bizzXceleration: Performance, Value and Profit

Long-term Employment Trends

 In fact the news on the job creation front is, it turns out, as bad as it's been in decades (including during the GD - as CR points out in his post). The top sub-chart shows private and public employment so the stack gives us total employment. We had longish periods of flat/sluggish job growth in previous severe (or what passed for back then) recessions but we've never had a decade where net job growth was negative as it is now.

If you look at the bottom chart that terrible performance, how far we are in the hole or how unlikely we are to dig out of it anytime soon should come as no surprise. It starts with YoY% growth/change and looks at the trends. The straight-line trend is down, rather severely in fact. The non-linear trend is even scarier in a way - it tracks the straight-line for most of the time and then falls off the cliff. As if you all needed to be told that.

Growth = Jobs

 The question that naturally follows from that is what happened? Why has job creation been so poor? Well as it turns out there are, again, no real surprises. But knowing what the numbers are should make things pretty clear as to the outlook.

The top sub-chart gives us, in read it off the chart form, the relationship between real GDP growth and job growth. You might remember that we need ~2.5% growth in jobs to breakeven on labor force and productivity growth (roughly speaking that 450K/month benchmark). That, in turn, requires 3.5-4.0% GDP growth.

The bottom sub-chart tells us how we've been doing on that front. The only time we got net new job creation was during the late 90s, when we also saw real GDP growth pushing toward 4.0%. Since 1960 job growth has been getting weaker and weaker, with the straigh-line trend negative since then.

You can go back and think about what was going on, e.g. the malaise of the 70s as the excesses of the 60s caught up with us and combined with the oil shocks to retard growth, the slight improvements during the 80s as policy changed and the damage began to self-repair on thru the early 90s. But it was only when Investment during the Tech Bubble pushed growth up that jobs began to recover back to the halcyon glories of the 50s and early 60s.

Wages, Economic Health and Prosperity

 If you thought a decade of null performance on the markets and jobs was bad how about real wages - which are the "beating heart" of economic prosperity? If real wages aren't growing neither is long-term demand. And if l.t. demand isn't growing then there's no investment and ultimately no real profits. If you look at real wage trends (red) they've been the next thing to zero growth since 1965. Personal Income is slightly better though they dropped severely during the 60s and 70s before flattening off and beginning to recover in the 80s and  picking up a bit in the 90s before falling back off a cliff.

Profit, Wages and Capex Trends

Well not exactly though on first pass it might look like it. The top sub-chart shows the shares of real GDP that went to Profits, Capital Investment and Wages from the late 40s to now, which reinforces all the things we saw in shorter time-frames. But the 50s and early 60s were indeed a "Golden Age" with significant improvements in Wages growth. Strangely enough Profits performed well during that period as well, and Capital spending showed a rise. But in the late 60s Wages began a long downhill slide that only leveled off and stabilized in the 90s. Profits dropped almost as badly early on but then began climbing. Part of the problem was that capital spending picked up, partly (we suspect as the result of investments required to adjust the capital and technology base to less energy use, partly because of various regulatory burdens, e.g. new safety regulations and partly to adjust to labor force changes). But then capital spending leveled while profits surged.

When you compare aggregate growth in GDP and Profits from 1950 to now some very odd behaviors appear. They ran roughly with GDP until and then started lagging badly before beginning to pick up again, reaching a mini-peak at the height of the Tech Bubble. But it was the decade of the 00s when they really turned into a bubble - one that burst. On the surface then you would argue that profits resulted from no hiring or job creation and insufficient investment to increase the growth of the economy.

Profits Pass Two: the Triumph of Finance

 When you break Profits down into Finance vs. Non-finance a much different story emerges. Real profits from companies that made real things started badly lagging overall economic growth until they did, in fact, experience their own mini-bubble this decade.

Where the profits really went was into the Finance Industry, beginning in the late 80s; which, interestingly enough exactly coincides with de-regulation. Then they began exploding toward the very end of the Tech Bubble and metastasized this decade on the backs of leverage and funny accounting. Until getting popped and wiping out the better part of a decade's worth of paper profits.

The bottom sub-chart compares the relative GDP shares of Finance, Non-finance and Wages. Basically confirming the story.

The Sad Tale of the Real Driver: Debt

The next chart starts to bring us to the real root of the problem, which is the metastatic growth of debt. Consumer debt, business debt and, especially, Finance debt. The next chart shows total debt by sector as GDP multiples. BtW - interesting to note that the best behaved folks around were the Federal and State & Local governments, who actually lowered their total debt levels.

Consumers and businesses however started ramping theirs up. In other words our economic growth, such as it was, was fueled by debt and enabled by financial deregulation. When we argued in the last post that the business case for Finance being an effective allocator of capital was not true that would seem to be born out. But the real champion debt issuers were the Finance industry themselves. To the extent that those funds were used to re-loan elsewhere there may be some over-lapping double-counting. But to the extent that Finance debt was use to fund "investment" and trading (and bubbles and funny structured debt) the numbers are valid. If you want to see the chart that breaks down the details a little finer click here.

Growth vs. Savings vs. Investment: Debtor Nation

 This chart shows the long-run trends in economic growth, savings and investment. Notice that, on the whole, the highest growth rates were when we had the highest savings levels. When Savings began dropping precipitously growth started slowing down until it fell off another cliff recently. Savings meanwhile went to nearly nothing, and then went negative. And Investment growth nearly died.

The lessons seem fairly clear. Growth creates jobs, jobs drive wages which creates prosperity and savings drive Investment which in turn supports growth. If we want to get our feet back under us we need to return to being a nation of savers who investment in productive uses of our capital. So, sequentially, we're facing a strategic and structural outlook of poor job creation, long-term constrained demand as the consumer (and business) deleverages and a still bigger challenge in getting back to the kind of high-growth economy that benefits us all.

Debt vs. Savings

Just to bring that critical point home let's take a look at Debt vs. Savings. Here we can see where the precipitous decline in Debt (a good thing mind you) happened during the period of highest economic growth. Then debt started slowly increasing, then accelerating and then accelerating some more. Until we reached a point where the structural Savings rate feel into a canyon, not off a mere cliff.

Case closed, end of story. We need to save more, invest more and, hopefully, grow more.

In the meantime we've just defined the New Normal - which is the environment of de-leveraging and slow growth while we fight to re-establish the kind of regime that's pro-growth.