More than one in ten U.S. residents interested in working is unemployed, according to the 10.2% unemployment rate released this morning, the worst reading since 1983. Adding in discouraged workers who are not actively seeking a job and those working fewer hours than they want, the number jumps to 17.5%. For a huge number of these newly jobless, the lay-offs are not just temporary; their jobs have been eliminated.
Many analysts point with optimism to the fact that the monthly decline in payroll employment is shrinking. It is hard to find “green shoots”, however, when more than half a million Americans received pink slips last month alone. About all that can be said by way of encouragement on the employment front is that the situation is deteriorating at a slower rate than earlier in the year.
On the other hand, we are seeing economic growth and corporate earnings pick up around the world. The rate of growth is remarkably strong coming off the lowest readings for economic production and corporate earnings in years. The stock market has exploded upward since March, obviously celebrating the attractive rates of growth. Skeptics emphasize the need to look not just at growth rates but at levels of production and earnings as well. This week no less an authority than former Federal Reserve chief Paul Volcker downplayed the concentration on growth rates by pointing out that fundamentally we are still very near the bottom.
Ultimately it is highly improbable that we will experience a sustainable recovery until the U.S. consumer resumes significant spending. What is still far from clear is whether or not the consumer will soon bounce back and resume his/her traditional role as the world’s buyer of last resort. Count me among the skeptics. The damage being done to household balance sheets from this recession’s flood of pink slips is unprecedented. Coming so soon after the massive wealth destruction inflicted by the collapses in stock prices and residential real estate earlier this decade, that income loss has profoundly diminished the consumer’s ability to spend as before. The psychological damage done by the disappearance of so much of the average household’s financial foundation will likely reduce willingness to spend for many years to come.
Much of the recent increase in consumer spending has been induced by government stimulus. It is certainly possible that increased automobile and home buying simply reflected an acceleration of planned purchases in order to take advantage of tax credits. We can only speculate on how the consumer will react when government stimulus stops and, all the more, when it begins to be withdrawn.
Businesses rebuilding depleted inventories and increasing capital expenditures can generate improved economic statistics in the short term. Ultimately the rationale for such expenditures must be the reestablishment of consumer demand. That won’t happen, however, until consumers head back to work.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.