Tax Increases and the Two Johns

[andyfox]

"If the Democratic policies had been pursued over the last two or three years, the kind of tax increases that both Kerry and Edwards have talked about, we would not have had the kind of job growth that we've had," Cheney said.

What kind of tax increases have Kerry and Edwards talked about?

[ThaSaltCracka]

we would not have had the kind of job growth that we've had
what is Cheney talking about?
Job Growth? How about a decrease in job losses, but an increase in job growth?
The Bush Admin loves to trumpet how much the job market is turning around, however the fact that unemployment is stabalizing does not mean that it is. The reason unemployment has "stabalized" is because many unemployed workers have now become discouraged workers, thus they are not counted as part the work force.

[adios]

Let me see here, the highest marginal tax bracket now is 35% if memory serves. Not sure what Edwards has proposed but Kerry has stated that he wants to increase it to 40%.

[adios]

The unemployment rate in June time frame of 2003 was 6.4%. The last report from the Department of Labor had unemployment at 5.6%. The Department of Labor jobs report for February is coming out on Friday before the markets open (well most of em). Accoding to the Department of Labor in the preceding 12 months 1.4 million jobs have been created in the economy. The household survey show far more. What will be interesting is seeing how the unemployment rate is effected as workers exhaust their unemployment benefits. Congress is in no mood to extend them any more. Sure you're right that PART of the reason for the drop in unemployment is that some people quit looking for work and they shouldn't be counted. Is 1.4 million jobs enough? Hell no it isn't but that doesn't mean Cheney was wrong either.

[ThaSaltCracka]

thank you for pointing out my error. Question though. How many jobs were lost in the preceeding 12 months? I only ask because if 1.4 million jobs were created, does that mean we are finally in the plus column for jobs created against jobs lost?

[adios]

"I only ask because if 1.4 million jobs were created, does that mean we are finally in the plus column for jobs created against jobs lost? "

For the Bush term in office no. For the past 6 months yes although the net number of jobs over the past 6 months is on the positive side it's not enough, not even close. There are 2 employment surveys conducted by the Labor Department, the payroll survey and the household survey. Most people refer to the payroll survey when they talk about jobs, unemployment, etc. Here's the skinny according to adios, take it FWIW. The American work force is going to continue to go through some rough times no matter who's elected. Many manufacturing jobs have been lost and they're not coming back. People need to be re-trained and re-educated. Unfortunately for some that have lost their manufacturing jobs their standard of living will decline because they're probably not re-trainable and re-educatable for the opportunities that are available and will continue to become available. I hope I'm wrong but I don't think I am. US style capitalism can be very cruel. Here's an article about the jobless recovery that you may find interesting. I'm not going to say that Bush isn't vulnerable due to the employment situation because he is.

Jobless Recovery (http://www.rich.frb.org/pubs/regionfocus/winter04/jargon.html)

Jobless Recovery
By Aaron Steelman


Resources
Web Links


--------------------------------------------------------------------------------
As recessions go, the most recent downturn was relatively mild. According to the National Bureau of Economic Research, it lasted just eight months — from March to November 2001 — and during that time real gross domestic product (GDP) declined only modestly before picking up again. Indeed, there are signs that the economy is gaining steam: Preliminary data show that real GDP grew 8.2 percent in the third quarter of 2003. But there remains a dark cloud in this otherwise hopeful picture: the labor market. Employment growth has been unusually weak following the recession, leading some to dub this a “jobless recovery.”

According to the payroll survey conducted by the Bureau of Labor Statistics (BLS), the U.S. economy has lost 2.8 million jobs since the recession began. Roughly 2.4 million of those losses have been in the manufacturing sector. The BLS conducts another employment survey, the household survey, which shows less severe losses. By that measure, 1.3 million jobs were lost during the recession, but more than 600,000 jobs have been added since.

Why the difference? The payroll survey asks companies how many employees they have, while the household survey asks people whether they have jobs. As a result, the household survey captures many single-person proprietorships that are left out of the payroll survey. And in a slow economy this can be particularly important. For instance, people who lose their jobs often find it desirable to work as consultants or independent contractors until more permanent positions become available.

Also, some observers have suggested that the household survey is more effective at accounting for newly created jobs at start-up companies. “In our dynamic economy, old firms die and new ones are born. The [BLS] learns about the deaths quickly, but it takes longer to learn about the births,” argues Allan Meltzer, an economist at Carnegie Mellon University. This, no doubt, was true for past recoveries. But recent revisions to the payroll survey have likely improved its coverage of new businesses.

Overall, economists tend to prefer the payroll survey to the household survey. Its primary advantage lies in its larger sample size. The data in the payroll survey come from about 400,000 businesses, covering roughly a third of total nonfarm employment. In contrast, the household survey is based on data collected from about 60,000 households.

“Whatever the verdict regarding the relative reliability of the two surveys, their differences should not obscure the fact that the U.S. labor market has been weak,” stated Ben Bernanke, a member of the Federal Reserve Board of Governors, in a November 2003 speech.

One factor contributing to recent labor-market weakness is common to almost all recoveries. Businesses are typically hesitant to hire new workers until they are sure the downturn is over because they don’t want to be burdened with excess labor costs should the recovery prove fleeting. It’s not unusual, for instance, to see a few quarters of GDP growth before some employers decide to increase their work force.

But this alone cannot account for the type of employment weakness we have seen recently. Consider a few other possibilities.

First, some have argued that increased benefits costs — especially health insurance costs — are deterring employers from taking on new workers. For instance, benefits costs rose more than 11 percent from September 2001 to September 2003, while wages and salaries grew at just 6 percent.

Second, political uncertainty may be playing a role. The terrorist attacks of Sept. 11, 2001, and the war in Iraq have made some employers hesitant to expand their operations.

Third, structural changes in the economy could be important. In particular, many of the manufacturing jobs that were lost during the recession may be gone for good. Employers saw the recession “not as an event to be weathered but as an opportunity — or even a mandate — to reorganize production permanently, close less efficient facilities, and cull staff,” write economists Erica Groshen and Simon Potter of the Federal Reserve Bank of New York.

Fourth, productivity growth continues to be strong at around 4.5 percent per year, compared to a historical average of roughly 2.5 percent. In many ways, this is a huge boon to the economy. Over time, productivity growth boosts real incomes and leads to more efficient industries. But it also can mean that employers need less labor in the short run.

While there is no single explanation for the jobless recovery, increased productivity is quantitatively “probably the most important” factor, Bernanke concludes

One way to to gauge how the employment picture really is, is to look at federal tax revenues and my understanding is that they have increased from the lows of the recession but are still below the peak level of 2000.

[AceHigh]

You are asking the wrong question. You should be asking what kind of job growth have we had? The answer is we've lost jobs, in record numbers. So it's unlikely that the tax increases have helped job growth.

Got to wonder why Cheney phrased his sentence like that. The economy has shown high rates of growth the last two quarters. If he just would have substituted the word economy for job, he could argue that without the tax cuts the economy would not be growing.

[ThaSaltCracka]

I really think this jobless recovery will be especially damaging to Bush. People wont care if the economy is getting better if they don;t have a job.

[andyfox]

Q: Which of the tax cuts enacted in 2001 would you change, if any?

A: I will roll back the Bush tax cuts for the wealthiest Americans. However, I don't believe that we should be raising taxes on the middle class. Specifically, I want to protect the increases in the child tax credit, the reduced marriage penalty, and the new 10 percent tax bracket that helps people save $350 on their first level of income.

Source: Associated Press policy Q&A, "Taxes" Jan 25, 2004

Kerry wants to touch the Bush tax policy for only people making over $200,000 a year.

[adios]

What I believe Kerry would say if asked these questions if he was being truthful:

Q. Why do you want to raise the highest marginal tax rate?

A. To reduce the budget deficit.

Q. The NTU and the Washing Post have stated that your proposals will increase the budget defecit from between $165 billion to $265 billion given your plan on taxes. In light of this, doesn't reducing the budget deficit involve raising taxes more, cutting spending or a combination of both?

A. Yes

Q. Which choice would you make?

A. A combination of both.

Q. So if you have your way raising taxes won't stop with just raising the highest marginal tax rate?

A. No.

Q. So where would you make spending cuts if you have your way?

A. Defense, Intelligence, and Homeland security.

Q. The amount of the current budget deficit is estimated to be $520 billion but as a percentage of GDP it's not even close to a historical high in fact on that basis the budget deficit it's less than the deficits ran in the Reagan years. Do you agree that viewing the deficit as a percentage of GDP is the proper way to view it?

A. Yes

Q. What are the biggest structural problems with the deficit?

A. Medicare/medicaid and Social Security.

Q. Social Security is running at a surplus now is it not?

A. Yes bet we know that the demographics of the baby boomers will erase this surplus and add a great deal more to federal outlays.

Q. You don't support privatization of Social Security, correct?

A. Correct.

Q. So you would further increase taxes to fund the budget shortfall caused by Social Security?

A. Yes.

Q. Would your plan for health care coverage increase the budget deficit contribution of Medicare/Medicaid?

A. Yes.

Q. So you would raise taxes to cover this budget shortfall as well?

A. Yes.

Q. Federal tax revenues are down since the peak in 2000. We have the Bush tax cuts as one reason. Isn't the biggest contributer by far due to the slowdown in the economy?

A. Yes.

Q. So economic growth will actually help the narrow the budget deficit?

A. Yes.

Q. Doesn't excessive taxation put a damper on economic growth?

A. Yes.

[jokerswild]

The jobs here are wonderful if you like minimum wage.

Cheney will remind Americans that minimum wage on an interantional scale is quite high. He will tell the unemployed, or underemployed to be glad they don't make you live like they do in India as your 50K a year jobe is given to an Indian for 10k. They expect the shoe shine American class to be overjoyed to be working 20 hours a week at McDonalds.

[ripdog]

[ QUOTE ]
The jobs here are wonderful if you like minimum wage.

Cheney will remind Americans that minimum wage on an interantional scale is quite high. He will tell the unemployed, or underemployed to be glad they don't make you live like they do in India as your 50K a year jobe is given to an Indian for 10k. They expect the shoe shine American class to be overjoyed to be working 20 hours a week at McDonalds.

[/ QUOTE ]

Interestingly, Molly Ivins points out that the Bushies are trying to get fast food industry jobs reclassified as manufacturing jobs. Pretty transparent as to why they'd want to do that. And pretty disgusting too.

[ThaSaltCracka]

Interestingly, Molly Ivins points out that the Bushies are trying to get fast food industry jobs reclassified as manufacturing jobs. Pretty transparent as to why they'd want to do that. And pretty disgusting too.

whoah, are you serious!!!! I got see the link you got this from

[Wake up CALL]

Mary Tyler Ivins is not known for factual representation but for political punditry, and she is very good at what she does.

[andyfox]

Faced with the decline in manufacturing jobs, the Bush administration’s Economic Report of the President opens the door to classifying fast food workers as manufacturing workers instead of service workers. In a special section titled “What is manufacturing?” the report asks, “When a fast food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?” The report, presented Feb. 9 and signed by President George W. Bush, notes the current system of defining manufacturing jobs “is not straightforward.” According to the federal Bureau of Labor Statistics’ “Occupational Handbook,” some 2.2 million food preparation and serving workers, plus another 421,000 counter attendants were at work in 2000—just a few million short of the 2.8 million manufacturing jobs lost since the Bush administration took office.

[Wake up CALL]

Andy I did not take the time to read all 397 pages of the President's 2003 Economic report but I did read Chapter 3 Policies for A dynamic labor Market and could not find any reference such as the one you made above. Below is the link in a PDF format, perhaps you will tell me on what page you found that this is on.

2003 Economic Report (http://w3.access.gpo.gov/usbudget/fy2004/pdf/2003_erp.pdf)
Thanks,

Wake

[adios]

I have a friend (yeah I actually have a few /images/graemlins/smile.gif) that is a software developer from India who's been living in the US since 1995. He claims that he would have been better off staying in India than moving to the US as he would have ultimately made more money due to stock options. There's an interesting article about outsourcing software development work to India in yesterdays Wall Street Journal on the front page. As I suspected it's not as easy using outsourcing for software development as many who are unknowledgable about software development would have us think. Have companies saved money in outsourcing software development work to India? Yep some have. IMO effective and skilled management will still be in demand in this field in the USA. So will highly skilled developers. In the not too distant future I think wages for software developers in both countries will reach some sort of equilibrium.

[andyfox]

The fast food issue is addressed on page 73 of the lengthy report in a special box headlined "What is manufacturing?"

"The definition of a manufactured product," the box reads, "is not straightforward."

"When a fast-food restaurant sells a hamburger, for example, is it providing a 'service' or is it combining inputs to 'manufacture' a product?" it asks.

[elwoodblues]

That's good stuff. Why limit it to fast food? Wouldn't the greatest chef's in the world just be "manufacturing" a product?

[adios]

As much as I'd like to see robust jobs growth in the economy I've been posting on the Stock Market forum that I don't think we'll see it. My crystal ball only goes out a year and it's cracked often. The employment report showed basically no jobs growth in the economy (+21,000). Average hourly wages were below expectations as well. Not good. The jobless recovery is alive and well unfortunately especially for those who have lost their jobs. Nobody cares about what's considered a manufacturing job and what isn't IMO. IMO employers in the USA are just paying up for unskilled labor. Is this surprising? Clearly Bush is very vulnerable. IMO Kerry is making some errors in letting the Republicans define him. Doubt if that will continue though. Out.

[Wake up CALL]

[ QUOTE ]
The fast food issue is addressed on page 73 of the lengthy report in a special box headlined "What is manufacturing?"

"The definition of a manufactured product," the box reads, "is not straightforward."

"When a fast-food restaurant sells a hamburger, for example, is it providing a 'service' or is it combining inputs to 'manufacture' a product?" it asks.




[/ QUOTE ]

Thanks for the reference point Andy but it doesn't exist there. Could this have been culled from a version of the report modified by the Democrats in order to make political hay?

Page 73 is headed by the title of Chapter 2 : Corporate Governance and its reform. This is the 2003 Economic report report of the President. Are you referencing a different document? Sorry to keep pressing this point but the liberals all too often make up things just in order to bash the success of the current administration.

[Taxman]

[ QUOTE ]
Sorry to keep pressing this point but the liberals all too often make up things just in order to bash the success of the current administration.


[/ QUOTE ]

Not that it ever happens the other way around.... I am way too lazy to go through all of that stuff, but Andy seems less likely to make up stuff than many here. <shrug>

[Wake up CALL]

[ QUOTE ]
[ QUOTE ]
Sorry to keep pressing this point but the liberals all too often make up things just in order to bash the success of the current administration.


[/ QUOTE ]

Not that it ever happens the other way around.... I am way too lazy to go through all of that stuff, but Andy seems less likely to make up stuff than many here. <shrug>

[/ QUOTE ]

A typical Taxman response:

1) Nyah, Nyah, others do it too!
2) Andy would never mislead me!
3) I am too busy to do the research so I'll believe what I like and trust Andy.


I never accused Andy of making it up but I do believe he was remiss in his research and took some other not so trustworthy liberals word for the information.
Now I may well have overlooked this little gem in the Economic report however I did look carefully where Andy indicated and found nada on the subject.

[Taxman]

And I thought we were actually getting somewhere with each other. I have argued with almost everyone on this forum about one thing or another and I don't take anyone at their word. Personally I don't much care about this particular topic (given that I know next to nothing about it) and I don't have the time or energy to sift through hundreds of pages of dry text. Obviously you are not willing to do so either so lets not be a hypocrite here. I have done plenty of research and offered sources on things I do care about. My comment was not meant to do anything other than point out that Andy tends to be much more straightfoward than most here. Also, it is obviously true that both sides do plenty of making things up to bash eachother's administrations (the Republicans are better at it too IMO). I'm sure Andy has a source and is not simply inventing things, though that source may or may not be trustworthy. You are constantly (not always I'll admit) remiss in your reasearch and instead of clarifying you get pissed at me for pointing it out. I can't even make one innocent comment without you going on the warpath. Relax, you'll live longer.

Taxman

[elwoodblues]

Are you sure you've got the right report (yours was "transmitted to congress February 2003"

[elwoodblues]

This one should get you to the current report...on page 73 is where you'll find box 2-2 entitled "What is manufacturing"

2004 report (http://a257.g.akamaitech.net/7/257/2422/09feb20040900/www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf)

[Wake up CALL]

Thanks Elwood, that is what I was searching for. I got somewhat confused when Andy responded to my post that had the link to the report I had found (2003). I then began to wonder about some possible miscommunication. The mistake was on my part.

[andyfox]

When I say it's on page 73, you can take it to the bank.

Sometimes. /images/graemlins/wink.gif

[andyfox]

"Clearly Bush is very vulnerable."

-I've been saying this all along.

"IMO Kerry is making some errors in letting the Republicans define him."

-Well, it's early and he's a novice at this game.

[ThaSaltCracka]

just to clarify on the pdf doc. its page 78-79.

[adios]

Be careful what you ask for Andy /images/graemlins/smile.gif. Here's an article with some commentary you may find interesting:

Job Growth Anemic in February (http://biz.yahoo.com/rb/040305/economy_13.html)

Job Growth Anemic in February
Friday March 5, 4:45 pm ET
By Tim Ahmann


WASHINGTON (Reuters) - The U.S. economy added a paltry 21,000 jobs last month, according to a surprisingly weak government report on Friday that turned up the heat on President Bush as he seeks re-election.

The February jobs report from the Labor Department was the latest in a string that have fallen far short of expectations, dashing hopes employment would soon turn decisively higher.

"The job market is stuck in a cycle of inertia," said John Challenger, head of the outplacement firm Challenger, Gray & Christmas. "The fact is, we are going to have to get used to slow job creation in this country."

The details in the report were uniformly bleak.

Private-sector employment showed no gains. Government hiring was the only reason the nonfarm payroll count rose.

In addition, job creation in December and January was weaker than previously thought, by a combined 23,000 jobs.

While the unemployment rate held steady at 5.6 percent, that was only because many people stopped looking for work. Employment as measured by a survey of households plummeted.

Chris Low, chief economist at FTN Financial, said the report was "unambiguously ugly." Joel Naroff of Naroff Economic Advisors called it "terribly disappointing."

Wall Street firms had forecast a February gain of 125,000 jobs and the market reaction was swift and sharp.

The dollar weakened against most currencies and U.S. Treasury bond prices shot up, sending interest rates down sharply, on the view the Federal Reserve would hold borrowing costs steady for a long time.

In the stock market, expectations of steady interest rates helped temper concern over the lack of jobs. The blue chip Dow Jones industrial average closed up 7 points at 10,595, but the tech-heavy Nasdaq Composite Index dipped 7 points to 2047.

Economists warned consumer spending could falter, once a burst of tax refunds was spent if jobs did not turn up.

"The risk of an economic slowdown later this year has increased, persuading businesses to be extra cautious about hiring people," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

JOB LOSS POLITICS

Democrats reacted almost as swiftly as the markets, blasting Bush for the 2.2 million jobs lost on his watch.

"At this rate the Bush administration won't create its first job for another 10 years," Democratic presidential candidate John Kerry said in a written statement.

The Bush administration released a forecast last month that looked for average job growth of about 300,000 a month this year -- a forecast that looks increasingly pie-in-the-sky.

"The numbers ... reinforce our view that it would be a terrible mistake to raise taxes on American families and American businesses that are working to create jobs," Treasury Secretary John Snow said, referring to Kerry's proposal to roll back tax cuts for the wealthy.

An average of just 42,000 jobs have been created each month in the last three months, down from the 79,000 average of the prior three months. Economists say gains near 150,000 are needed each month just to keep pace with labor force growth.

In addition, the report showed pay gains have slowed, while the average length of time workers who had lost jobs stayed unemployed climbed to its highest level since January 1984.

WHY? WHY?

Construction employment tumbled 24,000 in February, while the factory sector shed 3,000 workers, the 43rd straight monthly drop. The service sector also proved unexpectedly weak, creating just 46,000 new positions.

Economists were hard-pressed to explain why job growth had fallen far short of expectations yet again, although some said poor weather may have played a role. For the most part, however, they cited the ability of businesses to boost output without taking on new workers.

Analysts said the Fed would not bump up overnight interest rates from their current 1958 low of 1 percent until robust jobs creation finally takes root.

A Reuters poll on Friday of 23 major Wall Street firms found six had pushed back their rate-hike forecasts. Ten firms expect the Fed to sit tight until next year and six expect no increase until the fourth quarter of this year. Only one clung to call for a June hike, down from four in an earlier poll.

Some economists said the relative dearth of hiring more than 27 months into an economic recovery was unprecedented.

"We are in uncharted territory," said David Rosenberg, chief North American economist at Merrill Lynch.

[andyfox]

I don't think I wished for anything. Bush is clearly in trouble, though. Having said that, $153,000,000 can buy you out of a lot of trouble.

"The numbers ... reinforce our view that it would be a terrible mistake to raise taxes on American families and American businesses that are working to create jobs," Treasury Secretary John Snow said, referring to Kerry's proposal to roll back tax cuts for the wealthy.

Treasury Secretary John Snow is a sniveling, sycophantic, lying liar. If "American 'families' [sic] and American businesses . . . are working to create jobs," where are these jobs? Obviously tax cuts ipso facto do not create jobs. Bush's team has been pounding away at Kerry's purported proposed tax increases for a week now. It's a bad strategy. Bush is going to get the votes of most people making over $200,00 a year.

[adios]

[ QUOTE ]
I don't think I wished for anything.

[/ QUOTE ]

How about Kerry replacing Bush? That's fine with me though /images/graemlins/smile.gif. I mean if people think Kerry will do a better job as president in helping the economy fine. He could do worse though and that's no joke.

[ QUOTE ]
Treasury Secretary John Snow is a sniveling, sycophantic, lying liar. If "American 'families' [sic] and American businesses . . . are working to create jobs," where are these jobs?

[/ QUOTE ]

Not necessarily. The economy was shedding jobs net at a fairly brisk pace prior to the latest round of tax cuts. I remember Boris chiding me once about fiscal policy actually taking quite a bit of time to take effect as comparred to monetary policy and he's right. I'm not trying to pooh-pooh the eomployment problems in this country either so please don't take it that way. I'm not making excuses for Bush either. I've said many times people that are hurting economically will just vote for someone else and I think that could very well happen again. The buck stops with Bush period.

[ QUOTE ]
Obviously tax cuts ipso facto do not create jobs.

[/ QUOTE ]

If the tide has been turned from net jobs being lost at a fairly brisk pace to a pace where jobs are being created at a slow pace I don't think that the data necessarily supports that claim. Just look at GDP growth since the end of the recession and correlate to the tax cuts. Keep in mind I've been in some fairly lively discussions on the stock market forum stating that I don't see job growth being all that strong in 2004. What I see is the old economists models for correlating GDP growth to jobs growth are out the window now. A lot of people would jump in here and tell me that jobs are a lagging indicator but we've been in a recovery for YEARS, saw [8.2% GDP growth] in the third quarter of 2003, and over six percent GDP growth overall for the second half of 2003 but the jobs growth was lackluster at best. It's not an excuse for Bush, far from it. I'm just trying to present what I see as the realistic scenario. What I think people should be concerned about is the amount of monetary and fiscal stimulus that have been applied to this economy and the results that have followed. We're talking about some major monetary stimulus and we're seeing a fairly bleak employment picture. IMO restraints on growth in this economy could really send the US into the economic doldrums. IMO Greenspan alluded to this last week in his testimony to Congress. I'm not a doom and gloomer by any means. But IMO financial missteps, at this point, even slight could lead to disaster. I think most people feel that all that needs to be done is apply the right formula and we'll see lots of jobs growth. What I'm saying is that many of the right things are being done and this may be the best we can do at the present time. I'm sure many think I'm wrong but that's ok, I hope I'm very wrong.

[ QUOTE ]
It's a bad strategy. Bush is going to get the votes of most people making over $200,00 a year.

[/ QUOTE ]

I think you could very well see the standard of living for many in this country decline at least somewhat in the next 10 years or so. I sure hope I'm wrong about that too.

Hope I made myself clear.

[adios]

I thought this article was good. It's long and a little dry but I think it's a valid perspective on the employment outlook. It's not politically motivated, states nothing about the election or anything else political that I noticed. It doesn't paint a pretty picture. Some excerpts:

To get a clue as to what's so different now, let's go to a study from the New York Federal Reserve entitled "Has Structural Change Contributed to a Jobless Recovery?" by Erica L. Groshen and Simon Potter. I am going to pull several paragraphs directly from the paper, rather than summarizing, as they do a very clear job for economists in explaining their research. (http://www.newyorkfed.org/research/current_issues/ci9-8.html)

"The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change--the permanent relocation of workers from some industries to others--may help explain the stalled growth in jobs.

"A surge in payroll jobs used to be a reliable sign of the end of a recession--but not any longer. When the National Bureau of Economic Research (NBER), the accepted arbiter of business cycle dating, recently designated November 2001 as the end of the nation's latest recession, it based its decision largely on the growth of output (GDP).1 By the end of June 2003, GDP had risen 4.5 percent from its low in the third quarter of 2001 and significantly exceeded its pre-recession peak. While the members of the Bureau's dating committee saw the strong growth of this indicator as persuasive evidence that the downturn was over, they acknowledged that their decision was made very difficult by the 'divergent behavior of employment.' What troubled the committee was that payroll employment, which would normally rise in tandem with output, had shown no sign of recovery. Indeed, the payroll numbers fell almost 0.4 percent in 2002 and another 0.3 percent through July 2003. In this edition of Current Issues, we explore why the recovery from the most recent recession has brought no growth in jobs. We advance the hypothesis that structural changes--permanent shifts in the distribution of workers throughout the economy--have contributed significantly to the sluggishness in the job market.

"We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment."

They further explain what they mean by structural versus cyclical change:

"At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

"Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

"A preponderance of structural - as opposed to cyclical - adjustments during the most recent recession would help to explain why employment has languished during the recovery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions."

They go on to analyze industry by industry the nature of job losses and do indeed conclude that there is a significant amount of structural change. In past recessions, roughly 50% of the job losses were cyclical and thus poised to come back swiftly and the other half were structural. During this last recession, the amount of structural job losses was 79%. Think telecom and manufacturing, as examples, not to mention all the jobs which technology and mergers have eliminated.

The last recession has had to overcome a far deeper permanent loss of jobs than any post-war recession. Given that, we should not be surprised at the job-less recovery.

They give us three reasons as to why there might be such a significant increase in structural job loss. First, over expansion in industries to the enthusiastic boom of the 90's, then the possibility that the Fed actually reduced the problems of cyclical job loss through its easy money policy, and finally the simple decision by management to run leaner operations.

Here is what I think is he central part of their conclusion:

"The largely permanent nature of this recession's job losses could explain why jobs have been so slow to materialize. An unusually high share of unemployed workers must now find new positions in different firms or industries. The task of finding such jobs, difficult and time-consuming under the best of conditions, is likely to be even more complicated now, when financial market weakness and economic uncertainty prevail. In such an environment, firms may hesitate to create new jobs because of the risks involved in expanding their businesses or undertaking new ventures. Some support for this interpretation comes from the findings of the Job Openings and Labor Turnover Survey, which suggest that the current shortfall in payroll growth owes more to low job creation than to widespread job elimination."

and

Let's look at some of the implications of the above two pieces. First, obviously, we have permanently lost more than the usual number of jobs for a recession. Structural loss of jobs is normal. But this time it has been much higher than in the past. It is Schumpeter's creative destruction on steroids. Every new innovation changes the relationship between labor and production. Sometimes it allows for fewer people to produce more "stuff." Other times it simply removes the need for products or services, like buggy whips and typewriters. But it still means those who lose their jobs must find new ways to re-train themselves.

Second, as Rosenberg pointed out, it is often cheaper for employers to buy technology than hire new employees. Partially that is because the price of technology is coming down and partly because the cost of borrowing is so cheap.

These two factors are not going away. We are seeing continuing high numbers of lay-offs, much more than one would expect for this point in a recovery. Money is going to be cheap for quite some time. These are headwinds against which rising employment must sail.

What is actually amazing is that the job picture, from the point of view of past recessions and from whichever set of unemployment statistics you look at, is really quite astounding. The American economy has created an remarkable number of new jobs in a small amount of time. If this had been a typical recession, we would now be seeing a significant drop in unemployment. Has it created all we need? No. But given the actual permanent loss of over 2,000,000 jobs, and the on-going nature of large lay-offs, it is remarkable that unemployment is as low as it is.

and this was something I hadn't contemplated:

Of course, if you are the one who is still looking for a job that is of little consequence. The economy will not be seen as amazing until you and your friends have jobs.

Which brings us to our final piece of the puzzle. Gary Shilling has done some excellent research on employment, giving us some very disturbing numbers. The extension of unemployment benefits has given a cushion to many of those unemployed.

But, he notes: "...although Congress extended that program twice, it ran out at the end of 2003 and has not been renewed... it's estimated that in January, 375,000 ran out of unemployment benefits. Unless the [program] is renewed or replaced by another extended benefit program, the total is expected to swell to 2 million in the first half of this year. Want to bet, however, that Washington will sit by idly if unemployment leaps between now and the first Tuesday in November, to pick a random date?"

Ah, but some of the more cynical among my readers might think that this will lead to a surge in employment, as people will go back to work if they have no other sources of income. But Shilling (who no one ever accused of having a Pollyanna gene in his body) gives us a large body of research which shows that this time, that is not the case. While it may have been true in prior times, it is not true today. As it turns out, the data suggests what the real world knows: It is hard to find a job.

"[the research] reveals that the rate at which the unemployed exhaust their benefits used to peak [in recessions prior to 1991] at about the same time as the duration of unemployment. Since the early 1990s, however, the benefits exhaustion rate topped out while the duration was still rising. It may be that in earlier recessions, the leisurely unemployed went back to work when their benefits ran out, but not in the last decade. This lends credence to our belief that the jump in duration of unemployment since the early 1990s fundamentally is due to globalization, the lack of pricing power and cost-cutting that involves job chops, as discussed earlier.

"On balance, then, it does not appear that now or earlier, the duration of unemployment was influenced significantly by the extra unemployment insurance benefits that the federal government almost always institutes in tough times. Rather, added benefits are reactions to slack labor markets of which the time between jobs is an important measure.

"Further, the leap of the duration in recent years as well as it's abnormally high level in the much of the 1990s is probably due to the difficulty of many in finding new jobs in an era of globalization and lack of business and labor pricing power. When both blue and white collar positions are being eliminated permanently, it simply takes more time for people to find new jobs. This may mean that the average duration of unemployment is now a more important gauge of the labor market than the unemployment rate in influencing consumer sentiment and spending as well as voter attitudes."

The average duration of unemployment is over 21 weeks, and was just barely under the all-time highs of last quarter. (I did not ask Gary if this included those who are no longer classified as unemployed because they are not looking for a job, but I bet it does not, which if they were included would make the number even higher. Next week, we will see if my cynical attitude is correct.)



Those Magic Unemployment Numbers (http://www.frontlinethoughts.com/printarticle.asp?id=mwo030504)

Those Magic Unemployment Numbers
March 5, 2004
By John Mauldin


The Bureau of Labor Statistical Magic
The Structure of Unemployment
Capitalists of the World, Unite
Bull's Eye Investing, Kansas and Sir Walter









That loud boom you heard Friday morning coming from the futures pits was the job report imploding the dollar and sending interest rates tumbling. The consensus estimate was for 125,000 new jobs and it came in at a meager 21,000. Most economists think that we need 150,000 new jobs created per month to actually gain ground with population growth.

This signals the potential for a weaker economy in the future, thus interest rates drop. A weaker economy also hurts the dollar, and thus the market reaction. Perversely, the stock market seemed to think lower rates are good for stocks in the future, so the broad market ended up sideways, except sadly for Martha Stewart Omnimedia.

We are going to follow up last week's thoughts on trade with a look at employment and the lack of job growth. These are two of the three critical issues the country will deal with in the coming election cycle, with Iraq and the War on Terror being the third. We are going to look at three different research reports and then see if we can draw some conclusions, as well as look at the magic of numbers from the Bureau of Labor Statistics.

The reasons for the jobless recovery are complex. They stem from a structural shift in the US and global economy, capital labor ratios and productivity, among other factors. It's not just job-outsourcing to China and India, the favorite whipping boys of the month.

Now, I want to put this letter in the context of an economy that is growing by over 4%, where US household wealth hit an all-time high last month, where there is a slight slowing of the rate of increase in household debt growth and that productivity growth is slowing, which as the Wall Street Journal noted "The gradual slowing in productivity suggest that employers are running out of ways to milk their workers for more output and may be inclined to hire more in the months ahead." I recognize that there are a lot of good things happening. We are simply going to focus this letter on one part of the economy where things are not doing as well.

Last week, I argued that productivity was a large reason for the jobless recovery. From that letter: "Here are the facts, conveniently brought to us by Martin Wolfe in the London Financial Times. First, American manufacturer employment has dropped 2.6 million jobs between March of 2001 and January of 2004. By January of 2004, employment in manufacturing was 17% below what it was in June of 2000, the peak month for manufactured output in the last cycle.

"Outsourcing? Offshore manufacturing? On the surface, it seems to be the culprit. It makes for good copy, as it is easy to see a manufacturing plant closing in Wisconsin and opening in Shanghai. But it is not that simple. If we look at the numbers, I think we can find another perpetrator. There was a 17% rise in worker productivity over the same periods noted above, with just a 3% drop in production. We are producing roughly the same amount of 'stuff' with a lot fewer workers. We produce almost twice as much as we did just 24 years ago."

But it is more than that. There are longer term structural changes at work and a shift in the nature of business investment, which we will look at. Plus, I think we can offer a few reasons why consumer confidence is going down, even as US household wealth hit a record high this last month. This has important implications for the economy and public policy and ultimately for our investment portfolios.

The Bureau of Labor Statistical Magic

First, some would argue that we should not be whining about unemployment. It is, after all, only 5.6%, which is historically not all that high. But current headline Bureau of Labor Statistics unemployment rates are not the whole story. The magic of statistics is that if you get to define the terms, you can make the numbers say what you want them to say.

No great conspiracy here, but the unemployment numbers are developed in such a way that unemployment is understated. If there was some conspiracy, we would not be able to look at the detailed way in which the numbers are developed. The fact that most commentators do not look beyond the headline number is not a conspiracy. It is laziness. Big difference.

The unemployment numbers are useful as they give us a direction of employment, which has been improving, and a basis for historical comparison. But there is more when you look at the underlying actual numbers that make up the statistics and how they are counted.

For instance, the BLS does not include people in the category of unemployed who want a job but have not looked for one in the last four weeks. If you add in the people who want a job but are not counted as unemployed, the unemployment rate goes up to 8.8%.

There are also 4.4 million people who are working part-time but would like a full time job. If you add those in also, we have 11.8% of the population who are unemployed or are under-employed.

But the statistics are even more ambiguous than that. If you look at the actual numbers for February 2004 (www.bls.gov) you find that the total number of people classified as unemployed went down by 127,000. Doesn't that mean we created 127,000 jobs?

The answer is no. Let me throw you some odd statistics. First, since November, the actual labor force (according to the BLS) has dropped by over 700,000, even though the population rose. The number of people actually employed dropped by a seasonally adjusted 265,000. The number of people who are now considered not in the workforce rose by over 500,000.

Yes, in the world of government statistics, we can have a rising population, the number of employed go down and still see the unemployment rate drop. We simply use a definition for unemployed which ignores many of those who are in fact unemployed and would like a job.

The number of people not in the work force has risen by almost 1.7 million in the last year. Part of the rise in the number of people not in the labor force is due to retirement, going back to school and other natural forces, but a significant part is simply reclassifying people as not part of the labor force because they have not looked for a job in the last four weeks. The labor participation rate is 62.2%, down by 0.2% from this time one year ago, yet supposedly the unemployment rate has dropped almost 1%.

We will come back to this in a minute, but let's look at some other studies first to give the numbers come context.

The Structure of Unemployment

Many economists are looking at historical charts of recoveries and predict that any day now we will see employment rise substantially. That is because in past recoveries, by 18 months after the end of the recession the employment numbers were soaring. Even in 1991, which was the first jobless recovery, the job growth started later than the typical recession cycle, but eventually took off.

To get a clue as to what's so different now, let's go to a study from the New York Federal Reserve entitled "Has Structural Change Contributed to a Jobless Recovery?" by Erica L. Groshen and Simon Potter. I am going to pull several paragraphs directly from the paper, rather than summarizing, as they do a very clear job for economists in explaining their research. (http://www.newyorkfed.org/research/current_issues/ci9-8.html)

"The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change--the permanent relocation of workers from some industries to others--may help explain the stalled growth in jobs.

"A surge in payroll jobs used to be a reliable sign of the end of a recession--but not any longer. When the National Bureau of Economic Research (NBER), the accepted arbiter of business cycle dating, recently designated November 2001 as the end of the nation's latest recession, it based its decision largely on the growth of output (GDP).1 By the end of June 2003, GDP had risen 4.5 percent from its low in the third quarter of 2001 and significantly exceeded its pre-recession peak. While the members of the Bureau's dating committee saw the strong growth of this indicator as persuasive evidence that the downturn was over, they acknowledged that their decision was made very difficult by the 'divergent behavior of employment.' What troubled the committee was that payroll employment, which would normally rise in tandem with output, had shown no sign of recovery. Indeed, the payroll numbers fell almost 0.4 percent in 2002 and another 0.3 percent through July 2003. In this edition of Current Issues, we explore why the recovery from the most recent recession has brought no growth in jobs. We advance the hypothesis that structural changes--permanent shifts in the distribution of workers throughout the economy--have contributed significantly to the sluggishness in the job market.

"We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment."

They further explain what they mean by structural versus cyclical change:

"At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

"Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

"A preponderance of structural - as opposed to cyclical - adjustments during the most recent recession would help to explain why employment has languished during the recovery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions."

They go on to analyze industry by industry the nature of job losses and do indeed conclude that there is a significant amount of structural change. In past recessions, roughly 50% of the job losses were cyclical and thus poised to come back swiftly and the other half were structural. During this last recession, the amount of structural job losses was 79%. Think telecom and manufacturing, as examples, not to mention all the jobs which technology and mergers have eliminated.

The last recession has had to overcome a far deeper permanent loss of jobs than any post-war recession. Given that, we should not be surprised at the job-less recovery.

They give us three reasons as to why there might be such a significant increase in structural job loss. First, over expansion in industries to the enthusiastic boom of the 90's, then the possibility that the Fed actually reduced the problems of cyclical job loss through its easy money policy, and finally the simple decision by management to run leaner operations.

Here is what I think is he central part of their conclusion:

"The largely permanent nature of this recession's job losses could explain why jobs have been so slow to materialize. An unusually high share of unemployed workers must now find new positions in different firms or industries. The task of finding such jobs, difficult and time-consuming under the best of conditions, is likely to be even more complicated now, when financial market weakness and economic uncertainty prevail. In such an environment, firms may hesitate to create new jobs because of the risks involved in expanding their businesses or undertaking new ventures. Some support for this interpretation comes from the findings of the Job Openings and Labor Turnover Survey, which suggest that the current shortfall in payroll growth owes more to low job creation than to widespread job elimination."

Capitalists of the World, Unite

David Rosenberg, Chief North American Economist of Merrill Lynch gives us this observation on yet another reason for a soft labor market: Let's read him in his own words:

"A little while ago, we published a report titled 'Capitalists of the World, Unite' because we had noticed that while this cycle has been sub-par from an employment standpoint, and that's true whether or not you look at the non-farm or household survey, business investment has actually been quite robust. What's interesting is how everyone is focused on China and India as the source of the job market malaise of the past couple of years, and while this is significant, the real story may well be in our own backyard. It is our contention that there is a fundamental shift underway in the capital/labor ratio. In essence, labor is re-pricing itself not just to the extremely low wage rates in China and India, but also to the declining price of capital here at home.

"Invoking the works of David Ricardo, there are two factors of production capital and labor, and the cost of capital as measured by the equipment & software price deflator has hit a 25-year low and in the past eight quarters is roughly down 2%. Over this 2-year span, the employment cost index has risen by almost 8%. Employment costs are not being driven down by the wage rate, which is decelerating, but rather by the acceleration in benefit costs. Benefits, largely healthcare and workers' compensation, now account for over a third of employment expense and is running near their fastest rate in 13 years. The challenge for the household sector is that wages are discretionary income while benefits are targeted.

"While everyone is looking for the answers to this lackluster job market cycle, businesses are actually far from stingy. They are focused on the input that is increasing less costly in the production process, with a focus towards upgrading their tech infrastructure. In fact, real business spending on tech capital expenditures has risen in 7 of the past 8 quarters and at an average annual rate of better than 12%. At the same time, more than 2 million payrolls have been shed and even the household survey shows job creation basically in line with the sluggish upturn in the early 1990s.

"The net effect has been to boost productivity sharply, which is running at a 5.3% year-on-year rate, almost double the pace of two years ago. At the same time, slack in the labor market has helped companies keep a lid on wage growth and as a result we have unit labor costs running at a -2.3% y/y rate. Unit labor costs have the most powerful statistically significant correlation with core consumer inflation, and are a key reason why the Fed can remain accommodative and the primary reason why corporate profit margins have remained wide even in the face of rising raw material prices."

Let's look at some of the implications of the above two pieces. First, obviously, we have permanently lost more than the usual number of jobs for a recession. Structural loss of jobs is normal. But this time it has been much higher than in the past. It is Schumpeter's creative destruction on steroids. Every new innovation changes the relationship between labor and production. Sometimes it allows for fewer people to produce more "stuff." Other times it simply removes the need for products or services, like buggy whips and typewriters. But it still means those who lose their jobs must find new ways to re-train themselves.

Second, as Rosenberg pointed out, it is often cheaper for employers to buy technology than hire new employees. Partially that is because the price of technology is coming down and partly because the cost of borrowing is so cheap.

These two factors are not going away. We are seeing continuing high numbers of lay-offs, much more than one would expect for this point in a recovery. Money is going to be cheap for quite some time. These are headwinds against which rising employment must sail.

What is actually amazing is that the job picture, from the point of view of past recessions and from whichever set of unemployment statistics you look at, is really quite astounding. The American economy has created an remarkable number of new jobs in a small amount of time. If this had been a typical recession, we would now be seeing a significant drop in unemployment. Has it created all we need? No. But given the actual permanent loss of over 2,000,000 jobs, and the on-going nature of large lay-offs, it is remarkable that unemployment is as low as it is.

Of course, if you are the one who is still looking for a job that is of little consequence. The economy will not be seen as amazing until you and your friends have jobs.

Which brings us to our final piece of the puzzle. Gary Shilling has done some excellent research on employment, giving us some very disturbing numbers. The extension of unemployment benefits has given a cushion to many of those unemployed.

But, he notes: "...although Congress extended that program twice, it ran out at the end of 2003 and has not been renewed... it's estimated that in January, 375,000 ran out of unemployment benefits. Unless the [program] is renewed or replaced by another extended benefit program, the total is expected to swell to 2 million in the first half of this year. Want to bet, however, that Washington will sit by idly if unemployment leaps between now and the first Tuesday in November, to pick a random date?"

Ah, but some of the more cynical among my readers might think that this will lead to a surge in employment, as people will go back to work if they have no other sources of income. But Shilling (who no one ever accused of having a Pollyanna gene in his body) gives us a large body of research which shows that this time, that is not the case. While it may have been true in prior times, it is not true today. As it turns out, the data suggests what the real world knows: It is hard to find a job.

"[the research] reveals that the rate at which the unemployed exhaust their benefits used to peak [in recessions prior to 1991] at about the same time as the duration of unemployment. Since the early 1990s, however, the benefits exhaustion rate topped out while the duration was still rising. It may be that in earlier recessions, the leisurely unemployed went back to work when their benefits ran out, but not in the last decade. This lends credence to our belief that the jump in duration of unemployment since the early 1990s fundamentally is due to globalization, the lack of pricing power and cost-cutting that involves job chops, as discussed earlier.

"On balance, then, it does not appear that now or earlier, the duration of unemployment was influenced significantly by the extra unemployment insurance benefits that the federal government almost always institutes in tough times. Rather, added benefits are reactions to slack labor markets of which the time between jobs is an important measure.

"Further, the leap of the duration in recent years as well as it's abnormally high level in the much of the 1990s is probably due to the difficulty of many in finding new jobs in an era of globalization and lack of business and labor pricing power. When both blue and white collar positions are being eliminated permanently, it simply takes more time for people to find new jobs. This may mean that the average duration of unemployment is now a more important gauge of the labor market than the unemployment rate in influencing consumer sentiment and spending as well as voter attitudes."

The average duration of unemployment is over 21 weeks, and was just barely under the all-time highs of last quarter. (I did not ask Gary if this included those who are no longer classified as unemployed because they are not looking for a job, but I bet it does not, which if they were included would make the number even higher. Next week, we will see if my cynical attitude is correct.)

(You can read a summary of this excellent research at www.agaryshilling.com (http://www.agaryshilling.com), under INSIGHT newsletter.)

Now, let's examine some of the implications. First, this underscores several of my long time themes. The Fed is not going to raise rates in this environment. Ultimately, without job growth, the stimulus driven recovery is going to weaken. Third, this is going to weaken consumer spending, contrary to what almost every mainstream economist believes. Simply the loss of benefits will put less money in the hands of consumers.

A notable exception is Richard Bernstein of Merrill Lynch. From his February 9 US Strategy Update:

"...look at the relative forecast P/E between Consumer Staples and Consumer Discretionary over the past 20 years. The relative valuation has carved out a cycle during the last 14 years or so, and it turns out that this cycle is a very good contrary forecaster with respect to the health of the consumer sector. In other words, when Staples are priced very expensively relative to Discretionary, then it implies that the market is convinced that the consumer sector will meaningfully weaken. Typically, the consumer has ended up being stronger than investors expected. Similarly, when Staples are very inexpensive relative to Discretionary, it implies that the market is convinced that the consumer will be extremely strong. Typically, the consumer has subsequently disappointed. Currently, Staples remain quite undervalued relative to Discretionary stocks. Investors are once again convinced the consumer will strengthen, but history argues that they might be disappointed."

When and if consumer spending slows down, the stock market is in big trouble.

What can offset this and make consumers spend more? Mortgage rates are once again dropping. This will allow anyone who missed the last round of re-financing to once again hit the piggy bank of increasing home values. The irony is that a weak economy allows for lower rates which allows for increased borrowing and spending. We will have to watch this carefully, as it could be a pre-cursor to another large stimulus.

On the negative side of the ledger, gasoline and energy prices are acting as a huge tax increase. My bet is that the government will soon stop (or at least slow down) topping off the strategic petroleum reserves. They are increasing them quite steadily, and it does put upward pressure on prices. Would Bush open up the reserves to lower prices in the summer as a further stimulus?

The correlation between employment and consumer confidence is quite high. Kerry is going to play upon that uncertainty.

From a realistic point of view, there is not much more the Bush administration can do that will have an immediate effect. They have cut capital gain taxes, which helps foster new business and investment. As Shilling noted, if employment does not improve within the next few months, expect Washington to once again extend benefits.

You can cut regulations and bureaucracy, which is a serious hindrance to capital formation, but that is not going to do anything this year. The time for that to make a difference today was in 2001. We need to really, really re-think our educational system. Vouchers, higher new standards, updated curriculum and less bureaucracy and more teachers and smaller classrooms and a host of other changes. Of course, this makes a difference in 15-20 years, but it is one we must start.

The economy is growing at 4% plus. But if we need to grow at 1% just to make up for population growth, and if productivity is over 3%, that does not make for a surge in employment. Either we must grow even faster, or eventually the lack of job growth is going to slow the economy and create a recession.

On the political from, my bet is that the Bush team argues that Kerry, by raising capital gain taxes, would damage what new business formation there is. Along with the dividend tax cut, it is a large part of the stock market rebound. But that is a difficult and complex proposition to put across. We will see benefits extended and everything that can be done to show those who are worried that they care. And of course Kerry will say that everything they do is either wrong or too little, too late. They will both have huge amounts of money to make their case. It is going to be a long campaign season.

But at least the debate will be as stark and contrasting as any we have seen in years. It will be interesting to see the outcome.

[andyfox]

Yup, all Bush has to do is explain this at the first debate and he's home free. /images/graemlins/smirk.gif

[adios]

I think the US should make some laws to tax companys more that utilize computer technology to replace unskilled labor /images/graemlins/smile.gif.