The Labor Department released the latest data not only on jobless claims but also on productivity as well. While productivity fell in the latest report by 1% it is virtually flat this year which is where the real interest in this story begins.
Productivity is a double-edged sword for investors because it directly impacts the profit margins of corporations and ultimately the bottom line. However, the economy, and primarily employment, is negatively impacted by increases in productivity. The more unit hours that can be squeezed out of a single employee means less overhead and payroll costs for corporations. Increases in productivity has massively boosted the profit margins of U.S. corporations since the demise of the economy, as we knew it anyway, in 2008.
As profit margins have soared over the last 8 quarters and once again are rapidly approaching new highs, revenue at the top line has not done the same. In fact, revenue is only up fractionally compared to the underlying profit margins as consumption has been constrained by hard economic times and, ironically, productivity which has kept hiring and wages suppressed.
Jobs, Jobs, Jobs…
This has the been the rallying cry of the current administration yet to their get astonishment jobs simply have not come roaring back. In fact, as you can see in the attached chart, the black line represents the employment to the total population ratio. Currently, at levels not seen since 1984 the real unemployment rate is closer to 17% rather than the 8.8% rate as espoused by the government. You realize this fairly quickly when you have 6 applicants for every job opening and McDonald’s receives 1,000,000 applications for 65,000 part-time and full-time burger flippers. This isn’t the upside you are looking for in employment. However, productivity is a contributor to the meager job growth in today’s economic environment. Corporations are realizing the value in higher profit margins driven through employee squeeze. Real wages have declined over the last 5 years as employees work longer hours for roughly the same pay. In the real world it is not uncommon for a single employee to do what used to be the jobs of two and three people. The is the new economy and you better get used to it.
Weak Economic Growth In The Works
However, weak job growth isn’t the only victim of higher productivity – the economy gets hit as well. Currently, as corporations try and maximize the employee squeeze productivity has rebounded sharply back to levels that are normally associated with previous recessions. However, this higher productivity has also led, as we stated previously to suppressed wage growth as high levels of job competition gives employers the negotiation power to hire cheaply. With an economy that is currently built on 70% consumer spending – lower wages and lower discretionary income are impacting the ability for the economy to recover.
Headwinds More Than Tailwinds
The problems facing the economy are very real and while there has been a tremendous amount of fiscal stimulus injected into the system via various programs from the Government to the Federal Reserve – there is actually very little to be shown for it other than the fact that we are not in a severe economic depression. However, with the majority of Americans, according to the recent Gallop poll, stating that they believed that we were in a recession or depression, maybe the real difference is only in the labeling.
The real issues facing the economy must be dealt with and while stimulus has kept the boat from sinking it doesn’t mean the boat isn’t half full of water either. For the first time since The Great Depression we are dealing with a balance sheet recession. Money isn’t flowing through the system because banks are not lending – it is because small businesses, your biggest creators of jobs, aren’t borrowing because, according to the recent NFIB polling, “Poor Sales” are their biggest concern and close to the lowest number of small businesses on record believe that this is good time to expand their business. The deleveraging process has to be completed before the economy can organically begin to grow again and this is a long and arduous process that takes years to complete. Unfortunately, the more stimulus that is thrown at it – the long that it will take.
The list of headwinds is long from the debt, to the deficit to poor monetary and fiscal policies. The big problems don’t have any answers, however, when it comes to your investments and your retirement money – I would bet on the side of caution because there are lot more traps, pitfalls and potential catastrophies on the path to economic recovery – the goal is not to hit every pot hole on the way to your destination.