6.5 Graphs Outlining the US Economy

I’m in a room that’s 8 feet by 10 feet. It’s just me. There’s a small box playing loops of TV shows, but I’m ignoring it. The temperature is 95 degrees but its cold in here. And I have a lot to think about.

I know I’m going to pay for it. Situations like this require penance and it’s going to cost me. It’s part of life though and inevitably I’ll be back.

The bill was a shade under $200. Frankly it could have been a lot worse. My car hasn’t been serviced in a year; it needed an oil change, inspection, tire rotation, and the radiator hose had a hole in it. I paid for the car, but I got time to think.

This cycle of activity drove me to consider the business cycle. It normally looks like a sound wave with peaks (good times) and valleys (recessions).

Are we still in a recession? Are we in an initial recovery? Maybe even an early upswing? Chris Stuart wondered the same thing in his write up Why We’re At The Early Upswing Stage In The Business Cycle.

I predicted the recession after observing a lack of income appreciation and buying patterns changing in October 2007 and although this is a classic supply and demand cycle where aggregate demand is lacking it feels more structural. Structural means the skills needed in the employment arena are lacking in the environment, so a transitional period of training is required. Instead of a sudden shift in skills we have an elongated one. Globalization dramatically changed supply chains and created liquidity in the job market. Goods producing jobs like manufacturing are now feasible almost anywhere. And the education advantage of the US is no longer prevalent.

This is forcing the US to consider it’s jobs strategy, or at least create one in the first place. Many of the assumptions about the viability of the US worker are no longer true. And think about the US consumer. Will they always buy? Like an alarm clock introducing the morning, the US worker and US consumer realized better days are not guaranteed. People are starting to slowly de-leverage. It’s a huge adjustment in the way people live their lives and it will take time. The debt burden is simply too great.

So if this cycle is a classic supply and demand recession and the US consumer isn’t going to buy (low demand) then isn’t this going to take awhile? Yes, the rest of 2011 and 2012.

Here’s my outline of the timescale:

Jobs will be tepid but consistent for the rest of the year and next. Companies large and small are getting creative with their resources. Many are investing in equipment rather than people (you don’t need to buy health insurance for an industrial printer), but the gains will be positive. There is no double dip recession.

The best workers are beginning to jump to other opportunities. They’ve installed micro-innovations for their current employers, but since volume has been low these improvements haven’t knocked anyone’s socks off. But they will.

So after a period of discipline, brighter days are ahead.


I wanted to pull together some graphs showing what’s happened since the beginning of 2008. Below are four time-scaled illustrations showing the situation with jobs.

  1. The first one is the overall jobs report. It shows how far we have to go to balance out the lost jobs.
  2. The second one is a growth rate of jobs for the private sector as they relate to Service Producing and Goods Producing industries. Goods Producing encapsulates manufacturing and construction, two of the harder hit industries. 
  3. Since the ratio of Service Providing jobs and Goods Producing jobs is 5 to 1, I wanted to show the relative impact and that is what the third graph depicts.
  4. The last one the Dow Jones during the same period. It’s the index that most people focus on as a reflection of the stock market.

Lastly, Wired did some research with Linkedin.com about what terms people were using in their titles after they changed jobs. The results below reflect a pool of 7 million linkedin users and a good indication of what jobs are in need in this day in age. But remember, people still need an oil change.

Working Thoughts 6/15/2010
We Respond To Cues Very Effectively

Working Thoughts 6/15/2009
Resilient Attitudes are Rare

Split Personalities – Tax Breadth and Tax Depth

We seem to have split personalities when it comes to the news and our politics. In the news we hear about natural disasters and the sour economy. In politics we hear about the failings of the President and the deficit. Why are these two voices talking about different subjects?

The truth is they are talking about the same problem, just different ends of it. The US is maturing. A large portion of the population is entering their retirement years. Every day, for the next 19 years, 10,000 baby boomers will turn 65. By 2030, 18% of the U.S. population will be over 65, compared with today’s 13%.

This is important for several reasons, but here are two:

  1. Federal tax collection is based on income. Those that are retired usually don’t make significant income, so the taxes they contribute are very low. A change or decrease of 5% is a huge impact to the revenue of the government. Or said another way, 10,000 people, who have a high average income, can drop out of the tax pool everyday.
  2. The baby boomers have been in leadership positions for two decades. The groups behind them, smaller in numbers, will need to fill the void.

The first reason is why you hear about Medicare and the budget. The second reason is why you hear about stimulus and silicon valley.

– When we talk about the deficit and paying down the debt we are talking about the inevitability of time. Our demographics show an aging population who will not be contributing to tax rolls. Less income means less spending. Tax Breadth.

– When we talk about innovation and stimulus spending we are pushing for investment and hopefully an improvement in future wealth and the standard of living. This would offset the loss of tax income from those no longer in the workforce. Tax Depth.

Both of these are concerns. I tend to be more transfixed with the latter. Many young professionals are either not entering the workforce or they are at compensation levels below the norm of 5 years ago. This lag in pay is not easily overcome and tends to persist for a career. Smaller income means smaller taxes paid. In addition to that, younger professionals are not moving into challenging roles as they would have in the past. Opportunities for learning experiences are reduced. Plus what they’ve been taught in school isn’t applicable e.g. China has changed dramatically since 2007, but the text books didn’t.

The 18% not in the workforce is unavoidable, but what should be asked is what’s to come of the under employed?

There will always be some number of the under employed, but we are currently looking at a devastating mix of long durations and loss of skills. The recession as it began in 2007 was a supply and demand recession, meaning nothing out of the ordinary occurred. But the last two years has led to a structural recession. This means that the skills and knowledge the US worker has isn’t quite matching up with what labor is needed. If this is more than a blip then high unemployment will continue for a few years as education and training requirements sort themselves out.

But I also feel like the 16-24 group, or more broadly the under 30 age group, is pioneering a new track. The way the view the world is much different than their older counterparts. As a consumer group they can influence the creation and offering of products and services. The next 24 months will be telling about the future of this country.

Value Creator – CEOs

Chief Executive Magazine and chiefexecutive.net are running the third annual list of CEOs that are value creators and value destroyers . The standard measurement of a CEO doing well is the stock price, but there are influences on a stock price that may or may not happen. For instance Apple’s stock price barely budged when news broke that the iPhone was going to be offered on the Verizon network. The stock didn’t move because it was already priced in – investors expected it.

The measurement Chief Executive Magazine uses is:

Economic Margin (EM) is calculated as (operating cash flow – capital charge)/invested capital. Companies with positive EM (greater than 0 percent) are creating wealth; those with negative EM are destroying it.

Here’s a portion of the list :

Top 10

Overall Ranking ’09 Rank Change from ’09 Rank MVIC 3 Yr. EM EM Change Management Quality Score Company CEO CEO Last Name
1     A A A A Priceline.com Jeffery H. Boyd Boyd
2 23 21 A A A A AFLAC Daniel P. Amos Amos
3 2 -1 A A A A Federated Investors J. Christopher Donahue Donahue
4 35 31 A A A A Apple Steven P. Jobs Jobs
5 4 -1 A A B A Amazon.com Jeffrey P. Bezos Bezos
6     A A B A Colgate-Palmolive Ian M. Cook Cook
7 7   A B A A Ecolab Douglas M. Baker, Jr. Baker
8     A A A A DeVry Daniel Hamburger Hamburger
9 40 31 A A B A Fastenal Willard D. Oberton Oberton
10 6 -4 A A C A C.H. Robinson Worldwide John P. Wiehoff Wiehoff

Learning about Risk and Reward in the Marketplace

The US has a culture where commerce permeates everything. It’s practically omnipresent. Because of this many Americans unknowingly learn facets of business that other cultures do not. A Harvard Business Review blog entry by Vijay Govindarajan called Marketplace Literacy: A Reverse Innovation Opportunity? pulls out three aspects of business: the skill being sold, the know-how to be efficient and the know-why to be effective. Here’s an excerpt example:

Marketplace literacy itself can be viewed at three levels: the concrete level of vocational skills or a trade, the more abstract level of business know-how, and the level of understanding, or “know-why,” about the marketplace. For instance, suppose a poor woman who knows how to cook (a vocational skill) starts a food shop. To run the business, she needs know-how — specifically, she needs to know how to set the menu and prices, choose a location, and promote her business. She also needs “know-why” — to understand why it’s important to be customer oriented, why to choose one location and not some other, and, ultimately, why to go into this business and not something else.

The second two items really leverage planning. Knowing details, spotting trends, and anticipating demand levels enable a good business person to set up a business for success. Many people in the US get lulled into a belief that their intuition is the same thing as truly understanding what can or will happen. Another HBR blog entry discusses the differences between foresight and intuition. It’s by Jeff Stibel and it’s called How Forethought (Not Intuition) Separates the Good from the Great. Here’s an excerpt:

But let’s beclear: Intuition is different than forethought. Intuition is another oneof those necessary but not sufficient traits. Without intuition, thehuman race would have been finished a long time ago. Intuition rests onthe ability of the brain to read patterns, and react accordingly. Forinstance, you don’t need to accumulate hundreds of details about acoiled object in your path to jump out of the way. The brain decidesinstantly that it’s a snake. Now the object may merely have been acoiled rope — and you may have jumped into the air needlessly, to theamusement of passers-by. But that is because the brain is built to reactquickly. It doesn’t wait for all the details.

Here’show forethought is different from intuition. To have forethought, youneed an abundance of details and you must labor over them. There is noright answer when thinking about the future, merely an endless number ofscenarios. It is what the Stanford economist Thomas Sowell calls”long-range thinking.” Forward thinking is the brain’s way to chip awayat the edges of uncertainty, to make bets based on past experience. Thebest of the best do this incessantly.

Finally, I mention these two items because the US economy is essentially sitting still. The inputs – the data – used for decision making is not currently trust worthy. Legislation over the past two years, such as Health Care reform and Financial Reform, have left many businesses flummoxed as to what to do, so they’re not investing until a path is clear. Geoff Colvin in his article Uncertain of future regulation, businesses are paralyzed provides a stat that is indicative of a business environment in wait:

Once these mammoth laws are enacted, government agencies must write new rules to implement them. For example, the Dodd-Frank law requires 243 new rules, by the count of the Davis Polk & Wardwell law firm, and no one yet knows what they’ll require. 

But it’s also a time of getting ahead. Sunk costs are a reality in business and holding off on investments or hiring is valid to a point. The problem is waiting too long can lead to lost opportunity in the marketplace. After all, business is all about risk and reward.

Working Thoughts 10/21/08
The Next Stimulus Package Must be a Job Creator

Working Thoughts 10/21/09
US Values have Changed, but the Change is Subtle

Teachers Often Go the Extra Mile for Their Students – There’s a Means to Help Them Get There

It’s back to school time. Parents have spent precious dollars getting their kids backpacks, notebooks, new clothes, and other supplies. But I’ve observed first hand that many teachers also spend getting ready for school. Often times there’s the perfect lesson that needs this or that to be perfect. Or there’s a student or two who are hurting financially, so a few extra supplies are made available to them. All this adds up though. For instance, Kathy Casaday of Gardendale Elementary in Alabama spent $400 for her class room. CNNMoney.com has 5 other examples of teachers, who aren’t getting big pay increases, contributing to the learning environment. These are passionate people, people who are rewarded by the epiphanies of kids.

It’s a good time to think about helping teachers make those ah-ha moments happen. Donorschoose.org is a great place to review different teaching lessons that teachers have planned. It’s personalized, so if you like rockets, then Dr. Y of Lakewood High School in Salemburg, North Carolina has a project for you. Not near you? That’s OK, there’s nearly 50 other similar Rocket related projects to choose from. Perhaps theatre is your favorite. Mr. B of Endeavour Middle School in Lancaster, California (South) has a project requiring two speakers so the actors can be heard. It’s $272 away from meeting the goal.

The point is that teachers go the extra mile for the kids, but sometimes they need someone to help them.

Also, there’s a movie coming out called Waiting for Superman . I don’t completely agree with the methods of Mr. Canada, but getting more attention to the matter is important either way. Check it out:

Working Thoughts 9/9/08
What is promised to Wall St and what is promised to the CEO are not the same

Billions of Dollars: Giving, Spending, Fighting, Accumulating, Owing, Losing, and Earning

The smart people over to Informationisbeautiful.net created something called a The Billion Dollar-o-Gram . Its a Treemap. I don’t visually get why its called that, but it’s the method for displaying heirarchical data by using nested rectangles.

What I like about it is the relationships. Understanding proportions when talking about big numbers is difficult, so an illustration like the one below helps immensely, especially when people mention a few billion spent on this or a few billion going on that.

I suggest checking out a book by them as well. It’s called The Visual Miscellaneum and it’s $17.81 over at Amazon.com .

One more item about their work, they provide a link to all their supporting data .

Opinions on the Economy for Today and Tomorrow

The jobs report came out last week and it left me utterly befuddled. It wasn’t good, but it wasn’t as terrible as it appears (relatively speaking of course). There’s a certain segment of employment that has shrunk and is never coming back. A CNNMoney.com article claims it could be almost 8 million jobs. But conversely there are certain types of jobs that are going unfilled because the number of candidates to fill them are few. For instance, last week the NY Times published a story about manufacturing companies struggling to find candidates who knew how to work a sophisticated computerized machinery. And now I’m reading about something called rural sourcing. It’s mostly the same advantages as outsourcing, but it’s hiring or setting up facilities in small towns in the US. At one point taxes were such a monetary consideration that places like China and India were no brainers. But now states have wised up and they offer tax incentives to encourage these developments. The states recoup the lost business tax by having income tax from the employees and the cursory taxes associated with the business ecosystem that the facility supports. Things like gas stations, restaurants, delivery, markets, and so on.

I can only offer several educated guesses as to why the US is still in this malaise. My basic idea is that education hasn’t adequately prepared the same level of people as it has in the past. I’m not trying to romanticize it, there’s always been only a handful of people with audacious goals and the vision to accomplish it. But I feel like even that small number is currently at it’s lowest levels. Wealth creation needs these people.

My main other opinion is the spread of the rich, middle class, and the poor has widened to the brink . The US brand of capitalism needs a healthy middle class to drive supply and demand. Supply is still there, but the buying power of the middle class has been decreasing over the last 10 years. My overly simple explanation for this is the attention of the quarterly earnings report. Big businesses are not paying their workers like they used to because they are pressured to show positive results every three months. Cash is either distributed through a dividend or stashed into cash on the balance sheet. This helps the investors and the executive leadership, but does little for the average worker who ultimately buys the goods that are produced.

I’m extremely optimistic for the US in the long run though, assuming we get past the next five years. Areas like health care, energy, information and people are primed for value creating totally new opportunities. I don’t see China, India, Europe, or any other country having the resources, skill set, and ideology to accommodate these on the horizon favorable circumstances.

Working Thoughts 7/9/07
When Discipline Gets in the Way

A National Review of Education – Start Evolving Now

The video below is a great end result of several ideas I have running throughout this blog. To sum up: Education needs to evolve:

  • We haven’t changed the educational structure of this country in 100 years (primary school to secondary school to college).
    • That in itself isn’t a bad thing, but it relies heavily on a culture that is stable. SAT format and score adjustments reflect kids are getting better, that’s right better, at that type of thinking and test taking.
  • We need parallel paths that generate alternative skills, especially in local markets. I’m not just talking about vocational skills, but those have been de-emphasized because of flawed policies
    • We need more University of Phoenix ideas. A sort of distributed education system where the curriculum is expert oriented and can be accessed as needed and paid for not by supply and demand but rather the cable system style of subscription. This allows for more popular courses to somewhat subsidize the less popular and a tiered cost model would offer more benefits. It also gives autonomy to the entrepreneur-educator that operates the specific curriculum pod.
  • State and Local governments are pressed currently by budget constraints and good educators and methods for teaching are being abandoned. And those that do remain are hamstrung by a lack of teaching resources or in some cases faulty facilities
    • We have two business models we can leverage to alleviate this situation with creative adjustments. An organization like Donor’s Choose could expand on their version of micro-funding with tapping into the growing number of retired teachers. Time is currency and I bet someone that loves kids wouldn’t mind sharing ideas about lesson plans with fellow teachers. Here’s how I see it, a teacher could be interested in trying a new way to get kids excited about math, but has run out of ideas. So they post a “lesson plan request” instead of a project. This “lesson plan request” spells out the situation and educational goals. Teachers with free time could donate their successful lesson plans and on a limited basis work with the teacher to implement it.



Lulled Into a False Sense that the System Knows Better than You Do

Back in October of last year I was on a kick about thin value and thick value. I used High Frequency as an example of Thin Value because it only cared about the spread between the bid and the ask. Comedy Central did a bit on it that I reposted in my creatively titled entry A Funny Bit about High Frequency Trading .

The stock market, as you’ve probably heard, had one of the oddest days in it’s history a week ago. At one point the Dow dropped almost 1000 points and recovered in mere minutes. I’ve been waiting to write about it to see what happened. I knew it wasn’t a fat finger as was suspected. But I thought it could be cyberterrorism. Someone decided it was time to make a lot of money (make the markets drop, buy $40 stocks at a penny and then sell when they rebound to $40). But nothing has surfaced about that either. What appears to have happened is a classic example isolated engineering. What I mean is that one part of a system expects the other parts to only vary so much and builds that into the business rules, or in this case, the algorithms.

It used to happen a lot at intersections that had car traffic and train traffic. The light controlling car traffic has to know when train traffic is coming and circulate the cars through the correct passage; basically red light those that are perpendicular to the train rails. It seems obvious now, but people have died because the rail and car traffic partners didn’t consider each other in their safety approaches. Each independently worked fine, but together they didn’t.

There are two follow up writings I’ve enjoyed today about the high frequency situation. The first is a blog entry by James Surowiecki called The Flaky Stock Market and the other is an article by Floyd Norris called Time for Regulators to Impose Order in the Markets .

I like the Surowiecki post because he agrees with my opinion that the markets, although flawed, worked as intended. The computers don’t consider context. You build rules for them to follow and those rules are based on certain probabilities. But no one can predict the future, so when things get out of whack there must be some sort of reasonableness associated with it. And that is the topic of my thin and thick value posts – high frequency trading doesn’t care about the equity in question, it only cares about price. Fundalments are ignored. And it’s intentionally ignoring the purpose of capital markets in the first place – to fund money to efficient uses, usually succeeding businesses. New information and interpretation of the information isn’t happening, so the herding of ideas occurs and that leads to pooled risk.

I liked the Norris article because it lays out how having competition for markets is good, but they need to be coordinated. Creating a vacuum in one can unintentional set off a panic in another. Here is where establishing business rules makes perfect sense. For instance, if the NYSE puts in a delay, the other markets should flip a switch and delay as well.

Ultimately high frequency trading is good because it lowers transaction costs, but it encourages lazy management; the speed is so fast that you hardly notice. It lulls you into a false sense that the system knows better than you do.

April 2010 Jobs Report and Wages

Here are the job market and compensation numbers for April 2010 (based on the job report):

Net gain
of 290,000 jobs in the month
(revised in June to a gain of 313,000 in June)

  • The largest one month gain in four years (March 2006)
  • Analysts expected a gain of 187,000
  • One year ago the US lost 582,000 jobs
  • March was revised to a gain of 230,000 jobs from an original reading of a gain of 190,000
  • February was revised to a gain of 39,000 jobs from an original reading of 36,000 lost jobs and a revised reading of a loss of 14,000 jobs
  • The first four months of 2010 have seen 573,000 jobs gained
  • 6.7 million people have been jobless for more than 6 months (long term unemployed)
    • 45.9% of the unemployed are long term unemployed

  • Temporary work, which usually precedes full time employment gains, has added 330,000 jobs since September of 2009
  • 66,000 jobs were part of the Census work conducted by the Federal government and are temporary hires

Unemployment rate rose to 9.9%

  • Analysts predicted it would be 9.7%
    • As employment picks up, the labor pool grows and the unemployment rate goes up or holds steady while this period balances out

  • The unemployment population edged up to 58.8% – meaning people are getting themselves back into the overall count for the unemployment rate
  • The U-6 report, which is a broader group, increased to 17.1%, which is in line with the overall increase
  • PMI, a measure of manufacturing pace, rose to 60.4. Anything above 50% means the machines are running. This is the highest it’s been since June 2004

Specific Segment Job numbers:

  • Manufacturing added 44,000 jobs
  • Construction added 14,000 jobs
  • Retailers gained 12,900 jobs
  • Leisure and Hospitality Services grew by 45,000 jobs
  • Government sector gained 59,000, Federal gains were 65,000
  • Education and Health Services grew by 35,000 jobs
    • Health Care and Social Assistance grew by 26,400

  • Professional and Business Services grew by 80,000

Wage (can be revised):

  • The average weekly paycheck (seasonally adjusted) is $633.26, from $629.70
  • Productivity rose by 3.6% beating expectations (2.5%)
  • The average hourly earning (seasonally adjusted) is $18.96
  • The average hourly work week rose to 33.4

Bureau of Labor Statistics

Job Report Stats Summary