US unemployment, cyclical or structural?: the latest round

the Siemens interview

Yesterday’s Financial Times contains a report of the paper’s interview with Eric Spiegel, the head of US operations for the German industrial conglomerate, Siemens.

Asked about the employment situation in the US, Mr. Spiegel comes down squarely in the structural camp.  He makes the following comments (some in the video of the interview, but only summarized in the written article):

–Siemens wants to hire 3,200 workers in the US right now

–all of these jobs require at least a college degree, some require more advanced education

–Siemens has recently begun to use recruiters to find workers to fill these jobs (by luring workers from other firms), because the company can’t find what it needs through internet job boards or resume submissions.  “There’s a mismatch between the jobs…and the people that we see out there.”

–in the Carolinas, Siemens is retraining laid-off textile workers to manufacture gas turbines, adapting the traditional manufacturing apprentice program of in-house training the company uses in Germany to do so.

The article also refers to a recent Manpower “Talent Shortage” survey, according to which 52% of US employers queried say they’re having trouble finding job candidates with the skills needed to fill open positions.  A year ago, only 10% were having this problem.  Other recent employment research says that employers are now willing to pay to relocate new employees, since they can’t find suitable local candidates.

implications for stocks

The Siemens interview suggests that the US is much closer to full employment than a 9% unemployment rate would suggest.

If companies want to continue to expand at full employment, the only way to get workers for their new plants is to bid them away from other employers by offering higher wages.  But this is how wage inflation starts.  And in an advanced economy like the US, wage inflation is the crucial component in overall inflation.

The orthodox remedy to nip incipient inflation in the bud is to raise interest rates to a level where expansion becomes financially unattractive.  Doing this is unequivocally bad for bonds.  History shows, however, that stocks can advance modestly while rates are going up.

On the other hand, one of the sectors that will be hit worst by rising rates is construction–one of the few employment sources for the low- or unskilled workers who make up the bulk of the unemployed.  Also, higher rates typically mean lower house prices and higher payments on variable-rate mortgages.  In a perverse way, it’s fortunate that the economy is only moving ahead slowly, so that any rate rises will likely be more modest than has historically been the case (which is a minimum of 175 basis points).

To my mind, all this has two implications for US stocks:

–the forces that have led the bull market to date, that is, non-US exposure + consumption by the more affluent, will likely keep their front-row role, and

–while the already-employed may be on the cusp of enjoying substantial wage increases, the lot of the chronically unemployed may well deteriorate over the coming year or two.  This is a social problem that fiscal policy from Washington is best suited to deal with.

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