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Mark's Market Blog

8-28-10: Unemployment & Job Creation

By Mark Lawrence

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The market took a step down on Tuesday, and piddled around the rest of the week, ending on an up trend but down for the week. I expect the market to keep going up for a little while. However, the medium term trend is clearly established, and it's down. I expect this market will continue down to at least S&P 1010, perhaps S&P 900.

S&P 500 March 8 2010 to August 27 2010

Chinese officials said a 60-mile (100km) traffic jam outside Beijing could last until mid-September. Road construction is the immediate cause for the gridlock, which stretches as far as Inner Mongolia. Enterprising locals have started selling drinks and noodles to stranded drivers.

This week, Intel CEO Paul Otellini blamed the Obama's policies for creating an environment of "uncertainty" that is crippling America's economy. The Obama administration is "flummoxed by their experiment in Keynesian economics not working," Otellini said Monday. Higher taxes and more regulation add an additional $1 billion to building a semiconductor manufacturing plant in the U.S. vs. overseas, the CEO said. As a result, "the next big thing will not be invented here. Jobs will not be created here," Otellini said, warning of "an inevitable erosion and shift of wealth, much like we're seeing today in Europe. . . this is the bitter truth."

Sales of existing homes nose dived 27% in July. What does this mean? 1) sales and prices of homes last year were obviously inflated by the tax credit; 2) absent the credit, sales plummet and prices will too; 3) Who's going to build new homes in this environment? Historically home construction is our largest employer of unskilled and semi-skilled workers.

Existing Home Sales 1994 to 2010

Historically home builders have about 3 employees for each home they build. Right now that number is more like 10, as builders, having cut the fat, retain core workers and hope for a rebound. With sales drying up and foreclosures increasing, how long before they cut into muscle? Expect bankruptcies and layoffs. Like another couple million. Which means unemployment will be up well over 10% again. Notice the tick up at the end of the graph? That's not hiring, that's the collapse in new home starts.

Ratio of Construction Employment to Housing Starts 1960 to 2010

How is manufacturing doing? In the chart below, we see that US manufacturing employment as a percentage of workers has been on an uninterrupted straight line down for, well, my entire life - since 1956. We're consistently dropping at the rate of about 5% per decade, about 1/2% per year. In 2011 that would predict 750,000 layoffs from manufacturing. Several of our historically major manufacturing and transportation cities have now lost half or more of their peak population, including Buffalo, Flint, Cleveland, New Orleans, Detroit, Albany and Allentown. Projecting on current trends, the very last US manufacturing worker will be laid off on February 14th, 2028 in an event that historians will come to call "The Valentine's Day Boo-Boo." This is why unions are going after government workers: manufacturing jobs are just sooo last millennium.

Manufacturing Employment 1939 to 2010

Banks aren't making loans. The 30-year fixed rate mortgage is at about 4.5%, but unofficial studies indicate that there are only three Americans who qualify for a loan, and it seems I don't know any of them. Meanwhile, lots of banks have lots of employees in their loan departments who are, well, not making any loans. US Banks would have to lay off about 500,000 workers to get their staffing to pre-crash levels of worker per loan.

State and local government revenues are down, and the outlook is that they will stay down for at least a couple years, likely more. About 500,000 government workers would have to be laid off to get their labor force in line with current revenues. As noted above, not only are tax revenues down during this recession, but in some cities and states jobs, companies and population are all going away.

2011 total expected results: 1,000,000 laid off in the construction industry, 750,000 in manufacturing, 500,000 in banking, 500,000 in state and local government, total 2.75M lost jobs, about 115,000 layoffs per month average, about 1.5% of our work force total. Others on Wall Street are estimating the total layoffs at 4 to 5 million, I'm being conservative. Buckle up: we're going on Mr.Toad's Wild Ride.

Washington would have us believe that new jobs, an end to the recessions, and prosperity for all are just around the corner. If we wish to believe this, what would the driving force be for these new jobs and new prosperity? Short answer: small companies, with a workforce of less than 100 people. For the last 30 years nearly every new job in the US has been created by small companies. Washington policies however ignore small companies and focus on big firms, fortune 500 companies that haven't hired a net new person since before I graduated college. It's true that if these firms go down, a lot of people get laid off, but to count on them to lead us out of the unemployment morass is simply non-credible.

US Job Creation 1977 to 2005

And these small companies that create the new jobs? What do they look like? In a word, startups. Job creation is almost exclusively the province of small companies in their first year of operation. Want jobs? Encourage new businesses. Something that currently is completely off Washington's radar.

Job Creation and Losses by Company Age

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