Crossing the Tipping Point II: Employment, Wages, Demand
The immediate prior post on the state of the economy ran up one of our redder red flags because we thought it indicated that recent GDP and other data told us we were beginning to tip ove into a more rapid downtrend. The last chart in that post talked about pressures on future Consumer demand from falling real wages and dropping employment. Here we're going to dig into that further by taking a deeper dive on the elements of consumer demand, particularly Employment and Real Wages.
Current Situation
Let's start with the existing situation and take a look at the multi-chart which brings all these elements into view. The top sub-chart shows the YoY% change in Employment combined with the total Payroll employment number. Notice the latter has been flattening off for some time, which you see in the gradual slowing of the former. Which has now for the first time touched zero. Given the Birth-Death adjustments this is likely to be revised severely downward as better sample data becomes available. The bottom sub-chart shows Real Wage, Employment and their sum on a YoY% basis. Notice the real spike due to falling oil prices and the return to a zero or slightly negative growth rate. If W+E continues to fall watch out below in the economy - even if it just stays were it is that'll mean severely tepid demand for a very long-time. So much for a V-shaped recovery and 50% earnings growth in the 4th quarter, eh ?!
Employment Trends
One of the things that surprised everybody was the jump in Unemployment, which means that more people who want to work aren't finding jobs. Part of the anemic and non-organic recovery was that lots of folks got discouraged and gave up...these are the folks who're still optimistic. Nonetheless changes in total employment and unemployment mirror each other. The top subchart looks at a shorter-term horizon for the YoY% changes in Employment and Unemployment (on an inverted scale). Everybody got really scared three months ago when the increase in Unemployed jumped over 20% but it has now remained over 20% for three months. That's a real, big ugly canary and lies at the heart of the health of the economy. The bottom sub-chart runs back to 1980 and tells you lots of things but two are important here. First there's a standard, predictable, cyclical pattern and the current data fit right in. Second all these different employment indicators have some wider swings in the short-term that are useful to look at but in the long-term they tend to move - trend and cyclical-wise - together. A third thing that caught our eye....the increase in Unemployment looks to be as steep as any past downturn !
Long-term Malaise
Have you ever wondered why the general feeling has been downright depressed despite the apparantly good employment and economic news over the last several years ? And why, despite the resilience of the economy so far, that everyone seems to be getting depressed (we're all whiners now) ? Well we keep talking about poor job creation, non-organic recovery and so on and this chart composite puts some evidence behind that. There's a rule-of-thumb that says we need about 150K jobs/month to keep up with population and labor force growth and offset productivity increases. You can debate that but the debates are in a pretty narrow range (130-170) so we use 150K, or 450K/quarter as our strategic bogie for neutral job creation. With that in mind the top chart puts it all in a nutshell - monthly job creation (Jobs-150K) only briefly rose over zero and has been negative ever since. If you wonder why labor costs are not rising or why everybody's not been happy there it is.
Actually if you wonder why all the companies have been buying back their stock and not either hiring or investing there it is. You don't add capacity when there's no future demand growth. The apparent. The bottom sub-chart makes this entirely clear by running the analysis back to 1980 and letting you see the cycle in aggregate new job creation, i.e. the running total of net new jobs. Basically we're over 4 million jobs in the hole - talk about demand destruction !
Consumption Demand
Which brings us back full circle to where we lead into this. The accompanying chart shows the long-term changes in Real Wages, Employment, W+E and Consumtion going back to 1980. It should reinforce our assertion that W+E ==> Demand, that they are cyclical, that there was an oil-price anomoly in late '06 and that we're in real trouble now and it looks to be getting worse. But decide for yourself - here's the evidence !