In a December 4, 2010 Miami Herald article titled, Bleak jobs report conflicts with most recent data, by Kevin G. Hall, he poses the question of why the jobs data doesn’t sync up with the other positive economic indicators and seems to intimate, maybe the unemployment number is incorrect. Further, though not mentioned specifically in the article, the Florida unemployment rate remains one of the highest in the country at over 12% with Palm Beach County hovering around the statewide average. The article did note Dade County unemployment at 13% and Broward County at 10.1%.
Fed Chairman Ben Bernanke has indicated that he believes the unemployment rate will remain stubbornly high and stay above 7% for the next 4 years. This even though the Federal Reserve for the first time I can remember taking an intentionally inflationary stance through expansion of the money supply.
So why the disconnect between the Fed, Wall Street, analysts & main street and the government’s legitimate desire for lower unemployment (yielding more taxes)????
My take on this follows.
Main Street Vs Wall Street
The Fed’s move will continue to lower interest rates due to more liquidity and continued soft demand. My Dad used to say, “When rates are low, stocks will grow” and this is playing out now on Wall Street with the continued rise in the stock market. Some see this as positive and restoring the 401Ks to pre 2008 levels. However, if inflation occurs, the nominal (inflation adjusted) value of the portfolio will diminish.
The Fed’s policy will weaken the dollar against foreign currencies making U.S. goods and services abroad less expensive and foreign goods and services in the U.S. more expensive.
For the most part, publicly traded companies are flush with cash and have no incentives to hire U.S. employees, particularly those in the employee sector hardest hit, those without higher education of which many positions have been outsourced over the past 10 years. The companies are profitable and are sitting on record amounts of cash reserves. So Wall Street is happy!
However, job growth is not going to come from Wall Street. Over 27 million small businesses in the U.S. hold the key to reducing the unemployment rate.
By the way, I would argue that inflation is already alive and well. Gas is up, food prices are up and most other prices are on the rise. The drag on the inflation rate is the continued decline in home values, which as discussed further below.
The American Consumer is Broke
In a December 6, 2010 Miami Herald article by David Roda, titled Fed’s QE2 plan is too risky and too expensive, makes the following point:
“Consumers are so deeply mired in debt that a disproportionate number do not meet standard lending criteria. They have no choice but to reduce debt, which translates into reduced spending. Because consumption represents approximately 70 percent of U.S. GDP, the economic drag will be significant and long lasting regardless of how much money the Fed makes available.”
Why is the consumer broke? Simple, they are unemployed, upside down in their homes, many have spent the equity through home equity loans and have no limit left on credit cards either from excess spending or in a number of instances a credit card company that seems to take pride in reducing credit limits on performing accounts.
Certain Industries Take it on the Chin
Anything touching real estate continues to struggle. Commercial and residential contractors and their subs are out of work. I know of a Subcontractor in the area that has zero backlog going into next year. I spoke with a home builder at breakfast yesterday morning and his point was simple, “To survive I have to go back to the way I started, 60 hour weeks, handling all of my bills myself and running jobs myself.” Does this sound like an industry ready to hire?
So make no doubt about it, construction employment in Florida is at the center of the storm. I have a client that has seen a multimillion dollar reduction in his sales to the builders and other contractors servicing the residential market and another that is positioned to be a market leader once there is an up tic in building because he survived the downturn when his competition did not. But the real estate market needs to work through inventory and foreclosures to move forward.
Finally businesses need to be able to plan. Hopefully the recent compromise on taxes will go through extending the existing tax rates for an additional two years for all Americans. Why is it important to continue for all many ask?
The wealthy drive the economy top down through investment, and the middle class drive the economy bottom up through consumption. Remember, not only does the top marginal rate on earned income go up for most U.S. taxpayers January 1 if there are no changes, the capital gains rate would go up as well, penalizing investors when they exit their investments.
Additionally if the business is taxed as a Subchapter S Corp or partnership, the increased tax liability will reduce the amount of capital available to grow the business and subject the company to some of the highest company tax rates in the world!
The new healthcare law also has many unknown and perhaps unintended consequences. One client of mine, a 10 person manufacturing company, has experienced a $5,000 per month increase in their healthcare costs. This is the equivalent of a one to one and a half full time equivalent employees. Not a help in hiring new staff!
Unfortunately the unemployment rate requires more than a magic bullet and there are no easy fixes. But until the economy works through a number of the issues above, unemployment will remain higher than anyone would like…….Wall Street, Main Street, or Washington.