Is High Unemployment the New Normal?

Includes: DIA, IRBT, SPY, XLK
by: Nicholas Pardini

Friday's job report was far worse than expected and has caused this current leg down in the market. The unemployment rate has risen 9.2% with half of those out of work for at least six months. Even though the economy has partially recovered, and corporate profits and margins are back to pre-recession highs, job growth has not been able to keep up. In addition, advances in technology and globalization have eliminated the need for employment in both high and low skilled professions. Due to mechanical automation, the advancement of information technology, outsourcing, baby boomers not retiring, and government regulations keeping the cost of employment high, higher unemployment will be the new normal.

Automation and technological advances lower the costs of goods while increasing the standard of living of a population. However, automation creates unemployment. The rate of automation has increased rapidly since the dawn of the internet and employers simply need fewer workers to do the same amount of work. In unskilled fields, examples include self check-out machines in retail, programming macros replacing data entry, robotic harvesters replacing farm workers and gardeners, and many more.

Higher skilled labor is at risk to automation as well. Cloud computing has eliminated the need for many IT jobs that relied on companies previously needing to host their own servers. Basic legal work has commoditized by companies such as Legal Zoom which reduces the demand for lawyers to more complex contracts and criminal courts. Algorithmic trading and discount brokerages have reduced or eliminated the needs of stockbrokers and market makers. Accounting, back office support work, education, and professions that involve transaction coordination are also at risk of automation through software or outsourcing.

Outsourcing has also eliminated the need to keep an in-house workforce for entrepreneurs and large companies. The personal assistant can be replaced by outsourcing to companies such as or, which can run errands for you or solve basic accounting or IT problems. Manufacturing has already been outsourced, but in the long run will be automated altogether with robotics technology.

In addition, many functions, such as accounting, compliance, research, human resources, or just about any other non-revenue driving function of a business, can be outsourced to either domestic or overseas specialized companies that can do it cheaper and/or at a greater efficiency with no training costs or health benefits needed for full time employees. This is great for business (particularly start-ups) as it lowers barriers to entry and allows companies to focus on their core competencies. The downside results in even less demand for labor and higher unemployment.

Both personal and financial reasons have postponed retirement for millions of baby boomers. Many boomers saw their stock investment portfolios and real estate take severe losses from the financial crisis, and and if they sold out or switched into bonds they will have to work longer to reach retirement. Others simply just enjoy working and would get bored retiring. It has been reported that as high as 50% of baby boomers never want to retire. With the boomers staying in the workforce by necessity or choice, this reduces the opportunities for younger people to enter the workforce and therefore creates a jobs shortage.

So what will be the impact of a new normal of high unemployment? The main beneficiaries of increased automation and lower employment are large companies with a leaner workforce that produce more, including a creative class, which consists of entrepreneurs, highly specialized professionals, artistic professions, and employees who directly generate revenue (such as a sales force) versus being just a cost of doing business.

Companies that specialize in automating the workforce, military, and domestic labor will also be large winners. The high tech sector,especially industries such as robotics, cloud computing, business software, and others connected to automation, will benefit greatly from increased demand to increase business efficiency. As a result, production will continue to increase due to higher marginal productivity of the remaining workforce. Growth may be slightly slower due to reduced consumer demand, but the US economy will still grow due to increased investment spending from higher company profits and a global market of consumers in emerging economies replacing the demand lost domestically.

Overall, automation, outsourcing, and delayed retirement will keep the unemployment rate high for an extended period of time. However, the economy can continue to grow without job gains as increased efficiency will allow for increased production of goods while maximizing the earning potential of the "creative classes" of society. I think that the jobs numbers are an overrated measure of equity performance that does little to affect the returns of companies in the big picture. Investors should instead look for firms that continue to increase the efficiency of society and can reach global markets if they want to beat the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.