Thursday, April 30, 2009

First Quarter Labor Costs Rise Least on Record

I've been meaning to write a post about an avalanche of furloughs, wage reductions, benefit reductions I've been stockpiling as they've come through over the past 2-3 months but simply have not had the time to do it. This story via Bloomberg talks about the subject from a 40,000 point of view although I'd caution almost any report out of government is to be viewed with jaundiced eye. This set of data seems pretty hard to manipulate since wage data is straightforward so I'll make an exception and post government data which I try to avoid.
  • Employment expenses in the U.S. rose 0.3 percent in the first quarter, less than expected and the smallest gain on record, a sign the worst recession in at least half a century is restraining wages and benefits. The first-quarter gain was the smallest since records began in 1982.
  • The increase in the employment cost index compares with a 0.6 percent gain in the last three months of 2008, the Labor Department said today in Washington. In the last 12 months, costs were up 2.1 percent, after a 2.6 percent year-over-year gain in the previous quarter.
  • Labor costs, which account for about two-thirds of company expenses, are likely to stay contained as the global downturn forces businesses to trim workers and benefits.
  • Among private companies, total compensation costs increased 0.2 percent, the smallest gain since that measure began in June 1980, while for state and local government employees, compensation increased 0.8 percent. (now of course - this brings up another issue I've talked about repeatedly; the complete disassociation between public and private workers... even in the worst post World War 2 recession public worker costs are increasing at annualized 3.2% rate - even as their private counterparts are getting 1/3rd that. Mull for a moment how we are paying for that divergence. I don't think Americans are paying attention - and each time the states get in trouble I guess we can borrow from the Chinese - our ourselves via quantitative easing - and steal from future generations to pay public workers today. But some day there needs to be a rationalization ... tax rates need to skyrocket to pay for our promises to the public sector. )
Now as stock market participants we must clap and cheer at the "discipline" of our corporations at making sure costs are contained. Or as Alan Greenspan called it "the productivity miracle" is once again here again.

This ties into one of our "very long term" views about the pressure on US wage earners that I believe (unlike 99% out there) is a secular change not cyclical. Median wages have stagnated the past decade and many Americans turned to their home (or credit cards) to make up for it. Hence you had a zero and indeed NEGATIVE savings rate nationally for parts of the 2000s. Further we are moving to a more transitory, "temporary" type of workforce - and this is why so many companies have beaten (very low) expectations this quarter. So many heads have been chopped so quickly - that the expense lines have improved. [Apr 2, 2008: The Underemployment Rate is Rising] So we have a SECULAR (in my belief) class of underemployed in the country

I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers") This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

So this brings up the great disassociation - what is good for the stock market (and companies) is not really quite so lovely for the workers. Again, I have a dark view on this as a permanent change in America... but the stock market only worries about the next day or week. So as long as you "beat the number" everything is good, and green shoots abound. My personal belief is many Americans, via increasing instability over the past decade are seeing the situation in a very slow creep around them - but it is so incremental as to not be easily visible. If you've never read the piece I suggest going to [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] to get my long term views on what really has been happening in the country.

Now what we see in Bloomberg is a very low level of wage increase - 0.3% in a quarter annualizes to 1.2%... that degree of degradation is due to recession. You can simply pick up the local newspaper (if you still have one in your area) and read about the cost cutting measures from small businesses cutting health care, to larger businesses cutting 401k contribution, to wage freezes, to wage reductions, et al. But my contention has been inflation has been understated by the government versus reality - and with the amount of profits going to small slivers of society (at levels not seen since the 1920s) the "median" humanoid in America has been falling slowly behind year after year. I had never seen before what IBM proposed about a month ago to some of its workers - you are free to keep your job you have if you move abroad.... and (kicker) accept the local wage. Canary in coal mine? If so, my thesis is playing out in its next stage.

But, as stock market speculators all we care about is the nirvana of the "workerless" economy and the lower the wages, the lower the benefits, the lower the costs. And all that matters are lower costs = more profits. What you need to ask a generation or two out is at what point do wages get to the point where the median worker can no longer enjoy the median middle class lifestyle. Or are we going to need to wait that long to find out? Even BEFORE the Great Recession I've been reading studies where parents are beginning to believe their kids won't be able to maintain the same lifestyle they did. Not parents in the upper 15-20%; parents in 30th, 40th, 50th percentile. After all this ability to increase living standard is the great carrot in our society and why we allow such divergence from top to bottom versus "those damn socialists" overseas.

Now the counter arguments are familiar: (a) as the Baby Boomers retire a much smaller workforce remains to take their place hence less people fighting for same amount of jobs = higher wages and (b) we are the technical innovators of the world so new jobs are around every corner. I'd argue in an increasingly flat world, why do jobs that don't require hand to hand contact (i.e. nurses) need to remain here at all? As Baby Boomers retire the job can be outsourced (p.s. can Baby Boomers afford to retire?) And we've had technological innovations here for years - where has the job growth been the past decade? Government and healthcare.... oh yes financial innovation (worked out great) and that innovative industry called "building houses".

Anyhow we don't talk about these issues here because its a stock blog and the time frame in the stock market is hours, days, or (nowadays in rare cases) a month. Just keep your eye out on what is going on out there - think of how 2 workers (mother and father) now bring in income to be able to replicate similar lifestyle to what 1 worker did 2 generations ago. (and yes the living standard is higher now but that's not the point - what sacrifices are necessary to maintain that now higher standard?) Or how many are stuck working 2 service jobs to make ends meet versus how one would do 25 years ago. Most of those folks I speak about don't have time to read this blog, nor any income to invest - but they are a growing class of America. I will say again - if Ben B gets his way and he is able to reflate a new bubble (and avoid deflation), this version of stagflation could make the 70s look like a cake walk - worker "power" back in the 70s was far greater, and the ability to move jobs overseas was far weaker. But at least the "ownership" class will be giggling to self in their new found asset appreciation. And that's the main concern. (err, I'm sorry Main Street = Wall Street is what I really meant to say)

But as always I could simply have Michigan bias, and be completely wrong.

EDIT 12:05 PM - so as an investing site let's take the 'other side of this commentary' - as I said; this is "great news" for companies. See below
  • Corporate earnings worldwide haven’t been the disaster analysts predicted as companies from Ford Motor Co. to Siemens AG beat earnings estimates through job cuts, factory consolidations and a dose of lowered expectations.
  • One reason is the low hurdle the companies set earlier this year by reducing forecasts, rather than any recovery from the deepest U.S. recession in a half-century, investors and analysts said. At the start of April, equity analysts estimated earnings among S&P 500 companies fell 37 percent in the first quarter. Six months earlier they had been calling for a 22 percent gain. (that's a 59% divergence - the bar was set very low. Ironically we were mocking Q3 and Q4 2008 estimates in early 2008 when the talk was of "2nd half recovery" - I didn't realize how low estimates has been slashed in Q1 2009)
  • Far from being a buy signal, sometimes earnings that beat estimates should be a “major red flag for investors” because they were achieved by cutting costs that may restrict growth, said David MacGregor, a Longbow Research analyst in Independence, Ohio. “The assets they are closing or rationalizing today, a year ago they would have said they needed for the recovery phase,” MacGregor said. “Recovery is not imminent, and is far enough into the future that they are re-sizing the business to a much lower level.”
The rest of the story is just a litany of companies that slashed heads in massive waves. But they "beat" - time to cheer. With the recovery "in 6 months" I guess they can begin rehiring now.

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