When Jobs Go Away, Do They Come Back Again?

So much focus over the past twelve months has been put on job losses and hopes for their return that it has apparently become the be-all and end-all of US economic policy.

On that note, a colleague and I discussed the recent equity market reactions, never mind the cheerleading pundits, over the recent slowing of job losses and new jobless claims.

Let's take a moment to view job losses over the past few years.

We've known for about a year that the NBER declared the US economy to enter recession in late 2007. Here's a pdf file from the US Dept. of Labor containing a very clear, easy-to-read chart of monthly payroll changes from November 2007. Job losses peaked a year ago at a rate of over 600,000/month. By last August, the rate was back under 200,000/month.

The US experienced a recession brought on, in large part, by a long term explosion of bad real estate lending, brought forth by Congressional mandates and suasion of two GSEs, Fannie Mae and Freddie Mac, to buy, package and distribute marginally-creditworthy mortgage loans. The plummeting value of bonds containing those loans, and their subsequent repackagings, caused financial service firms to lose equity, slash lending and, by extension, create downward economic pressure. Coincidentally, the marginal mortgage loans began experiencing high losses, which caused loan defaults, foreclosures, and subsequent losses of value in various US locales which had recently experienced such heated residential property value growth.

After this two-pronged blow to the US economy began in late 2007, consumer spending and net worths plummeted, as job losses mounted. To be sure, 2008 was a year of maximal effects of these trends.

Thus, nobody would have expected 2009 to necessarily be as bad as 2008. And the deep job losses of late 2008 did, indeed, attenuate and slow to a trickle last month.

But as we stand at a point of seeming inflection, ask yourself,

"Where will new jobs appear?"

Do you really think what happens now is that companies that cut workers start calling them up to return to offices, production lines, etc.?

Do you think that companies which spent the last 24 months re-engineering operations, boosting productivity with fewer employees, and enjoying higher margins amidst low revenue growth, are simply going to issue calls for more people?

Or do you think those components of the US economy, in a Schumpeterian manner, have evolved and improved to a degree that what was normal for them no longer is?

It would be a set of incredibly inept managements to have stood still for two years amidst a slumping economy and made no changes whatsoever to business models, staffing, operations, etc., so that current production levels would require the same numbers of employees as before 2007.

And the most recent quarterly productivity data did indeed show some incredible growth. If memory serves, more than +5%. Or some other, totally unexpected number.

So, where will new jobs appear in the US economy?

My colleague and I quickly ascertained, having been in business for a combined total of more than 50 years, that they will appear in new businesses.

Don't expect great job growth from a propped-up, failed, government- and UAW-owned GM. Or Chrysler. Don't expect the recent Congressional health care bill to spur hiring in pharmaceutical firms. Or health insurers.

No, it's much more likely that new hiring after recessions, since 1982, come from new businesses in the economy.

Given the improvements since the mid-1980s in usable technology, it's clear that startups don't engage in as much physical goods creation, metal-bashing, and high employment levels to create market value. For example, Google has a market capitalization of nearly $200B, but employs only about 20,000 people full-time.

That equates to roughly $10MM of market value and $1.1MM of revenue per employee. On only $250K of PPE/employee.

Hardly a steel or auto company, is it?

Yet that's where non-commodity, high value-added, defensible competitive-advanted jobs are created in our economy now.

Think about that again and reread it.

If you created another GOOGLE, you'd only add 20,000 workers to the US economy! And that's a well-run, long-lived, successful knowledge-oriented US business.

So, don't hold your breath on employment growth in the US economy anytime soon. With so much government-induced uncertainty and consumer spending declines, there's just no longer a linkage between a recession's technical end and the robust growth of jobs.

That seems to have ended with the last pre-Reagan recession-recovery cycle.