In June 3rd’s blog “Job Shocker Report” we had quoted NFIB’s Chief Economist, Bill Dunkelberg, as saying; “After solid job gains early in the year, progress has slowed to a trickle. The two NFIB indicators—job openings and hiring plans—that predict the unemployment rate both fell, suggesting that the rate itself will rise. May’s job numbers will disappoint; meaningful job creation on Main Street has collapsed…one in four owners still reporting ‘weak sales’ as their No. 1 business problem, there is little need to add employees, especially with the uncertainty about future labor costs arising from new regulation and legislation. And, if Congress doesn’t deal effectively with the trillion dollar deficit, we’ve got plenty to keep us worried.”
It is therefore not a shocking surprise that in today’s NFIB Small Business Survey that the percentage of businesses planning to increase employment in the next 3 to 6 months had a very sharp decline in the recent report. This is the primary discussion that we had in last weekend’s newsletter about creating 5% economic growth in the U.S. and why it may be as elusive as the unicorn. Businesses can not create “jobs, jobs, jobs” without an incremental demand pick up from consumers. Unfortunately, there is a dangerous cycle at play here that will be extremely difficult to break and one that CAN NOT be fixed by monetary stimulus programs.
In the June 13th article by Louis Woodhill entitled “Tim Pawlenty Is Right About 5% Growth” he states that; “The truth is that sustained, 5% real economic growth is not only realistic, it is necessary. Only a prolonged period of very fast economic growth will get unemployment down to a tolerable level in a reasonable length of time.” The problem with the idea is that 5% economic growth comes from consumers and businesses and they are inextricably linked together. If consumers are not spending money, making “poor sales” a primary concern of businesses, then businesses have no need to invest capital into expansion, increasing inventory or hiring. With wages declining on a year over year basis, food and gasoline consuming more than 20% of wages and salaries, 1 in 5 working Americans on food stamps, and 7 people applying for every job opening – it is no wonder that the American consumer is hunkering down. However, this attitude fuels the problem. The more the consumer hunkers down the less they spend which in turn leads to more concern by businesses about “poor sales” being a primary problem. Therefore, they don’t hire or expand their business. The individuals that do have jobs don’t press for higher wages because with 7 applicants for every job opening there is a deflationary pressure on wages. This deflation of wages in turn lessens spending power, combined with a weaker dollar deflating real net income, which in turn reduces purchasing power and therefore continues to drive “poor sales”. It is a vicious cycle, that as I said, is very difficult to break.
Louis states that additional capital investment is required in NON-residential areas to achieve 5% economic growth; “The amount of additional capital investment that would be required to sustain 5% real growth is not daunting. Normally, the U.S. devotes about 15% of GDP to nonresidential capital investment.” Again, the problem with these sentiments is that they are fine for fanciful observation, however, in reality you cannot promote businesses to increase spending to solve economic problems UNTIL you resolve the consumer equation.
As you can see in the chart the concern of “poor sales” continues to drive employment attitudes and with the recent spate of weakness in the economy is not surprising to see hiring expectations declining. However, since 70% of all hiring is created by small businesses then the Administration should be extremely concerned about future weakness in the employment trend over the next several months. The recent sharp decline in hiring expectations will show up in weaker employment trends and a higher overall unemployment rate.
This is why the plans by the Administration, Pawlenty, Cantor and others to create economic growth by trying to coerce and bribe small businesses will continue to fail. Plans to eliminate capital gains taxes, cut payroll taxes, etc. that are focused solely on businesses will continue to assist businesses in becoming more profitable, however, it will not entice them to hire more workers, invest capital or expand inventories if there is no end demand pushing them to do so. This is why businesses are hoarding cash – it isn’t because they just want to do so, it is because the current economic environment, weak consumer demand, poorly constructed economic policies and the threat of future payroll and healthcare cost increases are clouding their outlook.
If you want to fix the equation you have to start by focusing on solving the concerns of the consumer and households. Unfortunately, 30 years of excess consumption, leverage, and declining savings are not only going to make this a long, slow and difficult process – it will also be one that cannot be manipulated by monetary policy. Balance sheet recessions are a function of time and the deleveraging process will have to take its natural course. It is survivable and America will be much stronger after the cycle is complete just as it was after the last cycle that was concluded at the end of the last American depression.