Back in August, we shared historic data that show jobs always lag in economic recoveries. Well, based on the November jobs report, we could say that they're still lagging as the U.S. employment picture remains bleak.
One key challenge to job creation that will never go away: unless we're talking about rapidly growing companies rolling in cash (which may lead to relaxed purse strings and an increased propensity to spend), about almost every corporation we know remains extremely -- perpetually -- focused on reducing costs and improving productivity. In other words, squeezing more from less. The aim, of course, is to drive better margins and earnings to yield higher returns on capital and share prices. Not a bad thing for shareholders, but bad for job seekers.
Meanwhile, to combat the debt/deficit problem, many U.S. federal, state, and local government organizations are shedding jobs, as are other developed markets/regions such as Europe. Plus, the long cycle real estate market will likely remain slow no matter what the Fed does (long cycle = traditionally seven years up, seven years down, seven years up, etc. -- the last up-cycle lasted nearly ten years and we're probably in year four of the current down cycle). In perverse fashion, extremely low interest rates propping up what we see as still inflated home values across much of the country.
Highlighting government data, Calculated Risk Blog points out the following: Real Estate Brokers' Commissions Lowest since 1982 as Percent of GDP (click to enlarge) -
As if all of that isn't enough, we have the growing entitlement problem to rectify - from Wikipedia's U.S. Federal Budget page:
AND, expected shortfalls (per 2007 estimates, also from Wikipedia):
Although upside down demographics and political differences complicate this challenge, clearly something must be done. The retirement age should be increased and certain benefits reduced so that programs (and the U.S. government) remain viable. For an excellent read on Social Security, we recommend Fortune Magazine's thorough piece from last July:
- The next great bailout: Social Security - Fortune's Allan Sloan takes a look at the troubled retirement program, why it's more important now than ever - and how lawmakers can repair it.
Considering all of the above, we can reach an obvious, wide-spread conclusion: We're in somewhat of a pickle without easy solutions.
Of course, all of the challenges are well-documented in the press. The consensus view is seemingly that we're doomed and that the U.S. (and Western Europe for that matter) is a slow shipwreck, something akin to the fall of the Roman Empire. Maybe. Importantly, investors can mitigate this risk by holding a globally diversified portfolio and investing in companies with expanding international exposure.
For the stock market, volatility is par for the course as headlines sensationalize the problems (as usual) -- such as that from CNBC commentator Art Cashin: Spain Could Be the New 'Lehman'. High debt obligations coupled with high unemployment are serious issues, but -- last we checked -- Spain was/is a country, not a highly levered financial institution. For those interested, here's the latest news on Spain from the WSJ.
Yet, interestingly, all of our problems are self-created, which suggests that -- one way or another -- the world can find solutions. We remain in the more optimistic camp and keep tabs on corporate fundamentals across sectors. Here, we see mostly favorable news. Before we touch briefly on "fundys," we should note that November's unemployment report also included some good news: for what it's worth, previously reported October and September figures received positive, upward revisions -- directly from the BLS report:
- The change in total nonfarm payroll employment for September was revised from -41,000 to -24,000, and the change for October was revised from +151,000 to +172,000.
Finally, an 11/29 headline from Bloomberg out of Europe:
- While European countries slide deeper into debt, the region’s companies are paying off creditors and boosting profits at the fastest rate in seven years.
- Liabilities as a percentage of earnings in the benchmark Stoxx Europe 600 Index dropped 22 percent last quarter, the most since 2003, according to data compiled by Bloomberg. Analysts say annual profit growth in Europe will average 46 percent in 2010 and 2011, more than at any time in the previous seven years. The projected income would push valuations down to the lowest levels on record excluding the three months after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, the data show.
SO, no question, we certainly need more job creation. BUT, continued improvement in the global business environment should lead to more jobs, as we've seen in past cycles.
In sharing key investment musings the other week, we included commentary from Peter Lynch's One Up on Wall Street. Given our economic discussion here, let's conclude with several pieces of advice from Mr. Lynch:
- "Predicting the economy is futile."
- "Predicting the short-term direction of the stock market is futile."
- BUT, "the long-term returns of stocks are both relatively predictable and also superior to the long-term returns from bonds." (for reference: our stocks versus bonds post)
© 2010 Jeffrey Walkenhorst
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