Deflationary Income And Employment Trends

Includes: DIA, IVV, SPY
by: Jason Tillberg

In the year 2000, the U.S. saw the highest percentage of its population employed at a job. The rate was 64.9% in June of 2000. As of May 2012, that rate is 58.7%. With a current population of 313 million, if the employment to population ratio were to go back to 64.9%, that would mean our economy would be employing an additional 19.4 million jobs! Or, you could argue that the economy has lost a population adjusted 19.4 million jobs since June of 2000, but that wouldn't be very fair.

Throughout the 1950's until the mid 1970's, the population to employment ratio ranged between 54.5% to 58.5%.

What caused the ratio to boom up to nearly 65% in the year 2000? Baby boomers were born between 1947 and 1963 making them between the ages of 37-53 in 2000 and in prime working age. They were not going to school and still too young to retire. Other factors for such a strong employment ratio was that the U.S. dollar was very strong and commodity prices were low. The internet and cell phone industries were taking off providing lots of jobs with finance help from Wall Street as that too was booming. Today, baby boomers are between the ages 49-65, saving for retirement or retiring outright. The implications of the baby boomers saving and retiring is likely having an impact on the decline or sluggishness in aggregate demand we're seeing today.

Here is a chart of the population to employment ratio:

You can see we had a huge leg down in 2008 and early 2009. It's as though we gave back all the gains we had in the mid to late 1980's. We've been stuck adding just enough jobs to keep up with general population growth since mid 2009 in light of all the stimulus and deficit spending.

This article attempts to analyze these trends and see what may lie ahead.

I'll start by looking at employment in various sectors of the economy that have seen the biggest declines in employment that has contributed to this decline since 2000.

Manufacturing employment in the U.S. has been decimated. This sector has seen the brunt of the job losses since 2000 at over 5 million jobs:

Not only have we outsourced or simply shut down our manufacturing factories in the U.S., but we've also had great gains in worker output or productivity through innovative engineering. This has lessened the need for adding workers when volume of goods manufactured goes up.

Here is a chart of manufacturing output per hour since 2000:

Trade, transportation and utilities have seen ups and downs, but still less jobs today than in 2000:

Employees in wholesale trade and durable goods, well off 2000 levels:

Information Services sector has been shedding jobs non stop since 2001:

Construction has seen a very large drop in employees post the housing bust and has recently seen declines again after leveling off:

Postal Service has seen continued declines in employees since 2000:

Gasoline stations have shed jobs since 2000 but have recently seen some improvement:

Self checkout lines and other means of productivity improvement have reduced employees in the retail trade sector since 2000:

So where have the jobs been growing or at least not been losing? A couple of sectors have been the work horses of keeping Americans employed: Government, education and health services and management, professional and related occupations.

I think it's important to note that generally, these sectors have a higher chance of requiring a higher education. Most of the sectors that have been losing jobs have a higher chance of not requiring a higher education.

Education and health services has been by far the most consistent recession proof industry to have been working in since 2000:

Management, professional and related occupations has also seen strong gains in employment since 2000:

Here is a chart of Government employees since 2000:

The trend since 2009 for Government employees has been down and will likely continue to be down as budgets are increasingly under pressure all across America, especially the Federal budget. It is higher than in 2000 however.

It should be noted that despite running massive Federal deficits these past 3 years, we're still shedding Government jobs.

Federal deficit chart:

The overall total nonfarm employees since 2000 chart looks like this:

The most recent year over year percent gain in total non-farm employees has grown about 1.35%.

Below is a chart of the percent gain over the last 12 months:

Moving on to personal income, which is mostly made up of the following:

  • Wages and salaries
  • Personal current transfer receipts like social security, Medicare, unemployment insurance, disability and food stamps
  • Dividends
  • Interest income

Total personal income as of April 2012 in the U.S. was $13,298.1 Billion and of that, $6,840.70 was from wages and salaries. Personal current transfer receipts account for $2,352.2 Billion in personal income as of April 2012

Here is a chart of total personal income since 2000:

You can clearly see the leg down in personal income in 2008-2010 as a result of about 5% of the total population losing their employment wages and salaries. (From 63% to 58%)

Year over year percent gain in overall personal income over the past 5 years looks like this:

Overall personal income is rising only about 2.6% year over year now, with a down trend since early 2011.

The largest contributor to personal income in the U.S. is from wages and salaries, about 51%. Here is a chart of wages and salaries since 2000:

Here is a chart of year over year percent change in total wages and salaries over the past 5 years:

These figures are not inflation adjusted and include the additional workers as well.

To get a better sense of wages, we can look at average hourly wages.

Here is a chart of the year over year percent change in hourly wages of production and non supervisory workers since 2000:

The most recent month shows only a 1.4% year over year gain but more important is the downtrend in wage growth for production workers. This is also in light of having higher productivity rates, which I would think would reason well for deserving higher wages!

Here is a chart of average hourly wages of all employees in private sector jobs year over year percent gain going back to 2007:

Similarly in a downtrend of late and growing about 1.6% year over year.

So while we're adding about total employees at a rate of 1.35% year over year, coupled with wage increases of about 1.6%, we get an overall wages and salary growth of about 2.6%.

The next largest contributor to personal income are current personal transfer receipts from the Government which are social security, Medicare, unemployment, food stamps, disability, etc.

Personal current transfer payments year over year percent change has completely run out of gas after having double digit gains in 2009 and 2010:

With a current savings rate dropping fiercely the past 12 months, currently at 3.4%, it's difficult to not foresee a further slowdown in aggregate demand as we've already been seeing and potentially, the next leg down of our greater recession or whatever you want to call it.

Here is chart of savings rate over the past 12 months:

Here is what we have going for us in the U.S. economy:

  1. Low and declining job growth
  2. Low and declining wage growth
  3. Near zero growth in personal current transfer receipt income
  4. Low and declining savings rate
  5. In a narrow range of employment to population ratio awaiting the next leg either up or down

Given that the consumer spending makes up about 71% of the GDP in the U.S., it's going to be very challenging to stimulate growth in aggregate demand with the trends we're seeing today. It's going to take growth in aggregate demand to get more people back to work to provide the goods and services demanded.

Prices of goods and services have to come down to help stimulate demand as I see it.

If prices of goods and services don't start coming down, then aggregate demand won't come back up and the U.S. economy simply might need another adjustment that would take the employment to population ratio from 58.7% to perhaps 55.7%, which would mean we lose another 10 million jobs. This adjustment might be the straw that breaks the camels back in terms of it's ability to service its debt and make use of all its assets.

Of course, we could borrow our way to prosperity and stimulate aggregate demand with more loans. But the recent data suggests we've been trying just that as consumer credit growth has been rising.

Consumer credit is up 4.6% year over year but that has only contributed to a 1.35% gain in overall employment.

Here is chart of consumer credit growth year over year for the past 12 months:

On the bright side, the American worker has never been more productive and if less of us get to have a job and can work at home instead, employing ourselves to be more self sufficient, then perhaps this won't be so bad of an adjustment. I live upstate NY and often think about the livelihoods of the first settlers up here and the folks that worked on the Erie Canal and remind myself how well we have it today with all our tools and infrastructure we get to employ and enjoy.

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