In February, I wrote a post on unemployment in the US, titled “JP Morgan’s forex + IBM’s Watson = problems for Wal-Mart?”.
A couple of days ago, a reader pointed out that my conclusion didn’t follow from the argument I made. After rereading my post, I think he’s right. This post is an elaboration/clarification of my earlier comments.
cyclical vs. structural unemployment
I have a number of uncles who, when they were young, worked as longshoremen on the docks in New York. They unloaded ships. That business ebbed and flowed with the business cycle. As a result, they went through periods where they worked a lot, and through periods when they worked only a little. That’s cyclical unemployment.
Then, the transport industry innovated by introducing container ships, which didn’t require more than a few longshoremen to operate machinery. That’s structural unemployment.
shift of manufacturing to developing countries
The failure of central planning in places like China in the late Seventies-early Eighties has fueled the gradual development and expansion of efficient, low-cost export-oriented industries in these countries. It has also led to the courting of US and European manufacturing companies, in a (successful) effort to persuade them to open manufacturing operations in these areas, as well. This is the process of technology transfer.
The result has been the continuing structural migration of labor-intensive jobs away from high-cost regions like the EU and the US. During the speculative housing boom of the last decade in the US, new job entrants with manual labor skills and laid-off manufacturing workers were easily able to find employment in the construction industry. This delayed their adjustment to the new realities of global commerce. But no more.
Eventually, the US will digest the massive housing and retail overcapacity that was created several years ago. But it will be an extremely long time, in my opinion,–if ever–before the construction industry in the US again employs as many as it did in 2006. If so, there’s a considerable structural element in construction-related unemployment, not just a cyclical one.
In addition, increasing global competition isn’t letting up. It’s pressing firms in the US to accelerate replacement of clerical labor with machines. The examples of JP Morgan, which is only now substituting computers for typists earning $100,000 a year, and IBM, which is developing computers that have deep databases and understand ordinary language, suggest that this process is nowhere near completion. The recent realization of bricks-and-mortar retailers that they need a bigger online presence and fewer, smaller stores, is still another trend that doesn’t favor the job prospects for clerical or manual laborers.
More evidence of this continuing pressure on low-skilled workers comes from Wal-Mart, a third or so of whose customers are among the least affluent Americans. Its same-store sales in the US continue to fall, while, say, Tiffany’s business is booming.
There’s been little effective response to the problem from the White House and none from Congress that I can see. Only the Fed has been acting. And all it can do is keep interest rates ultra-low. But if the basic problem is structural, rather than the business cycle, keeping rates low won’t have much effect. It’s a little like hoping that low rates will induce manufacturers to ship their goods without using containers, thus offering the possibility of work to my uncles again.
my conclusion, and where I was mistaken
In my earlier post, I said that there would be adverse long-term consequences for the country if my description that we’re experiencing structural unemployment that Washington refuses to recognize or address, is correct. I’m still fine with that opinion.
In the near-term, however, I said that Washington’s actions make no difference for the stock market. That’s where I’m mistaken.
If I’m correct that there’s an overhang of unemployable workers, the economy will continue its sub-par recovery, interest rates will stay low, and today’s winners–multinational and globally focused firms, and companies catering to the more affluent–will continue to prosper.
On the other hand, if Washington’s policy of inaction is the right thing to do, then hiring will accelerate much sooner than I think and the economy will pick up speed as it heals itself. Success will feed on success. The Fed will then begin to raise interest rates.
In the past, in such periods the stock market has continued to make some upward progress. But the winners and losers among publicly traded companies would most likely change places. Domestic firms, and those that focus on ordinary Americans rather than the affluent, would become relative winners, in my opinion. Today’s top dogs would likely end up trailing the pack for a while.
Personally, I don’t think this will happen. But because this is such a fundamental tenet of my portfolio positioning, I should have been paying more attention to the consequences of my being wrong.