Nine Percent Is Now Full Employment in America

by: Michael James McDonald

Without excessive government or consumer spending - which can only create temporary jobs - we believe 9% is now close to full employment in America. Although this statement is initially somewhat shocking, we've been expecting it and only recently realised why it took so long to finally show up.

For ten years - from 1998 to 2008 - excess consumer spending, which amounted to about $400 billion a year, created millions of temporary but really nonessential jobs. This somewhat artifical job production masked for ten years the damage being done to America from the loss of 20 million jobs to overseas labor. There are only so many products and services people really need and too many of them were now made overseas. When consumer spending and savings came back to normal levels, the nonessential temporary jobs disappeared exposing the employment damage.

If we are right, it represents a major wakeup call and the consequences to both business and real estate forecasting are profound. So are the political ramifications.

The problem is Globalization. Globalization, while good for multinational companies, is known to be very damaging to employment levels in developed countries like America and Great Britain as millions of productive jobs move to developing countries like India and China.

The Process of Globalization Brings Country "Normalization"

The process of globalization helps bring about “normalization” in the world – a leveling of standards of living from country to country. For this to happen standards of living in developed countries must suffer a little while the developing countries move up rapidly. From a world view that’s good – from an individual country view it may not be.
But it doesn’t start out this way. At first globalization seems a blessing. Many essential items cost less so more money is available to spend on services and the niceties of life – life gets better, one feels “richer.“ But as the outflow of jobs to foreign countries continues this view changes. After a while it becomes hard to replace all the lost jobs with meaningful ones. Unemployment rises.
A Warning from Buffett

Many people estimate that we’ve lost about 20 million jobs to foreign countries over the last twenty years. If we no longer make something we have to import it, and the 700 billion dollar trade deficit simply reflects this. In January of 2006 Warren Buffett said, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to ‘political turmoil.’ Pretty soon, I think there will be a big adjustment.” At the time few cared or even noticed since unemployment remained low.
Global Forces Now Dominate

This view about American employment highlights something we firmly believe – that global conditions and factors now control the American economy more than what is happening internally. It also puts in doubt the tried and true, standard solutions the government uses. Stimulation packages no longer work because there is now little to stimulate. They are using old internal solutions to fix an economy now controlled by external conditions. Until the government faces this and begins to solve the real issue – the long term detrimental effects of globalization on the American economy – nothing significant can occur.
We think this paradigm is very close to the correct view and it carries many important forecasting consequences. Forecasting is always difficult. It must be done as honestly as possible with no bias or consideration for political correctness or whether the forecast will be accepted or believed. Many economists err here, using old, safe economic models, or they simply follow a consensus. In their eyes – and they’re probably right - it's better job security; if the forecast proves wrong they can’t be criticized. But then money is lost as the forecast fails.

A Bull Market With High Unemployment

Investors must stop fixating on American employment, thinking we can’t have a recovery and bull market without it.

First, if 9% is full employment, we are pretty much at full recovery right now. Don’t expect a lot more - but don't expect a second dip either. Second, over half of the S&P 500 earnings now come from overseas operations and because of foreign growth, you could have long term earnings growth and an American bull market even if unemployment stayed right here at 9%.

Disclosure: No positions taken