Update

We noted earlier that this recovery will not resemble that of past recessions. We also highlighted the reasons why. Let’s freshen up and see where we are now.

Some core sectors are beginning to show signs of life. Last week a well-monitored survey of the manufacturing sector (Institute of Supply Management Index) indicated a recovery in manufacturing. This is a big deal folks. Activity increased in August for the first time in 18 months, and by the largest increment in 2 years. Activity in this key sector is not robust certainly, it is subdued, but it is with the living again. Most observers now believe the recession in manufacturing is over.

Great!. Are we off and running? No. Something is missing. The recovery from the 60's recession was brief, that out of the early 80's recession, rocket-like - only 6 months. What is the problem now? Jobs. Some call this a "jobless recovery".Without jobs there is no personal income, without personal income there is no spending. We’re all hit - a depressant despite vigor in other sectors. So if manufacturers are experiencing higher new orders (which they are) and better export orders (which they are) and expanded order backlogs and lower inventories (which they are) why continue to displace workers?

Let’s take a closer look at jobs. The unemployment rate for Aug jumped to 9.7% (approaching the figure Reagan inherited). Interestingly, there are two surveys - one for major business, and one for households (LLC, S-corp type, etc). The biggest hit was in the smaller survey where 392,000 jobs were lost. This was the source of the rate jump. The establishment survey on the other hand showed the lowest level of job loss in over a year, as larger firms’ earlier drastic measures of cost cutting and inventory reduction pay off. This is what manufacturers are up to. The little guy (household survey) remains in the muck and continues to shed jobs at only a slightly decreased pace while the big guy about has his ship in order. Thus, we have stabilized a tad in the rate of job loss as noted in the last post. But that’s only half the picture.

Again, so why continue to fire? Why not hire if you sense demand? Because employers are scared to death, not of the economy (which they know when left to its own devices, always recovers nicely) but of the government. They know the little details that media types, and most of the masses don’t, and, they know what not to do. They know for example that payroll taxes are not only scheduled to rise, but already have risen. And they know that government-mandated unemployment compensation is funded by employers through an unemployment-compensation payroll tax. As a result, they’re not taking on any full time help. Better to grow more efficient instead. Makes sense. Then there are the tax and regulatory threats related to health care and energy reform. Potential employers would be even crazier to hire given this nonsense.

Thus, unless employers get the sense that Obama’s plans at nationalization are bound for failure, they’ll sit tight. They can make it with fewer employees - a good excuse to grow lean and mean. With this piece of the pie missing, look for the recovery to remain painfully slow.


Robert Craven