Employment is one of the fundamental factors of economic growth that represent the most frequently used yardstick for measuring recoveries. In discussion of employment, there are two distinctly different categories of unemployment that must be understood. The first is the ‘narrow’ definition that compares the people who are unemployed and looking for work against the total labor force who is employed or looking. The alternative or ‘broad’ definition includes discouraged workers who have stopped looking for work and incorporates the number of people who are working part time, but would like to be employed full time.
Some strange nuances can influence the reported unemployment rate that must be comprehended. When large groups of people stop looking for work, it can result in a net loss of jobs that rolls through as a lower rate of unemployment because the number of people who stopped looking exceeds the number of people who lost their job. Given the statistical machinations that are inherent within reported rates of unemployment, it is critical to understand the factors that will need to be present in a return of unemployment to historically healthy levels between 4% and 6%.
One of the most important factors to consider is the dynamics of “Job Gains” and “Job Losses.” The reported numbers are frequently the ‘net’ of all gains and losses in a given month or quarter. Focusing on the net number has the unfortunate effect of blinding many people to the ‘churn’ of jobs within the economy. Each US fiscal quarter results in the ‘destruction’ of somewhere between seven and nine million jobs that is offset by the ‘creation’ of seven to nine million jobs. The net change at the margin is what influences the reported rate of unemployment.
The current economic situation has resulted in the net loss of many jobs with many more people dropping down from full-time to part-time employment. Facilitating a return to healthy rates of employment will require many consecutive months of net job growth to absorb the currently unemployed work force. In the 2010 forecast book, we forecasted a narrow unemployment rate of 9.2% by the end of the year, and a broad rate of 16.1% by the end of the year. As of November, narrow unemployment stands at 9.6% with broad unemployment at 17.1%. Our 2010 model assumed an anemic economic recovery, but predicted a faster return to net job growth than actually occurred. The principal reason for this is because of uncertainty that surrounded the health care legislation that was pushed through Congress during 2010. As employers grappled with the expected impacts of these new laws, they held off on hiring new employees until their view of the future business landscape became more clear.
As we move into 2011, we are anticipating continued economic sluggishness that offers dim prospects for major net changes in employment. Over the past few quarters, economic growth has barely held pace with the entry of new workers into the labor force. This has resulted in narrow unemployment persistently holding above 9% with broad unemployment staying above 16%. In order for a major reduction in unemployment to occur, the economy will need to expand faster than the rate at which new entrants come into the work force. Since the economic fundamentals are not currently oriented toward the accomplishment of these goals in 2011, we anticipate that unemployment will continue to be relatively high throughout the year.
Our models predict that we will exit 2011 with narrow unemployment of 9.3% and broad unemployment of 16.8%. On the surface, this reduction in unemployment appears very anemic, but it is reflective of the fact that employment is a lagging indicator of economic recovery. During uncertain times, businesses become very cautious in hiring new employees. This generally results in new hiring only when it can be justified by tangible revenue generation. The wild card in growing employment is the impact of small business and entrepreneurial ventures. Job growth at the margin frequently stems from small business. Current uncertainty over the future of health care legislation, government policy, and taxation has suppressed growth and expansion for many small business entities. We do not currently believe that the regulatory environment will stabilize quickly enough to generate a tangible impact in 2011. However, if the mid-term elections and subsequent strengthening of the Republican Party in congress suppresses the tide of government intervention, there is the potential for an economic recovery to begin unfolding before 2011 concludes.
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The Solomon Success Team
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