Friday, December 7, 2012 - A Date Which Will Live in Infamy, Plus the Jobs Report

A Date Which Will Live in Infamy, Plus the Jobs Report

by Sinclair Noe

DOW + 81 = 13,155
SPX + 4 = 1418
NAS – 11 = 2978
10 YR YLD +.05 = 1.63%
OIL - .27 = 85.99

GOLD + 4.50 = 1704.50
SILV + .08 = 33.11

Today marks the 71^st anniversary of the attack on Pearl Harbor. There were of course, memorials in Hawaii and around the country. I've seen a few of the pictures. Each year the number of Pearl Harbor survivors that attend these memorials, their number grows smaller and their ranks thin. If you know a veteran of World War II, be sure to take time to recognize their stories, be sure to say thanks.

Today's major economic data was the monthly jobs report; widely expected to be weak due to the effects of Hurricane Sandy. Instead, it came in relatively strong. The headline numbers: the economy added 146,000 jobs in November, and the unemployment rate dropped to 7.7%, a four year low. The Labor Department claimed that the effect of Sandy on the report was minimal, saying in a statement, “Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”

In other words, we should not look at this report as surprisingly good given the effect of the hurricane. Rather, the Labor Department claims that the jobs numbers should be analyzed without taking the storm into account at all. And by that standard, not only were the job numbers weak, there were some underlying problems. To be counted, a person would needed to have been out of work for three weeks or so on Nov. 12. The storm hit Oct. 29. Only a few workers met the length criteria. So, some of the storm's negative effects will likely show up next month.

This month's number beat expectations of 75-80,000 jobs, but that was considering the hurricane. Taking out the effects of the hurricane the number was below the average job growth per month of about 150,000 over the past two years. It is growth but it is sluggish and not enough.

First, this is the initial report; there will be revisions. Each month, the Labor Department issues its estimate for the previous month’s job growth, but it also issues revisions for the two months prior to that as well. And this report showed a net downward revision of 49,000 jobs. So really this report gave us a net job gain of 97,000 — a much less impressive figure than the headline 146,000; and there will be revisions.

The report also showed a decrease in construction employment of 20,000 jobs. If Sandy did in fact have a minimal effect on the report then this is strange, because recent housing start data has been positive; just this week the Commerce Department announced that construction spending increased in October, showing the continuance of a positive trend. So, if construction spending is increasing it should show up as jobs, unless construction spending isn't really increasing or perhaps because Hurricane Sandy had a bigger impact on these numbers than the Labor Department’s statement suggests.

After showing a solid 0.3% gain last month, the participation rate — or the percentage of adult workers in the workforce — declined once again by 0.2%. That drop in the participation rate appears to be the primary reason the unemployment rate dropped to 7.7%, as the household survey actually showed a net decline in jobs. While some of the overall decline in the participation rate has been driven by demographic reasons — an older country is going to have fewer people able to work — that only tells part of the story. Some of the decline in participation is undoubtedly a product of a depressed economy, and a true jobs recovery would have this number moving upwards, rather than the other way around.

Roughly 350,000 Americans left the labor force in November, lowering the rate, partly due to bad weather keeping Americans from working. The ranks of the long-term unemployed—those without a job for 27 weeks or more—fell only slightly to 4.8 million from 5 million.

One thing not indicated in the report is a negative effect of the fiscal cliff. But November's figures also show that jobs are growing too slowly to significantly lower unemployment or boost the economy's overall growth, which faces headwinds. To keep up with population growth, the economy needs to add about 120,000 new jobs every month just to keep the unemployment rate from rising. While any slowdown could prove temporary, even a brief stall will hurt job creation—one of the main things keeping consumers confident.


A survey by the University of Michigan, also released Friday, suggests consumers this month are already feeling markedly less optimistic about the economic outlook, after being more confident than they have been in five years. The Thomson-Reuters/University of Michigan consumer sentiment index's preliminary reading for December slumped to 74.5 compared with 82.7 at the end of last month.

The jobs report revealed a bifurcated economy. Service-related businesses, a broad category including retail, health care and other areas, are fueling much of the nation's job growth. Retail employment alone added more than 50,000 jobs last month. However, the goods-making part of the economy, manufacturing and the housing market, didn't contribute to job growth in November. Construction employment fell by 20,000 and manufacturing lost 7,000 jobs. Government hiring was roughly flat, but declined by about 50,000 in October.

An unusually high number of workers—more than 1 million—worked part-time instead of full-time because of bad weather, the government said. That suggests that some of the 350,000 decline in the labor force, and the drop in the unemployment rate, could be linked to Sandy.

In February, 2011, President Obama went to Silicon Valley and participated in a breakfast meeting of high tech bigwigs. Obama interrupted Steve Jobs to ask what it would take to make iPhones in the USA. Jobs answered: “Those jobs are gone and they're not coming back.”

Well, time change, and a few of those jobs are coming back. Apple will resume manufacturing in the US next year, not much but a few Mac computers will be made here, about $100 million in manufacturing.

Meanwhile, GE is spending some $800 million to re-establish manufacturing in its giant, and almost abandoned facility at Appliance Park, in Kentucky. In February 2012, GE opened an all-new assembly line to make water heaters. In March 2012, GE started a second assembly line to make refrigerators. Another assembly line is under construction make a new stainless-steel dishwasher starting in early 2013. Whirlpool is bringing mixer-making back from China to Ohio. Otis is bringing elevator production back from Mexico to South Carolina. And Wham-O is bringing Frisbee-molding back from China to California.

Chinese wages are five times what they were in 2000 and are expected to keep rising rapidly. And labor is a steadily decreasing percentage of the cost of manufacturing.  Oil prices are three times what they were in 2000. Natural gas in the US is a quarter of what it is in Asia. By moving manufacturing back to the US, time to market also improves dramatically. As a result, that water heater that GE makes, they can now sell it for 20% less.

We have seen a very short-term and I think very poor decision by companies to outsource labor in pursuit of maximizing shareholder gain; and in the short-term it worked, but there was a cost. These executives also outsourced innovation and design and quality, and they decimated the core of their domestic customer base, and they debased their good name and reputation in exchange for a quick pop to the spreadsheet and a boon for bonuses. Most of these firms that outsourced didn't consider the externalities, the hidden costs.

They missed the fact that management needs to have a close working relationship with workers to insure quality and innovation. They also missed the costs and risks of an international supply chain, which is increasingly out of step with the shorter, faster product cycles; and as labor becomes an ever smaller part of the overall process, labor savings become less and less relevant. As products become more high-tech, production is more complicated, and the quality, rather than the cost of labor, becomes a priority.

As it turns out, maximizing shareholder value in the short-term leads businesses to do things that detract from maximizing long-term shareholder value, such as outsourcing, favoring cost-cutting over innovation, the destruction of brand equity, and excessive executive compensation. Outsourcing isn't an isolated event. It's the result of the underlying philosophy of shareholder value.

Fiscal cliff negotiations have devolved into direct talks between President Obama and John Boehner, cutting other congressional players out in effort to streamline the talks. House Speaker John Boehner and House Minority Leader Nancy Pelosi sparred in dueling press conferences today.

Boehner declared there was no progress in the talks. He accused the White House of enacting a deliberate strategy of”slow-walking” the economy toward the fiscal cliff. Pelosi took umbrage at that term. She said Republicans are the ones who have not acted on a bill that’s cleared the Senate, which would extend the Bush-era tax cuts for 98% of the population. Mitch McConnell was apparently too befuddled and so he just filibustered himself.

Today’s jobs report shows an economy that’s still moving in the right direction but way too slowly, which is why Washington’s continuing obsession with the federal budget deficit is insane. Jobs and growth must come first. The fact is some 350,000 more people stopped looking for jobs in November, and the percent of the working-age population currently employed continues to drop — now at 63.6%, almost the lowest in 30 years. Meanwhile, the average workweek is stuck at 34.4 hours.

The slowness of the jobs recovery isn’t because of Hurricane Sandy, and it’s not because of any uncertainty over the looming “fiscal cliff.” Businesses won’t create more jobs without enough customers. But consumers can’t and won’t spend because they don’t have the money. Until the private sector is able to boost the economy we need to invest in the economy. Now is the time to invest. The cost of borrowing is low; the yield on the ten-year Treasury is near historic lows, and the need for more jobs and better wages so high, and our infrastructure needs repair. We need to invest in infrastructure to improve productivity, and that means an investment in jobs.