay debt".
They will not be repaying that debt. That debt will continue on its current path 'til they enter bankruptcy and ultimately liquidation. This is no more than six years out.
Investors should watch earnings/debt going forward from now 'til 2017. If current debt grows i'd short that stock anticipating bankruptcy by 2020.
If one really wants to delve into their numbers you will see that YoY sales are down on a per item basis. Everything they sell has gone up 20%.
HDs real value at that point is their real estate.
LOL! I have a feeling that they are going to start asking themselves this very question real soon...
"Ummm...hey guys? I hate to bring this up, but, did anyone figure out where our FUTURE profits are going to be coming from?"
There are going to be a lot of Homer Simpsonesque "Doh!" 's heard in boardrooms all across America...
The longer you draw unemployment the harder it is to find a job. Employers discriminate against people with holes in their work history that are filled with UE compensation.
For that reason I purposely call my unemployed time a Consulting job. I never call it Unemployed Compensation
Give all the unemployed leaf blowers and station them every 5 feet around the peremiter of the lower 48. Have them blow leafs on left to right basis creating a continuous circular flow of leaves in perpetual motion around the continental USSA.
This will create 'full employment' among the prols and generate enough noise to deter our Sud Americano friends from jumping the border.
If you waste your time looking for a job you might miss your chance to buy a house at zero down, 125% LTV. "There's never been a better time then now to buy a house," the NAR still says.
"... Don't be locked out ... Stop looking for a job and grab one of them at zero down, never pay back!"
What I am envisioning is a brave new world. A world where everyone has a job and we don't burn any more of that awful carbon stuff to power our homes. The world I see for our future is one where everyone who lacks the skills to be an important government official is provided a job pedaling a cheap Chinese bicycle type generator. We report for our 12 hour shift at a government power generation and re-education center conveniently located in the basement of our twelve story apartment building where we each enjoy identical 350 sqft apartments, eliminating any jealousy. This brave new world also eliminates any need for money as everything we need is supplied to us at the very reasonable rate of all of our productive life span simply pedaling that generator. The slogan for this utopian existence is "power to the people". It will be beautiful...
Everything has a point of view, especially freedom and liberty. AS people lose their jobs and job skills, the economy will continue to deteriorate. At some point all of the dead weight will have to be put to use, and likely in the most base way possible. We WILL become the Matrix, maybe not powering the system with our body chemistry, but we will be powering it, even if it is only pedaling a generator. Dead weight will be consumed.
No one ever mentions that, as employment becomes less and less secure, more and more part-time, low-salary, short-term, contract work and casual, fewer and fewer of the laid-off even qualify for "initial claims".
The numbers qualifying will inevitably dwindle too, as incomes stagnate or fall.
i remember moving around a LOT more back in the 90's when jobs were Much Easier to obtain... i had a a LOT of cheap rental homes as well... (i was Hard to Find) :-)
Excellent point.
Benefits will eventually follow if things get bad enough. Either that, or the more sensible thing would be to make less secure forms of work not be a condition of accepting work - but as forms of work that compete against a highly secure (and equally available independent of skill level or qualification) default.
How do we reconcile the April jobs report that showed 288,000 jobs being created and 806,000 people dropping from the work force with economic reality? My take on the recent jobs report is that as spring comes upon us ever optimistic and more desperate Americans are being pushed into making a decision as to whether to leave the work force or take a lower paying job that is often part time.
Yes, people are busy scurrying around, but it should be clarified not at a fast pace. The question then arises as to how this will spill over to economic policy and are consumers changing their spending habits? More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/reconciling-april-jobs-report-wit...