I’ve been thinking a lot recently about the question of whether the current high level of unemployment in the US is cyclical (that is, will fix itself as economic recovery continues) or structural (that is, has deeper, more fundamental causes than the periodic ups and downs of the business cycle). Monetary stimulus will fix the former; the latter requires fiscal action from Washington (fat chance of that).
Regular readers will know that I’m deep in the structural camp. Recent travels in rural NY, NJ, PA and NH have done little to dissuade me–I’m seeing more dead businesses along the side of the road than a year ago, not fewer, despite a years-long record-high outpouring of “extra” money into the economy from the Fed.
Then, of course, there’s the case of truck drivers. According to the Wall Street Journal, the development of self-driven machines will begin to whittle away at the six million or so truck driving jobs in the US within two decades. In Australia, a country where labor is the most expensive factor of production, self-driven trucks are sprouting up at open-face mines, replacing (lots of) drivers with (a few) monitors in a far-away bunker. Sort of the way home security firms work.
Look at the numbers. According to the Bureau of Labor Statistics, the workforce consists of about 156 million people, of whom 144 million are working. There are 5.7 million people in the US with truck driver licenses–and a shortage of drivers. If all the licensed drivers are working, which is almost surely too high a number, then they represent 3.7% of the workforce. Throw them all out of work right now and the unemployment rate would be 11.1%, not 7.4%.
Obviously, that’s not going to happen. But it’s another illustration of the uphill battle that money policy is waging.
My point?
I have two:
1. As Ben Bernanke has been putting it increasingly forcefully to Congress, Washington’s continuing failure to enact fiscal measures (retraining, education) to address long-term unemployment risks creating a permanent underclass of citizens who don’t have the skills to do 21st-century work. Arguably, Europe has survived this way for decades–but then, who would want to be them?
2. Taking off my hat as a human being and putting on my hat as a portfolio manager, how does my belief that the US is on course for continuing high unemployment affect my equity portfolio construction? If I’m correct, accommodative money policy is doing perhaps too much good for 90% of the population, in hopes of doing at least something for an almost disenfranchised 10%.
This means:
–overall economic statistics, which include the 90% + the 10%, will understate how well off the average person is. Therefore, working only with macroeconomic data will result in underestimating profit growth for domestic companies.
–economic strength will continue to radiate outward, away from the wealthy and toward average Americans. Therefore, companies that cater to middle- and lower middle-class patrons will have the strongest relative profit growth.
–there may be some ebb and flow at the lower end of publicly traded consumer-oriented companies (WMT and the dollar stores, for example), as the bottom 10% trade down to goods and services below Wall Street’s radar screen but these companies” other customers have more money to spend.
–the plight of the 10% will hold back the pace of eventual money tightening. So easy money may be with us for a long time. If current indicators that the EU is entering economic recovery prove accurate, easy money may manifest itself in weakness of the US$. For US investors, that would make US-based multinationals much more attractive than they are now. The other side of that coin is that foreign companies with large US interests would become less interesting.
