By Jack Sparrow
Balance sheet recessions are not like normal cyclical downturns.
But there are still those who insist things will be getting back to “normal” soon. Consider this bit of blatant cheerleader puffery, U.S. Accelerates in 2011 as Demise of Consumer is Exaggerated:
Reports of the demise of the U.S. consumer have been exaggerated. Households are reducing their debts and building savings faster than he anticipated, said Richard Berner, co-head of global economics for Morgan Stanley in New York, giving them more room to spend in the future.“The deleveraging timetable is nearly a year ahead of schedule," he said.
A year ahead of schedule? Oh, good. But what schedule are we talking about?
It literally took decades for consumer savings rates to fall from double-digit percentages to below zero in 2005. Is that kind of secular build-up supposed to be reversed overnight? The idea that “the consumer isn’t dead, so buy retail stocks” (which Bob Doll of BlackRock implies in the piece) is tortured permabull logic at its finest.
When personal consumption drives 70% of U.S. GDP, you don’t need the consumer to “die” to create a problem. You just need a sustained trend of hunkering down and cutting back. Think occupancy rates in Las Vegas hotels. The typical Vegas hotel has a minimum occupancy threshold just to break even. For serious pain to occur, occupancy rates don’t have to hit zero. They just have to fall below a relatively high “covering costs” point — like, say, from 70% to 65%. The embedded leverage in a high turnover business model quickly goes toxic when black ink turns to red.
This non-linear dynamic also applies to overinflated expectations (and accompanying valuations). When a number comes in below trend, it doesn’t have to be a goose egg to court disaster. Similarly, a reworking of the U.S. GDP mix to reflect permanently reduced consumption levels — Americans spending less money on “stuff” — could constitute a major paradigm shift.
Getting back to consumers: Why are we likely to see a sustained trend of “hunkering down and cutting back,” besides the reality of a multi-decade spend-it-all trend reversal, via balance sheet recession in which debt-levels have mounted and home-based savings have been vaporized?
Because, to paraphrase Bruce Springsteen, “Foreman says these jobs are goin’, boys, and they ain’t comin’ back.”
The below three charts (click on all to enlarge) (via SmartMoney) tell the story…
First, headline unemployment. As the chart shows, we’ve actually been here before — headline unemployment was (briefly) worse in 1982. Keep in mind, though, that the ‘82 spike only came after Federal Reserve Chairman Paul Volcker had taken interest rates into the teens, inducing severe recession in order to “break the back of inflation,” and before the advent of globalization, outsourcing, and job competition on a worldwide scale.
But anyhow, moving on…
Here is where the pain hits. Long-term unemployment has never been this high (since 1948 at any rate). It’s never been anywhere close!
Why might this be? Because we are at the tail end of a 25 year leverage and debt supercycle, for one reason. Because U.S. homeowners were fooled into seeing perpetually rising property values as a proxy for real savings, for a second reason. And because the economic storm has hit even as many mid-level, mid-skilled American jobs are disappearing forever, for a third.
Average weeks unemployed is also off the charts. We have never been here before (in the past 62 years at least). And one of the chilling and quite possibly structurally permanent reasons for this is because there is a large and growing gap between the productivity demands of business and the skillset of the average American worker.
In an environment of lean, mean efficiency where cost cuts dominate, Future hiring will mainly benefit the high-skilled: “There will be jobs,” says Lawrence Katz, a Harvard economist.
"The big question is what they are going to pay, and what kind of lives they will allow people to lead? This will be a big issue for how broad a middle class we are going to have." On one point there’s broad agreement: Of 8 million-plus jobs lost to the recession — in fields like manufacturing, real estate and financial services — many, perhaps most, aren’t coming back. In their place will be jobs in health care, information technology and statistical analysis. Some of the new positions will require complex skills or higher education. Others won’t — but they won’t pay very much, either.
To quote another hard-luck bard, “The times they are a changin’.”
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