VOL. 128 | NO. 115 | Thursday, June 13, 2013
The Worldly Investor
Glacial Job Creation Equals Glacial Stimulus Reduction
By David Waddell
This has been the weakest job recovery on record. The 175,000 new jobs created in May did slightly exceed analyst estimates, but also slightly trailed population growth. The percentage of the U.S. adult population with a job equals 58.6 percent. This number hit 67 percent back in 2000. Adjusting this ratio for the “retirement effect” to only include those aged 25 to 54 increases the rate to 76 percent, but it still hasn’t budged for three years and is 5 percent lower than it was in 2007. This cannot be explained by retirees. Our job creation machine is malfunctioning.
Popular explanations for this malfunctioning include discouraged job seekers, cushy welfare benefits, off-shoring, skills obsolescence and faulty marketplace demand. While all of these factors contribute, low confidence likely contributes most. The positive BLS report issued Friday addressed labor statistics, but did not differentiate hiring by company size. According to the ADP report issued earlier in the week, small- and medium-size businesses added 97,000 jobs in May, while large employers added 39,000. According to the SBA, small businesses (less than 500 employees) account for 64 percent of net new private sector job creation. Clearly, as go small businesses, so goes employment.
It doesn’t take many conversations with small-business owners to identify pessimistic undertones. Escalating taxes and regulatory burdens add frustration, cost and complication. The Affordable Care Act, Dodd Frank, Sarbanes Oxley and the volumes of agency generated regulations may eventually increase the equality and quality of the American marketplace, but in the meantime they are major distractions for small employers. Additionally, tax rates (more so expected tax rates) drive a wedge in between hirers and hires. Since the revenue pie gets cut between overhead, owners, employees and the government … if the expectation is that the government’s share will grow, someone’s share must shrink. Self-preservation instincts prioritize those currently on payroll over payroll additions. We all intuitively know this, but we twist it into a political argument rather than accepting it as an economic fact. The National Federation of Independent Businesses also releases monthly employment data. According to the most recent data, 9 percent of small businesses added employees last month, while 12 percent shed employees. The remaining 79 percent of small-business owners made no change to their employee populations. Sadly, only 5 percent of small businesses have near-term hiring plans, as compared with nearly 20 percent pre-recession.
The dual mandate of the Fed roughly dictates that they keep policy tight enough that inflation doesn’t drift above 2.5 percent, and lose enough that unemployment doesn’t drift above 6.5 percent. With inflation at 1.1 percent and the unemployment rate at 7.6 percent, the Fed is failing to achieve their directives. Changing policy propaganda may deter excessive speculation spurned by long-term low rates, but actual restrictive changes to policy would only add further disincentive to small-business payroll decisions.
Why did the market rally big Friday? Because it now understands that Bernanke’s taper talk before Congress was a wolf cry. Easy money is here to stay.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.