Snow in the Spring

Today is a day off for me, but I could not help watching the employment numbers this morning, as I watched the snow falling outside and appreciated not having to drive anywhere at all today. What kind of spring is this, anyway? Here in the Twin Cities we are looking at something like a foot of snow in 24 hours. Amazing. Glad I resisted the urge to have the snow tires taken off.

And what kind of recovery is this, anyway? Six years into our recovery we are still limping along, slow growth and millions of now essentially permanently unemployed Americans. Today’s new jobs number of 192,000 (plus modest upward revisions to recent numbers) is entirely consistent with the anemic growth to which we have become accustomed. It is supposed to be spring, but we got more snow today.

Just a reminder — we have experienced an extended weak economy with a strong recovery in equities, and these things make sense when you look at them closely. Parts of the economy are doing well, and businesses have adjusted. But employment is a problem. We don’t consider a weak economy to be equivalent to weak equity markets, as that has obviously not been the case. So don’t let bad news rattle you.

Patterns of gains and losses

Funny, in our financial planning work with clients we often look at several downside scenarios. One of these can be a scenario which we have not seen historically, a bad one, just to look hard at the downside. That scenario features a big decline in equities, followed not by a sharp bounce back (as we have always had historically), but by a resumption of a merely normal rate of equity growth. The financial planning question is “what would your financial future look like if the portfolio’s equity went down sharply next year, and did not have a sharp recovery, but only a normal equity return thereafter?” That is effectively like reducing your assets by, say, 20%, permanently, and seeing how the plan works with that reduced asset number.

We have not seen that pattern in equity markets data dating back to 1926; as you may recall, despite the common knowledge that “we would definitely not be seeing a V shaped recovery” in equities after 2009, that is in fact exactly what we got, a sharp rebound. But we are now seeing that non-rebound pattern in our overall economy. We had a very sharp downturn, and then a resumption of more or less normal growth with no rapid recovery of what was lost. That is why modest growth such as we see now is not particularly good news.

To be clear, there is a lot of debate about the reasons we have not had a robust recovery. Who and what are to blame is not what we are writing about today. Just sticking to the facts, not offering any policy prescriptions.

63.2% labor participation rate, just off the lowest level in decades. “Official” unemployment rate, called U-3, remains at 6.7%, a very high number six years into a recovery. In fact, the U-3 rate never got this high in the 2000-2002 downturn; it has not been this high for decades.

Worse, the measure called U-6, a more comprehensive measure which includes part-timers, discouraged workers and others excluded from the U-3 number, tells a story that is deeply troubling. Even as today’s numbers indicate that we have finally recaptured the 8.8 million jobs lost during the downturn, the fact is we have millions of new workers now, and we left millions of old workers behind. We also failed to employ the less skilled of our young people, many of whom are back living with their parents. This isn’t good. These charts illustrate some of this.

Chart: What’s the real unemployment rate?

main vs u-6 unemployment rate

Click for chart: Unemployment/UnderEmployment (U3/U6) 1994-2012

So what is the good news?

Larry Kudlow has always been one of my favorites. He does good TV and has an excellent sense of humor, but beyond the superficial stuff he is a very good economist and has a knack for hitting the key points with clarity. Today, aside from reviewing the specific numbers of the day as part of a panel, he offered what I believe to be an important insight– energy/fracking is now, in his words, the lynchpin of the US economy. Who would have expected that 10 years ago? But here we are, potentially the world’s biggest energy producer, and soon a major exporter of energy. This unexpected development has been fortuitous, to say the very least. Where would the economy be without it?

There is another important piece of good news – innovation. Our colleague John Bussel is working on a piece about innovation in which he will discuss how the innovation economy is driving forward and producing economic success. And before we say we expected that, no surprise here, let us ask a question: do you remember not having an iPhone and iPad? That was not that long ago, was it? Change is pretty amazing, and very fast.

In summary, a relatively weak economy and good business news are not mutually exclusive. Business has shifted gears, adjusted to the environment as it is, and is doing well, thus the sharp recovery in equity markets. As an investor you did well to not look at the serious problems and conclude that those would necessarily lead to poor equity market results. It is a very complicated picture and will remain so.


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Snow in the Spring

time to read: 4 min