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Tuesday, October 11, 2011

We Need More Jobs, but We Can't Count on Construction to Save the Day

Unemployment remains at 9.1%, while the broader and more telling U-6 unemployment rate (also including discouraged and part time workers who want full time work) is now an eye popping 16.5%.

While everybody agrees about the need to create more jobs to get the economy moving again, not much is being said about how to do it. In that regard, the longer term negative impact on jobs due to the recent debt induced bubble in construction activity needs to be recognized for the game changer it is.

During the bubble timeframe, lots of nonrecurring construction took place. We borrowed to build and then borrowed against our newly created home equity to be able to spend some more. We didn't invest. We consumed. Those debt enabled bubble construction jobs are now largely gone and most won't be returning.

In past recessions, construction has led the way to recovery. This time we have a nasty credit cycle induced recession rather than a more typical business led recession with which to contend. This will have profound consequences for jobs and economic activity going forward. We have to look elsewhere than construction. And we have to accept the fact that this is not a "normal run of the mill" recession. It's much more serious than that.

So the question du jour gets down to this: Where should we expect to get the permanent new jobs needed to meaningfully bring down the current rate of unemployment? While there aren't any easy short term answers, the politicians, including the president, haven't offered up any long term solutions either. The topic of global manufacturing competition and the skills shortage relative to compensation is not even being discussed in any coherent or rational manner.

Meanwhile, President Obama proposes another new temporary $447 billion government stimulus program called the American Jobs Act. He claims this will improve the jobs situation, which I doubt. But even if it does, it will be of a temporary nature only. That is, the program won't have any measurable long term impact on jobs. On that you can wager and win.

It's likely that the U.S. employment situation won't return to what would be considered normal for perhaps another five years or more. And without policy makers acquiring a better understanding of the structural issues that need to be addressed to enable sustainable economic growth, getting rates of unemployment down to anywhere close to 5% simply won't happen.

In every post-war recovery of the 20th century, construction led the way. Obtaining credit simply wasn't an issue, unlike today. And unlike prior recessions, today we don't have the option of meaningfully reducing interest rates to boost economic activity. Interest rates are already at historic lows, so rate reductions are not an option. To make things worse, household and government debt levels need to be reduced meaningfully as well.

And to top it off, home prices continue to fall, causing potential buyers to stay away from the market, even if they have the down payment and are otherwise credit worthy.

Housing's Job Engine Falters tells the story of housing's ongoing negative impact on a small Maryland community. The story is a familiar one about the effects of a housing boom that burst.

In addition to the builders and developers who lost their jobs, there are the effects on those employed by realtors, small business owners, local bankers, mortgage brokers, wholesalers, landscapers, lawn care servicers, home improvement workers and many others as well.

I would add to that the impact on the even more indirect jobs that existed because of the housing boom. Additional consumer discretionary spending was funded by borrowings from home equity loans taken out during the bubble years. So we can include people like car salesmen, restaurant workers, retail workers, travel agents and countless more

During the boom years, we borrowed and spent a whole bunch of money to buy houses, and then added insult to injury as we borrowed and spent more based on the inflated equity therein. Now it's payback time, and we can't replace jobs lost by repeating the home buying spree again. We will have to find some other work to do.

In addition to the aftershock of the burdensome household debt, we now have lower property asset values to contend with as well. Due to these reduced home values, our communities will have fewer receipts from property taxes to build new schools and provide other local services.

That will make a tough situation even tougher for local communities.

Meanwhile, we still have all the debt to repay, even though the assets have declined in value. But what's next for housing?

Owning One's Home Loses Some Appeal is about the prospects for improved home sales. Listen to what one housing economist has to say, "People's perceptions of likely future home prices have been altered in a negative fashion. People buy a home not just to live in but because it's an investment. Combine that with a lousy economy and it becomes a lot harder in today's world to qualify for a mortgage to buy a home than to qualify to rent one for the next year."

The economist's comment about housing as an investment is an interesting one.

My view is that housing has never been a good long term investment. At times it's a rewarding speculative venture (a trip to Las Vegas can be, too), but it's never a good investment. That type of "investment" thinking is how we got ourselves into this mess.

Although using OPM and leverage often led to profits when prices were increasing, as they did for the past twenty or so years, prices can go down, too. Viewed from a historical persepctive, housing has not been a good investment, even though during the recent bubble period home ownership was seen by many as a can't lose one way bet.

So now we know better but we're all stuck with the bill. My guess is that it will be a long, long time before speculative fever, albeit disguised as "prudent" home buying, takes center stage again. In any event, we'll be too busy paying down the loans undertaken during the boom to "invest" in these sure things again anytime soon.

Where will we get new jobs to replace those lost with the housing bust? Well, these necessary jobs won't come on stream in a meaningful way unless some new thing takes the place of our once-in-a-century home related spending and borrowing spree. And that something looks to me like it has to be domestic manufacturing jobs. It's back to the future, in other words.

What we most clearly need now is a manufacturing renaissance in America. Far too many of those jobs have moved offshore, and we need to make a concerted effort to get them back. That effort, even if undertaken, will take a long time to accomplish, but so far we aren't even seriously talking about it.

Instead we talk about more temporary "stimulus" jobs. That's just silly.

In summary, we built and spent way too much on a nationwide, speculative and debt driven housing venture. Now the bubble has burst. Those construction and related jobs won't be returning in big numbers anytime soon, and perhaps never.

Accordingly, it's time to focus on what we need to do to be a competitive producer of tradable goods worldwide and how to employ our many available workers to do just that.

If we make an all out effort to compete with all comers, we'll have jobs for all. If we don't, we won't.

We can't borrow to build, consume and spend our way to lasting prosperity. We've already tried that.

Thanks. Bob.





































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