Posts tagged ‘unemployment rate’

Recovering from the Coma

cpr

The patient, the U.S. economy, is sick and remains in a coma. Although the patient was never healthier six weeks ago, now the economy has fallen victim to a worldwide pandemic that has knocked the global economy on its back. On the surface, the physical impact of coronavirus on the health of the 330 million Americans seems relatively modest statistically (4,394 deaths vs. 45,000 estimated common flu deaths this season). However, in order to kill this insidious novel coronavirus, which has spread like wildfire across 200 countries, governments have been forced to induce the economy into a coma, by closing schools, halting sporting events, creating social distancing guidelines, instituting quarantines/lockdowns, and by shutting down large non-essential swaths of the economy (e.g., restaurants, retail, airlines, cruises, hotels, etc.). We have faced and survived other epidemics like SARS (2003-04), H1N1 (2009-10), MERS (2012), and Ebola (2014-16), but the pace of COVID-19 spreading has been extraordinarily rapid and has created dramatic resource drains on healthcare systems around the world (including New York with approximately 75,000 cases alone). The need for test kits, personal protective equipment, and ventilators, among other demands has hit the U.S. caregiving system especially hard.

Given the unique characteristics of this sweeping virus, U.S. investors were not immune from the economic impact. The swift unprecedented downdraft from all-time record highs has not been seen since the October 1987 crash. And although the major indexes experienced an illness this month (Dow Jones Industrial Average -13.7%; S&P 500 -12.5%; NASDAQ -10.1%), the nausea was limited in large part thanks to trillions of dollars in unparalleled government intervention announced in the form of monetary and fiscal stimulus.

Healing the Patient

While the proliferation of the viral outbreak has been painful in many ways from a human and financial perspective, the beneficial impact of the medicine provided to the economic patient by the Federal Reserve and federal government through the Coronavirus Aid, Relief, and Economic Security (CARES) act cannot be overstated. The measures taken will provide a temporary safety net for not only millions of businesses, but also millions of workers and investors. Although last month many investors felt like vomiting when they looked at their investment account balances, gratefully the period ended on an upbeat note with the Dow bouncing +20% from last week’s lows.

Fed Financial Fixes

Here is a partial summary of the extensive multi-trillion dollar emergency measures taken by the Federal Reserve to keep the financial markets and economy afloat:

  • Cut interest rates on the benchmark Federal Funds target to 0% – 0.25% from 1% – 1.25%.
  • Make $1 trillion available in 14-day loans it is offering every week.
  • Make $1 trillion of overnight loans a day available.
  • Purchase an unlimited amount of Treasury securities after initially committing to $500 billion.
  • Purchase an unlimited amount of mortgage-backed securities after initially committing to at least $200 billion.
  • Provide $300 billion of financing to employers, consumers, and businesses. The Department of the Treasury will provide $30 billion in equity to this financing via the Exchange Stabilization Fund (ESF).
  • Establish two lending facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Create the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses, including student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA).
  • Expand the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include a wider range of securities.

Corona CARE to Country

Here is a limited summary of the sprawling $2.1 trillion bipartisan stimulus legislation that was recently passed by Congress (see summary and table below):

  • Direct Payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples, and phase out completely at $99,000 and $198,000, respectively.
  • Unemployment: The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal also applies to the self-employed, independent contractors and gig economy workers.
  • Payroll Taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
  • Use of Retirement Funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back in.
  • Small Business Relief: $350 billion is being earmarked to preventing layoffs and business closures while workers need to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to 8 weeks of financial assistance. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
  • Large Corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments, these will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlines will receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.
  • Hospitals and Health Care: The deal provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The rest will be dedicated to providing personal and protective equipment for health care workers, testing supplies, increased workforce and training, accelerated Medicare payments, and supporting the CDC, among other health investments.
  • Coronavirus Testing: All testing and potential vaccines for COVID-19 will be covered at no cost to patients.
  • States and Local Governments: State, local and tribal governments will receive $150 billion. $30 billion is set aside for states, and educational institutions. $45 billion is for disaster relief, and $25 billion for transit programs.
  • Agriculture: The deal would increase the amount the Agriculture Department can spend on its bailout program from $30 billion to $50 billion.

cares act

Source: The Wall Street Journal

Patient Requires Patience

As we enter the new 30-day extension of social distancing guidelines until April 30th, there is good news and bad news for the patient as the economy recovers from its self-induced coma. On the good news front, their appears to be a light at the end of the tunnel with respect to the spread of the virus. Enough data has been collected from countries like China, S. Korea, Italy, and our own, such that statisticians appear to have a better handle on the trajectory of the virus.

More specifically, here are some positive developments:

  • Peak Seen on April 14th: According to the IMHE model that the White House is closely following, the number of COVID-19 deaths is projected to peak in two weeks.

curve project cases

Source: IHME

  • Testing Ramping: The United States definitely got off to a slow start in the virus testing department, but as you can see from the chart below, COVID-19 tests are ramping significantly. Nevertheless, the number of tests still needs to increase dramatically until the percent of “positive” test results declines to a level of 5% or lower, based on data collected from South Korea. In another promising development, Abbott Laboratories (ABT) received emergency approval from the FDA for a rapid point-of-care test that produces results in just five minutes.

tests per day

Source: Calculated Risk

  • Closer to a COVID Cure: There are no Food and Drug Administration (FDA)-approved therapies or vaccines yet, but the FDA has granted emergency use authorization to anti-malarial drugs chloroquine phosphate and hydroxychloroquine sulfate to treat coronavirus patients. Patients are currently using these drugs in conjunction with the antibiotic azithromycin in hopes of achieving even better results. Remdesivir is a promising anti-viral treatment (also used in treating the Ebola virus) manufactured by Gilead Sciences Inc. (GILD), which is in Phase 3 clinical trial testing of the drug. If proven effective, broad distribution of remdesivir could be administered to COVID-19 patients in the not-too-distant future. Another company, Regeneron Pharmaceuticals (REGN), is working on clinical trials of its rheumatoid arthritis antibody drug Kevzara as a hopeful treatment. In addition, there are multiple companies, including Moderna Inc. (MRNA) and Johnson & Johnson (JNJ) that are making progress on coronavirus vaccines, that could have limited availability as soon as early-2021.

Darkest Before the Dawn

It is always darkest before the dawn, and the same principle applies to this coronavirus epidemic. Despite providing the patient’s medicine in the form of monetary and fiscal stimulus, time and patience is necessary for the prescription to take effect. As you can see from the chart below, the median total deaths projected is expected to rise to over 80,000 deaths by June 1st from roughly 4,000 today.

deaths curve project 2

Source: IHME

The physical toll will exceedingly become difficult over the next month, and the same can be said economically, especially for the hardest hit industries such as leisure, hospitality, and transportation. Just take a look at the -93% decline in airport travel versus a year ago (see chart below).

travel numbers

Source: Calculated Risk

The closure of restaurants, retail stores, and hotels, coupled with a cratering of travel has resulted in a more than a 1,000% increase in Americans filing for unemployment payments (see chart below – gray shaded regions correspond to recessions), and the unemployment rate is expected to increase from a near record-low 3.5% unemployment to a staggering 10% – 30% unemployment rate.

unemploymen claims

Source: Macrotrends

The spread of the incredibly debilitating COVID-19 virus has placed the economic patient into a self-induced coma. The financial and physical pain felt by the epidemic will worsen in the coming weeks, but fortunately the monetary stimulus, fiscal emergency relief, and social distancing guidelines are pointing to a predictable recovery in the not-too-distant future. Financial markets have survived wars, assassinations, recessions, impeachments, banking crises, currency crises, housing collapses, and yes, even pandemics. Each and every time, we have emerged stronger than ever…and I’m confident we will achieve the same result once COVID-19 is defeated.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, MRNA, JNJ, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in ABT, REGN or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2020 at 4:44 pm Leave a comment

Double Dip Expansion?

Ever since the 2008-2009 financial crisis, every time the stock market has experienced a -5%, -10%, or -15% correction, industry pundits and media talking heads have repeatedly sounded the “Double Dip Recession” alarm bells. As you know, we have yet to experience a technical recession (two reported quarters of negative GDP growth), and stock prices have almost quadrupled from a 2009 low on the S&P 500 of 666 to 2,378 today (up approximately +257%).

Over the last nine years, so-called experts have been warning of an imminent stock market collapse from the likes of PIIGS (Portugal/Italy/Ireland/Greece/Spain), Cyprus, China, Fed interest rate hikes, Brexit, ISIS, U.S. elections, North Korea, French elections, and other fears. While there have been plenty of “Double Dip Recession” references, what you have not heard are calls for a “Double Dip Expansion.”

Is it possible that after the initial 2010-2014 economic expansionary rebound, and subsequent 2015-2016 earnings recession caused by sluggish global growth and a spike in the value of the U.S. dollar, we could possibly be in the midst of a “Double Dip Expansion?” (see earnings chart below)

Source: FactSet

Whether you agree or disagree with the new political administration’s politics, the economy was already on the comeback trail before the November 2016 elections, and the momentum appears to be continuing. Not only has the pace of job growth been fairly consistent (+235,000 new jobs in February, 4.7% unemployment rate), but industrial production has been picking up globally, along with a key global trade index that accelerated to 4-5% growth in the back half of 2016 (see chart below).

Source: Calafia Beach Pundit

This continued, or improved, economic growth has arisen despite the lack of legislation from the new U.S. administration. Optimists hope for an improved healthcare system, income tax reform, foreign profit repatriation, and infrastructure spending as some of the initiatives to drive financial markets higher.

Pessimists, on the other hand, believe all these proposed initiatives will fail, and cause financial markets to fall into a tailspin. Regardless, at least for the period following the elections, investors and companies have perceived the pro-business rhetoric, executive orders, and regulatory relief proposals as positive developments. It’s widely understood that small businesses supply the largest portion of our nation’s jobs, and the upward spike in Small Business Optimism early in 2017 is a welcome sign (see chart below).

Source: Calafia Beach Pundit

Yes, it is true our new president could send out a rogue tweet; start a trade war due to a tariff slapped on a critical trading partner; or make a hawkish military remark that isolates our country from an ally. These events, along with other potential failed campaign promises, are all possibilities that could pause the trajectory of the current bull market. However, more importantly, as long as corporate profits, the mother’s milk of stock price appreciation, continue to march higher, then the stock market fun can continue. If that’s the case, there will likely be less talk of “Double Dip Recessions,” and more discussions of a “Double Dip Expansion.”

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 19, 2017 at 12:34 pm Leave a comment

Extrapolation: Dangers of the Reckless Ruler

Ruler - Pencil

The game of investing would be rather simple if everything moved in a straight line and economic data points could be could be connected with a level ruler. Unfortunately, the real world doesn’t operate that way – data points are actually scattered continuously. In the short-run, inflation, GDP, exchange rates, interest rates, corporate earnings, profit margins, geopolitics, natural disasters, financial crises, and an infinite number of other factors are very difficult to predict with any accurate consistency. The true way to make money is to correctly identify long-term trends and then opportunistically take advantage of the chaos by using the power of mean reversion. Let me explain.

Take for example the just-released October employment figures, which on the surface showed a blowout creation of +271,000 new jobs during the month (unemployment rate decline to 5.0%) versus the Wall Street consensus forecast of +180,000 (flat unemployment rate of 5.1%). The rise in new workers was a marked acceleration from the +137,000 additions in September and the +136,000 in August. The better-than-expected jobs numbers, the highest monthly addition since late 2014, was paraded across television broadcasts and web headlines as a blowout number, which gives the Federal Reserve and Chairwoman Janet Yellen more ammunition to raise interest rates next month at the Federal Open Market Committee meeting. Investors are now factoring in roughly a 70% probability of a +0.25% interest rate hike next month compared to an approximately 30% chance of an increase a few weeks ago.

As is often the case, speculators, traders, and the media rely heavily on their trusty ruler to connect two data points to create a trend, and then subsequently extrapolate that trend out into infinity, whether the trend is moving upwards or downwards. I went back in time to explore the media’s infatuation with limitless extrapolation in my Back to the Future series (see Part I; Part II; and Part III). More recently, weakening data in China caused traders to extrapolate that weakness into perpetuity and pushed Chinese stocks down in August by more than -20% and U.S. stocks down more than -10%, over the same timeframe.

While most of the media coverage blew the recent jobs number out of proportion (see BOOM! Big Rebound in Job Creation), some shrewd investors understand mean reversion is one of the most powerful dynamics in economics and often overrides the limited utility of extrapolation. Case in point is blogger-extraordinaire Scott Grannis (Calafia Beach Pundit) who displayed this judgment when he handicapped the October jobs data a day before the statistics were released. Here’s what Grannis said:

The BLS’s estimate of private sector employment tends to be more volatile than ADP’s, and both tend to track each other over time. That further suggests that the BLS jobs number—to be released early tomorrow—has a decent chance of beating expectations.

 

Now, Grannis may not have guaranteed a specific number, but comparing the volatile government BLS and private sector ADP jobs data (always released before BLS) only bolsters the supremacy of mean reversion. As you can see from the chart below, both sets of data have been highly correlated and the monthly statistics have reliably varied between a range of +100k to +300k job additions over the last six years. So, although the number came in higher than expected for October, the result is perfectly consistent with the “slowly-but-surely” growing U.S. economy.

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

While I spend much more time picking stocks than picking the direction of economic statistics, even I will agree there is a high probability the Fed moves interest rates next month. But even if Yellen acts in December, she has been very clear that this rate hike cycle will be slower than previous periods due to the weak pace of economic expansion. I agree with Grannis, who noted, “Higher rates would be a confirmation of growth, not a threat to growth.” Whatever happens next month, do yourself a favor and keep the urge of extrapolation at bay by keeping your pencil and ruler in your drawer.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 7, 2015 at 7:07 pm 1 comment

Is Good News, Bad News?

Tug o war

The tug-of-war is officially on as investors try to decipher whether good news is good or bad for the stock market? On the surface, the monthly January jobs report released by the Bureau of Labor Statistics (BLS) appeared to be welcomed, positive data. Total jobs added for the month tallied +257,000 (above the Bloomberg consensus of +230,000) and the unemployment rate registered 5.7% thanks to the labor participation rate swelling during the month (see chart below). More specifically, the number of people looking for a job exceeded one million, which is the largest pool of job seekers since 2000.

Source: BLS via New York Times

Source: BLS via New York Times

Initially the reception by stocks to the jobs numbers was perceived positively as the Dow Jones Industrial index climbed more than 70 points on Friday. Upon further digestion, investors began to fear an overheated employment market could lead to an earlier than anticipated interest rate hike by the Federal Reserve, which explains the sell-off in bonds. The yield on the 10-Year Treasury proceeded to spike by +0.13% before settling around 1.94% – that yield compares to a recent low of 1.65% reached last week. The initial euphoric stock leap eventually changed direction with the Dow producing a -180 point downward reversal, before the Dow ended the day down -62 points for the session.

Crude Confidence?

The same confusion circling the good jobs numbers has also been circulating around lower oil prices, which on the surface should be extremely positive for the economy, considering consumer spending accounts for roughly 70% of our country’s economic output. Lower gasoline prices and heating bills means more discretionary spending in the pockets of consumers, which should translate into more economic activity. Furthermore, it comes as no surprise to me that oil is both figuratively and literally the lubricant for moving goods around our country and abroad, as evidenced by the Dow Jones Transportation index that has handily outperformed the S&P 500 index over the last 18 months. While this may truly be the case, many journalists, strategists, economists, and analysts are nevertheless talking about the harmful deflationary impacts of declining oil prices. Rather than being viewed as a stimulative lubricant to the economy, many of these so-called pundits point to low oil prices as a sign of weak global activity and an omen of worse things to come.

This begs the question, as I previously explored a few years ago (see Good News=Good News?), is it possible that good news can actually be good news? Is it possible that lower energy costs for oil importing countries could really be stimulative for the global economy, especially in regions like Europe and Japan, which have been in a decade-long funk? Is it possible that healthier economies benefiting from substantial job creation can cause a stingy, nervous, and scarred corporate boardrooms to finally open up their wallets to invest more significantly?

Interest Rate Doom May Be Boom?

Quite frankly, all the incessant, never-ending discussions about an impending financial market Armageddon due to a potential single 0.25% basis point rate hike seem a little hyperbolic. Could I be naively whistling past the graveyard? From my perspective, although it is a foregone conclusion the Fed will have to increase interest rates above 0%, this is nothing new (I’m really putting my neck out there on this projection). Could this cause some volatility when it finally happens…of course. Just look at what happened to financial markets when former Federal Reserve Chairman Ben Bernanke merely threatened investors with a wind-down of quantitative easing (QE) in 2013 and investors had a taper tantrum. Sure, stocks got hit by about -5% at the time, but now the S&P 500 index has catapulted higher by more than +25%.

Looking at how stocks react in previous rate hike cycles is another constructive exercise. The aggressive +2.50% in rate hikes by former Fed Chair Alan Greenspan in 1995 may prove to be a good proxy (see also 1994 Bond Repeat?). After suffering about a -10% correction early in 1994, stocks rallied in the back-half to end the year at roughly flat.

And before we officially declare the end of the world over a single 0.25% hike, let’s not forget that the last rate hike cycle (2004 – 2006) took two and a half years and 17 increases in the targeted Federal Funds rate (1.00% to 5.25%). Before the rate increases finally broke the stock market’s back, the bull market moved about another +40% higher…not too shabby.

Lastly, before writing the obituary of this bull market, it’s worth noting the yield curve has been an incredible leading indicator and currently this gauge is showing zero warnings of any dark clouds approaching on the horizon (see chart below). As a matter of fact, over the last 50 years or so, the yield curve has turned negative (or near 0%) before every recession.

Source: StockCharts.com

Source: StockCharts.com

As the chart above shows, the yield curve remains very sloped despite modest flattening in recent quarters.

While many skeptics are having difficulty accepting the jobs data and declining oil prices as good news because of rate hike fears, history shows us this position could be very misguided. Perhaps, once again, this time around good news may actually be good news.

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www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs),  but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 7, 2015 at 2:16 pm Leave a comment

Unemployment Hypochondria

Average investors feel ill from the 2008-2009 financial mess, and like hypochondriacs they can only find fleeting reassurances by reviewing endless amounts of unemployment data. Volatile monthly data is not sufficient, so even more erratic weekly jobless claims data are relied upon. Why just stop there? With this insatiable appetite for unemployment rate data right now, people can’t get enough, so I am not only petitioning for the release of a daily jobs report, but also an hourly one.

Jobs data are relatively straightforward and simple for most Americans to understand.  However, most people have more difficulty connecting with economic acronyms and data points such as GDP, PPI, CPI, industrial production, Philly Fed, capacity utilization, Conference Board LEI, durable goods, factory orders, energy inventories, trade balance, unit labor costs, and other economic figures.

Normal Progression

What’s the big deal surrounding the infatuation with myopic unemployment data? We have these things called “recessions” about twice every decade, and of the last 11 post-WWII recessions we have had 11 recoveries – not a bad batting percentage. Obviously, unemployment is a big deal if you are one of the 15 million or so people with no job, but as Jim Paulsen, Chief Investment Strategist at Wells Capital Management points out in his August Economic and Market Perspective, this current recovery is progressing at the fastest pace of any recovery over the last 25 years, and yes, jobs are being added (albeit slower than hoped).

“The consensus perception that this recovery is the ‘worst ever’ and consequently extremely vulnerable to a potential double-dip recession is overblown…Even if this recovery is weak compared to older postwar norms, it is still stronger than any other recovery in the last 25 years,” states Mr. Paulsen.

 

As you can see from Paulsen’s table below, our current recovery is not as brisk as the recoveries in the pre-1983 era, but he chalks up this trend to subpar growth in the United States’ labor force.

Source: James Paulsen, Wells Capital Management

 Paulsen identified this dampened worker growth since the mid-1980s. He doesn’t attribute moderate growth to the “New Normal,” as described by PIMCO pals Bill Gross and Mohamed El-Erian (see also New Normal is Old Normal), but rather ascribes the phenomenon to a continuing trend.  Paulsen adds:

“Whatever is causing the ‘new-normal’ economy has been doing it for the last 25 years. The ‘new normal’ is actually kind of old—at least a quarter century old.”

 

If you think about it, what businesses carried out over the last two years is clearly consistent with a normal economic recovery:

1)      Businesses fired employees swiftly amid great uncertainty.

2)      Businesses cut expenses, especially discretionary ones, and now profits and cash are piling up.

3)      Businesses are buying more capital equipment. Spending is up +12% (to ~$1.3 trillion) from early 2009 according to Joe Lavorgna, an economist at Deutsche Bank.

4)      Business acquisitions are beginning to heat up. Witness BHP Billiton’s (BHP) bid for Potash Corp (POT), and HP’s (HPQ) bid for 3Par (PAR) as examples (read HP’s Winner’s Curse).

5)      Businesses are paying larger dividends and buying back more of their own stock.

All these actions are very reasonable given the continued uncertain economic environment and rapidly building cash war chests.  Buying back stock, doing acquisitions, and prudently spending on cost saving equipment are, generally speaking, accretive measures for a company’s profit and loss statement. On the other hand, hiring employees is usually a lagging indicator of economic expansion and acts as diluting profit forces – at least in the short-run until workers become more productive.  Eventually cash and/or business confidence will rise enough to push human resource departments over the fence to begin hiring again.

The weekly unemployment claims chart shows how rapidly improvement has been achieved over the last few decades, even though the improvement has stalled at a lofty level.

Source: ScottGrannis.Blogspot.com (8/13/10).

Japan Case Study: Demographic Double Edged Sword

Be careful what you wish for. Low unemployment is not the end-all, be-all of the world we live in. Take Japan for example. From 1953 until 2010, Japan’s unemployment rate averaged about 2.6%. The last reported rate registered 5.2% in July, double Japan’s average, but almost half of the U.S.’s current 9.6% rate.

Why does Japan have lower unemployment? There are numerous reasons cited – everything from over-employment in the agriculture sector to uncounted married women and protective conglomerates to better disincentives in unemployment insurance program. Overshadowing these reasons is the unmistakable aging of the Japanese population. The National Institute of Population and Social Security Research predicts the Japanese population will fall 30% to 90 million by 2055. Low birthrates, limited immigration, and retirement all increase demand for employment, therefore Japan’s younger-age workforce becomes a scarcer resource and will be more likely to secure and maintain employment. Eventually, I will become old enough in retirement that I will need my underwear and bedpan changed, and create a job for someone in the process – a job that cannot be outsourced I may add. Of course there are very few countries that want a declining population, even if it may lead to an improved unemployment rate. A growing country with liberal immigration laws, healthy birthrates, abundant resources, and pro-business initiatives may have higher unemployment rates but also have more jobs available because of the growing workforce.

 

Source: UN via Financial Times. Declining Japanese population is putting a growing burden on fewer shoulders.

Eventually the 76 million Baby Boomers born between 1946-1964 are going to be exiting the workforce and will increase the burden on our younger workforce. Do we want to follow in the same path of Japan? Or do we want to adjust our legislative process to meet the draining demands of our aging society? My answers are “No,” and “Yes,” respectively.

The unemployment hypochondriacs can take a deep breath knowing the path we are experiencing is nothing new. Certainly I would like to see better policies implemented to accelerate the economic recovery, but regardless of what inept politicians bungle, our innovative companies, and restless voters are waking up to keep our representatives accountable. This is important because we are like a younger but stronger cousin of Japan, and we do not want to follow along the decaying path of an aging indebted country. In the short-run, we all want to see job growth for the millions of unemployed. In the long-run, retiring Boomers will be stretching the resources of our country even more. So although the unemployment hypochondriacs have little to fear in the near-term as the recovery continues, fiscal responsibility needs to be kept in check or hidden economic illnesses may become reality.

Read James Paulsen’s complete August Economic and Market Perspective

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in BHP, POT, HPQ, PAR, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 20, 2010 at 12:37 am 4 comments


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