Ever since the end of WWII, the American eagle has been gliding the skies, growing stronger and prouder, its reach and power seemingly endless. Seriously bruised by the banking crisis, he was able to lift again thanks to Uncle Sam’s and Uncle Ben’s fiscal and monetary impetus. For a while, many saw signs of his previous poise. Yes, he would do it again. Someone, almost impersonating him, even shouted: “Yes, we can!”.
Alas, our bird has been more than bruised. His wings have been weakened. He is feeble, physically and morally. Uncle Sam and Uncle Ben are now effectively windless. The American eagle, already flying low and almost idle, is dangerously losing altitude. The whole world is anxiously watching the dive. Can he regain some composure, can he find the necessary strength, like always before? At worst, will he, miraculously for many, be able to land softly, softly enough to recover, fly again and resume its dominance of the skies?
Last Friday, the US employment report confirmed that this economic recovery was incapable of shifting from low to high gear. Total employment in September 2010 was only 0.4% higher than the previous year, lower than last May, and 4.8% below the November 2007 peak. The recession officially ended in June 2009, yet employment remains 0.5% lower.
TOTAL US NON-FARM EMPLOYMENT
Private employment has recently shown a very feeble improvement although private employment remains 6.6% below its December 2007 peak, in spite of the substantial recovery in corporate profits.
US PRIVATE EMPLOYMENT
Government employment, as usual, has not declined as much but notice the downward trend during 2009 and the severe drop post the 2010 census. Unlike the 2000 experience, government employment is in a clear downward path.
TOTAL US GOVERNMENT EMPLOYMENT
Not so much at the federal level (yet), but clearly at the state and local levels.
US FEDERAL GOVERNMENT EMPLOYMENT
US STATE AND LOCAL GOVERNMENT EMPLOYMENT
During 2010, total US employment increased 613,000. Private employment rose 863,000 but total government employment decreased 250,000 of which 269,000 were lost in state and local governments. State and local government finances are so bad that more layoffs are inevitable in coming months and years (read THIRD WORLD AMERICA: FROM THE JETSONS TO THE FLINTSTONES).
Can private employment soon rise strongly enough to keep the eagle flying? Consider that
- small and medium size businesses are the main job creators in the US. NSBA surveys continue to show that small business owners have little inclination to increase employment levels. Surveys reveal continued high uncertainty with regard to the economy, access to capital, taxation and regulations as well as the impact of heath care reform. New private sector jobs totaled 274,000 during Q3 2010, down from 353,000 in Q2.
- Construction, retail and finance account for 28% of private employment and none are showing clear recovery signals. Together, these sectors created 10,800 new jobs in Q3, up from –41,600 in Q2.
- Manufacturing has gained 136,000 jobs in 2010 but accounts for only 10% of total employment and remains in a secular decline. New manufacturing jobs totaled –2,000 in Q3, down from + 81,000 in Q2.
- Information-related industries employment peaked in 2001 and has yet to show any sustained signs of stabilization. No new jobs were created in Q3, but a small improvement from –17,000 in Q2.
- In total, 40% of private employment is in weak sectors. Only education, health, leisure, hospitality and professional and business services (46% of total) are displaying positive momentum, having added 670,000 jobs so far in 2010, 78% of total private new jobs. In September alone, these sectors contributed 108% of all new private sector jobs. Interestingly, these sectors face relatively little foreign competition. As such, the US uncompetitive taxation is not a major threat for these service sectors, unlike most other industries which are undoubtedly losing share to global competitors in more business friendly environments (who thought we would ever say that of the US!). But even these sectors seem to be losing momentum: they created 185,000 new jobs in Q3, down from 263,000 in Q2.
American consumers are very much aware of the exceptional economic difficulties facing their country. Their wealth has been severely reduced by the crisis and although equities have recovered some of the losses, housing remains extremely weak. Consumers seem to have changed their old habits as a result: the so called “new normal” calls for the restoration of family balance sheets through increased savings and a severe curtailment of the use of credit.
US consumer credit has been falling, yes falling!, continuously since early 2009. The year 2009 marked the first annual decline in US household debt since the Fed began tracking this series in 1946 and it is continuing in 2010. Even the extraordinary recovery in equity prices has had no impact on the confidence of Americans and their desire to adjust their standard of living by deleveraging (chart from fxstreet.com).
We are currently in the most important period for the US economy: back-to-school sales were soft, normally a signal that Thanksgiving and Christmas holidays will be challenging for US merchants. Weak sales during this crucial period of the year will hurt profits and force corporations to curtail activity during the first half of 2011. This would negatively impact employment and government finances, aggravating an already very weak economy. Consumer, business and investor confidence would decline further, potentially resulting in a hard economic double dipping.
Even a cheap market with even lower interest rates and lots of liquidity would be hard pressed not to succumb to the despair that would ensue. With no political leadership in the US, little if any ammo at the Fed, a weakening greenback raising havoc in currency markets, more serious deflation threats, possibly never before in peacetime has it been more important that God Bless America!
What about QE2? After “Helicopter Ben”, could “Ben’s Boat” be the solution? ISI’s excellent economist Ed Hyman rightly says that
The fact that QE2, which is a radical measure, is being discussed means the economy appears to be in deep trouble. (…) an open-ended (unlimited) QE2 program seems likely to be announced Nov 3 – desperate measures for desperate times.
Can we reasonably expect that more liquidity will boost the economy after QE1 and Obama’s fiscal stimulus together failed to show any meaningful lasting impact? Can even lower mortgage rates attract FICO-bruised buyers to invest in an asset whose value remains fragile? Can even lower interest rates lead business people to invest when their confidence in the economy and their government is so low and tax rates so high? Pushing on a string is likely to be the buzz word in coming months.
The only hope seems to be that the QE2-induced liquidity explosion will find its way into the stock market and help create enough wealth effect. What else can turn the tide?