Ah, how good would it be to go back to the days when nearly everyone had a wage to stagnate?
Not all that long ago, wages going nowhere fast was bad news.
As reported by Business Insider on 20 August 2019 (emphasis added):
‘The Australian Bureau of Statistics (ABS) noted last week that the proportion of Aussies working or looking to work — the participation rate — had never been higher.
‘With inflation having long-outpaced wages, it’s no secret that households are increasingly struggling from the rising cost of living.
‘That’s no doubt helped keep older Australians working longer, and pushed up the number of women working to help alleviate financial stress.
‘…[the] level of financial stress looks unlikely to improve in the near term.
‘As a record proportion of Australians work or look for work, more jobs have to be created to force the unemployment rate lower — a key economic target.
‘Without that [falling unemployment], pay will continue to stagnate and more people have to keep working or looking for jobs to afford rising costs of living.
‘This negative cycle has created a real pickle for the RBA, the entity charged with keeping the Aussie economy ticking along.’
Well, yesterday’s bad news would now be today’s good news.
Imagine if today we had…
Higher level of workforce participation. Unemployment at 5%. Wages to stagnate.
Today that would be a policymaker’s nirvana.
Yet, a mere nine months ago, this was bad news. We were being warned of the perils of wage stagnation…
- Financial stress was unlikely to improve
- Households struggling to afford the rising cost of living
- The RBA’s heartburn over the negative cycle
But everything in life is relative.
When compared with the latest news on unemployment, yesterday’s bad news is actually good news.
As reported by Roy Morgan Research on 1 May 2020 (emphasis added):
‘Roy Morgan’s unemployment measure for April shows 2.16 million Australians were unemployed (15.3% of the workforce) with an additional 1.32 million (9.4%) under-employed.
‘In total a massive 3.5 million (24.7%) Australians are now either unemployed or under-employed. This is 439,000 fewer than the 3.92 million (27.4%) during the last two weeks of March (March 20-31, 2020) immediately before the Federal Government’s JobKeeper program was announced.
‘Special research undertaken by Roy Morgan during April has revealed that 3.8 million working Australians have had their working hours reduced, 2.7 million have been stood down for a period of time, 2.4 million have not had any work offered, 1.4 million have had their pay reduced for the same number of work hours and 670,000 have already been made redundant. Some will have had two or more of the above impacts already on their employment.
‘Those most heavily impacted face a challenging employment market in the months ahead even as the harshest restrictions are rolled back.
‘The changed economic and employment landscape will start to normalise but with a much larger pool of unemployed and under-utilised workers there will be a far more competitive jobs market for employers to pick from. There will be no “snapback”…’
Almost one-quarter of the Australian workforce is un or underemployed. And, that number would be a whole lot worse without the de facto dole program JobKeeper.
The Roy Morgan special research contains some big and very disturbing statistics.
The new bad news that awaits is…
Less people employed. Challenging employment market. More competitive wage environment (stagnating or even falling incomes). There will be no ‘snapback’.
Yet, somehow, the share market is managing to see good news in all this new bad news.
Logic dictates that, if, financial stress existed before the crisis, then it has to be even more stressful now.
And, if the RBA had heartburn back then, it must surely have more serious cardiac issues now.
Economic activity — at its core — is a function of people doing business with each other.
How much business we do depends on the money — income, savings and borrowings — we have access to.
I’m not sure the market actually knows how our economic growth has been achieved.
Here’s a 30-second explanation from the October 2019 issue of The Gowdie Letter:
‘Australia’s last recession ended in September 1991.
‘According to the Australian Debt Clock, our nation’s total debt at that time was (a mere) $850 billion.
Source: Australian Debt Clock
‘The latest snapshot from the Australian Debt Clock, puts our total debt at a touch under $8,000 billion ($8 trillion).
Source: Australian Debt Clock
‘Over the past three decades, the Public and Private sectors have been able to increase debt (almost tenfold) due to the falling cost of debt…lower and lower interest rates.
‘These charts — rising debt levels and falling interest rates — are identical for all major economies.
‘The same formula has been used the world over to help turn dreams into reality.’
That’s it in a nutshell.
When you strip away the RBA’s economic jargon and bulldust, our so called economic success has been as simple as…lower rates, borrow more.
OK. That was then. How about now and the future?
With interest rates at 0.25%, can we get much lower? Maybe. But the impact will be nothing like when rates fell from 12%.
With more households experiencing financial stress — and a good many of them with uncertain employment prospects — will we see another household-borrowing binge?
Call me silly, but I just don’t see the same conditions in play that delivered us our world-beating economy.
That’s the bad news from Australia’s latest unemployment data.
But wait…it gets worse.
The world’s largest economy is doing it even tougher
The world’s largest economy — the one that sets the tone for the rest of the world — is doing it even tougher.
The outlook for US employment (or, more likely the lack of it) was a topic for discussion in the 18 May 2020 issue of The Gowdie Letter.
This is an edited extract…
‘We find 3 new hires for every 10 layoffs caused by the shock and estimate that 42 percent of recent layoffs will result in permanent job loss.’
University of Chicago research paper
published in May 2020
Source: University of Chicago
We intuitively know the pieces of the broken economy are not going to be put neatly back in place.
The world has changed.
However, very few (including those who have lost their jobs) are expecting that‘ 42 percent of recent layoffs will result in permanent job loss.’
We’ll get to how the researchers arrived at this number shortly. If proven — even close to — correct, that’s going to have a profound impact on economic activity in the world’s largest economy.
Putting the academic jargon and economic modelling to one side, the research paper was a very informative read.
Picking the best non-jargon bits to share with you was not easy.
However, the argument was so compelling it would have been a disservice not to give you the important take-aways.
Firstly, the rationale on why, life as we knew it, is not coming back
In this extract I’ve highlighted the relevant points.
‘The pandemic and lockdown will curtail current and near-term aggregate demand through several channels.
‘First, labor incomes and profits are severely depressed, and they will remain so for the duration of the lockdown.
‘Second, economic uncertainty is extraordinarily elevated, which further depresses consumption expenditures and investment demand. Since uncertainties about the course of the pandemic and the stringency of the lockdown are likely to abate over the next several weeks and months, firms have especially strong incentives to defer investments that are costly to reverse.
‘Third, temporary disruptions on the supply side of the economy can cause aggregate demand to fall more than one-for-one with the direct impact of the supply shock.
‘Fourth, as we discuss momentarily, the COVID-19 shock has negative effects on the economy’s productive potential in the future. That lowers expected future incomes, which further depresses current spending demands by forward-looking agents. The overall fall in aggregate demand is massive. While policymakers are aggressively deploying fiscal and monetary tools to counter this fall, it seems unlikely that they will or can achieve a full offset.’
- Income and profits…severely depressed
- Economic uncertainty…depresses consumption and investment
- Disruption to supply…causes demand to fall
- Expected lower future income…depresses current spending.
Monetary and fiscal stimulus…unlikely to achieve a full offset
The researchers have followed a logical progression of cause and effect.
Contraction begets contraction.
And, as I’ve stated previously, the Fed cannot print enough to fully offset the effects of…loss of income, loss of appetite for or access to credit and the pipeline of debt defaults.
On the US employment or more precisely, unemployment, outlook, the research paper offered this insight…
‘Broadly speaking, we anticipate permanent job losses in three buckets:
- jobs lost due to COVID-induced demand shifts
- jobs formerly at marginal firms that don’t survive the pandemic and lockdown, and
- jobs lost due to the intra-industry reallocation triggered by the pandemic and post-pandemic concerns about the transmission of infectious diseases.’
The last bucket — intra-industry reallocation — is where industries look for greater efficiencies and/or adapt their businesses to the new conditions…less staff more automation, less office space etc.
With reference to previous academic studies on major shocks to the economy, the research identified…
‘A key message is that the destruction side of reallocation precedes the creation side by 1-2 years.’
When an industry undergoes serious disruption (destruction), it can take several years for those resources (labour and capital) to be re-employed.
It takes time, money, effort and lots of red tape to create the new employers of tomorrow.
And that timeframe is getting longer…
‘Available evidence suggests the U.S. economy responds more sluggishly to reallocation shocks now than decades earlier, and that regulatory barriers to business entry and expansion are important reasons for the increased sluggishness.’
Based on data from these previous episodes of destruction and creation, the researchers developed the formula to estimate the 42% in permanent job losses (emphasis added):
‘Applying these figures to statistics…implies actual [employment] recalls equal to (0.72)[11.4⁄14.9] + 0.13[(1.6 + 2.1)⁄14.9] = 58 percent of gross staffing reductions.
‘This calculation adjusts for “permanent” layoffs that result in recalls and treats cuts in contractors and leased workers like permanent layoffs.
‘According to this calculation, 42 percent of the gross staffing reductions…will result in permanent job losses.
‘Applying the 42 percent figure to the 27.9 million new claims for unemployment benefits in the six weeks ending on April 25 yields 11.6 million permanently lost jobs. This number does not include future job losses caused by the COVID-19 shock.’
That was the number as at 25 April 2020.
Here’s where it gets ugly.
Since the research paper was published, the latest US claims figure is over 38 million.
When you apply the 42% figure to the latest figure, you’re talking about the permanent loss of…16 million jobs.
Based on the latest US labor force numbers, that permanent loss equates to 10%
AND add to this the 8% of ‘un and underemployed’ that existed BEFORE the crisis.
Source: US Bureau of Labor Statistics
That’s a more permanent ‘un and underemployed’ rate of 18%…these are Great Depression-like numbers.
At present, government programmes and central bank stimulus are acting like masking agents.
Hiding the true extent of the underlying damage to society.
Without people — in sufficient numbers — having the capacity or desire to spend and borrow, the debt-funded economic growth model is destined to stall.
The current disconnect between markets and the new economic reality is something to truly beautiful to behold.
Watching the market play with people’s minds — the believers become more believing and the doubters begin doubting themselves — is fascinating.
Investors are walking into a giant bear trap.
This is going to get really, really ugly.