bizzXceleration: Performance, Value and Profit

Just to put some perspetives on it let's take a look at a composite long-term chart. The upper part shows total employment and YOY% changes since Q1 1980. There's been a lot of discussion about how week this "recovery" has been in terms of job creation (Job Creation: Post-Recession Recovery Cycles from the BigPicure for example) which we won't repeat here. However that weakness shows up the growth rates which never reached the levels of prior recoveries. Something that most commentators have missed perhaps, which could be very important. There's a meme floating around that because fewer jobs were created fewer will be lost. An argument we find more wishful thinking and disingenuous than grounded. Fewere jobs were created because companies were more fearful and therefore careful about hiring and capex. There were more fearful because of growing worldwide competition and the impact on profits of inlfation. This represents a fundamental change in the job strenght of the economy. Which leads to the 2nd sub-chart which shows the consequences of the Red Queen Effect - you know running faster and faster to keep up ? Well the population grows about 1.5%/year so any new jobs below that level means a drop in per capita hiring. When you factor in productivity growth the rough rule of thumb is that the economy must create 150K job per month (450K/Qtr) to keep the Queen in place or she falls behind. We've been falling behind. Net new jobs (New Jobs-450K) dropped abruptly and sharply this last quarter, which is scary and dangerous. Over time (here since 1980) you can look at aggregate new job creation, that is the running total of Net new jobs, and see where we stand for the strategic health of the economy and what consumer demand might look like.

Just to put a point on that last statement let's remind ourselves that the engine is Consumption and the drivers of consumption growth are growth in Employment and Real Wages. We got a gift from the Econ Gods when real wages spurted up in late '06 as oil price declines pulled down inflation and reduced the implicit oil tax. Both of which have reversed, resulted in a very sharp drop indeed in the YOY% growth in W+E (Wages + Employment). Consumption still appears to be holding up but let's please remember the lag structure we're working with. Consumption is likely to turn down abruptly just from the W+E drop, which results from the drop in real wages. As Employment worsens this'll accelerate. And let's also remember that the Housing ATM has gone away and the ability of MEW to support consumption, which has held up consumer demand despite very poor job and wage growth, is about gone.

A final key point - none of the headlines, talking heads or punditocracy appears to be reflecting the normal economic cycle lags in their comments. Certainly it's not being reflected in analyst earnings estimates which are holding up the markets.