Randomly Noted

A quote from Jeffrey R. Immelt, the chairman and chief executive of General Electric who was just tabbed by President Obama to lead a government council on job creation, sums up quite well a key aspect of the  American economic dilemma.

“The assumption made by many that the United States could transition from a technology based, export-oriented economic powerhouse to a services-led, consumption-based economy without any serious loss of jobs, prosperity or prestige was fundamentally wrong,” Immelt wrote in an “op-ed” piece in today’s Washington Post.

I’ll take issue with one aspect of the quote: the implication that someone planned it that way, that someone thought this was a good idea. The transition, which threatens the long-standard American advantage of a broad and robust midlle class, was the result of market forces. Globalization works all sorts of ways.

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“Something happened in mid-December.”

It sounds like the subtitle for a horror movie. In fact, it was a crucial quote in a rather bullish economic forecast delivered today by a former Federal Reserve chairman.

While the current chairman of the U.S. central bank, Ben Bernanke, talked to senators at a hearing and was even-handed in his outlook for the economy and offered no real surprises, his predecessor, Alan Greenspan, adopted the role of U.S. stock market bull.

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Federal Express reported an 18% decline in second quarter earnings today. At first blush, that might appear to indicate that maybe the economy isn’t on the road to recovery after all. That’s because FedEx, and fellow shipping company UPS, are looked at as proxies for the economy. When businesses are building more products, they need to ship in tools that help them do that. And when consumers are opening their wallets, they buy products that are often shipped to them.

But read above the bottom line numbers at FedEx and you see some positive news.

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This is a big roll of the dice.

The U.S. Federal Reserve, at a time of too-slow economic growth but no longer of systemic emergency, voted today to add at least $600 billion more to the financial system in the next eight months to spur economic growth.

This second round of quantitative easing since the height of the credit crisis in 2008 was widely expected in markets, but that should not minimize the great significance of this move at this time.

This coming move was contentious inside the Fed and greeted with skepticism by many economists outside the Fed. The policy setting Federal Open Market Committee voted 10-1 for QE2. That serial dissenter, Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, was the only one to publicly stand against. But other Fed officials have publicly expressed doubts. Not all currently vote on the FOMC.

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In our sporadic, somewhat random, review of commentary about the level of structural unemployment in the U.S., we’ll add some recent comments from Jeremy Grantham of the fund management firm GMO.

They were part of Grantham’s well-reasoned and clearly presented jeremiad at perceived policy overreach by the Federal Reserve, which he maintains doesn’t result in long-term benefits to the economy and creates eventually harmful asset price bubbles.

A reminder about why the debtae on the nature of the high unemployment rate in the U.S. is important. The bigger the portion of the 9.6% unemployment due to structural issues – skills mismatch, geographic mismatch, etc – the less that monetary policy can do to solve the jobless issue, even if all the Fed’s quantitative easing plans work fully as intended. That in itself is a big if…

According to Grantham, by 2007 overbuilding in the housing industry drew about one million additional workers to the sector. The view that housing artificially decreased the unemployment rate has been heard before, but Grantham adds some twists.

He reasons that many of the “lightly skilled” workers drawn to housing would otherwise have fallen victim to another structural unemployment problem caused by increased globalization between 2002 and 2007. Less-skilled work went to lower-wage nations.

“With the housing bust, construction fell below normal and revealed this large increment in structural unemployment,” Grantham recently wrote. “Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.”

More statistical detail was provided earlier this week about a troubling aspect of the U.S. unemployment problem: the number of open jobs has gone up a bit even as the already high jobless rate has risen.

The following numbers were provided by Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, in the text of a speech he delivered Tuesday in Fargo, ND.

The Minneapolios Fed official was building on an earlier talk in which he cited the so-called structural unemployment issue, saying that up to one third of the 9.6% unemployment rate might be due to factors other than a flattish economy. Those could include a skills mismatch, a geographic mismatch and other factors.

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The headline numbers and election analysis are all out – the latest unemployment numbers, while about where they were the month before, don’t do the Democrats a lot of good going into next month’s mid-term elections. But there are some interesting numbers underneath the headline numbers that paint a workforce mosaic that shows significant challenges to whoever ends up in Congress in the next round of elections.

Start with this fairly startling number from the Bureau of Labor Statistics today – the unemployment rate for black or African American teenagers (aged 16 to 19) eligible for the workforce is 49%.  That’s up from 38% in May. The same age group among Hispanic or Latino ethnicity was at 31%.  Unemployment for all teenagers in this age group is 26%.

If the future of America begins with its teenagers, then we seem to have on our hands a volcano that is about to erupt. Perhaps a related statistic worth mentioning here is the overall unemployment by levels of education. Not surprising, people without a high-school diploma are the largest unemployment group – 15.4%. High-school graduates who did not go on to college – 10% of them are unemployed. Some college or associate degree shows some improvement – 9.1%.

And those with a bachelor’s degree or higher? Only 4.4%.

Education and employment are certainly linked together. Now, teacher’s unions might want to use this as an argument that cutbacks in school budgets will lead only to more cratering in the workforce. While some of those cutback numbers are big (local government education employment is preliminarily projected to be down 49,800 jobs in September versus August on a seasonally-adjusted basis), school budgets have been historically padded. Companies have had to try to find smarter ways to work. Schools and other governmental agencies need to do the same thing. Be smart.

Here’s another view on a key question for the U.S.: how much of the stubbornly high unemployment rate represents structural issues rather than simply an economy bumping along at a too-low growth rate to absorb new entrants and make a dent in those already out of work.

First, some fast background. In late August, we cited a couple of expert views of the structural problems  contributing to the morass. Manpower Inc., the temporary employment firm, released a global survey that cited an acute shortage of skilled production workers in many advanced-economy countries, including the U.S. and Germany.

Meanwhile, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said a skills mismatch might account for up to one-third of the joblessness reflected in the 9.5% U.S. unemployment rate. The Fed “does not have the means to transform construction workers into manufacturing workers,” he said.

So, when Federal Reserve Bank of St. Louis President James Bullard last week joined editors and reporters of Dow Jones Newswires and The Wall Street Journal for a conversation about monetary policy and the economy, it seemed reasonable to ask his view of the structural employment issue.

“At least some part of unemployment is structural,” Bullard said. The debate is about how much.

Bullard blamed the housing bubble.

The years-long, unsustainable escalation in housing prices did more than spark a global credit crisis, leading to deep recession. Bullard said it also led to a misallocation of resources for up to a decade, as workers across the country jumped into the construction boom and related employment streams, developing skills in areas where the demand has all but vanished.

And it wasn’t limited to construction workers or mortgage loan officers. Ripple effects would have included trucking companies whose businesses became too dependent on shipping housing related goods, to cite one example given by Bullard.

As for housing generally, Bullard said the bubble “has deflated.” That likely won’t mean any near-term gains in housing prices, Bullards said, but he added it was hard to see house prices going down a lot more from the low levels to which they already have sunk.

A regional Federal Reserve Bank president thinks the sky-high U.S. unemployment rate is due in significant part to a mismatch between available positions and would-be workers able and willing to fill them.

And that mismatch means traditional Federal Reserve policy tools can do little to solve the problem.

It’s a bit of an assault on widspread notions that it’s the sluggish growth of the U.S. economy and extreme caution that slow growth generates in companies large and small that’s kept the unemployment rate hovering near 10%. Its latest reading is 9.5%.

Narayana Kocherlakota, installed in October 2009 as the president of the Federal Reserve Bank of Minneapolis, sees things differently.

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When we have regularly referred to the long slog of a U.S. economic recovery, we’ve generally meant slow growth and high unemployment will be features for several years. Improvement in all areas will be gradual.

Well, there are long slogs and there are very long slogs. Or, as the Federal Reserve might say, there are extended long slogs. MarketWatch reported today on a Brookings Institution report that gives some sobering dimensions to the long slog, as it relates to an eventual recovery in employment.

Certainly, today’s jobs report  showing only 71,000 new private sector jobs created in July (with a downward revision of June’s jobs reports) adds to the gloom.

The Brookings Institution has crunched some numbers ad says that it may take 11.5 years for employment to reach the levels that stood before the start of the recession. That’s a long slog.

The analysis was based on using the average monthly job creation in the best years of the 200s, which seems reasonable. The number also is reasonable: 208,000 jobs a month, MarketWatch reported.

Even faster-track growth isn’t all that fast, indicative of the big hole we are in. Brookings said even if the economy created 321,000 jobs a month it would take almost five years to get to pre-recession levels.

Right now, even 200,000 new jobs a month looks pretty good and nowhere in sight.

The only good news here is that many U.S. corporations are flush with cash and earnings have generally been strong. That means when they finally do decide to hire, and if that desire is reinforced by stepped up economic growth, they could move pretty quickly.