IN-DEPTH: TRANSCRIPTION - LONGWave – 08-24-22 - SEPTEMBER – US Labor Market in Productive Decline
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
The latest US Productivity statistics were alarming to say the least, but got little notice by the business media compared to highly manipulated Non-Farm Payrolls and Unemployment statistics. I am obviously dating myself by saying there was a time this measure was watched closely. Of course that was also an era of Investors and Money Managers versus Traders and Passive ETF Funds. In this session I want to talk labor productivity and its importance to the economy.
There are currently more US job openings than there are unemployed people. We have a major labor shortage in United States and frankly in the developed economies.
We don't need economic data, just look around you. The help wanted signs are everywhere. Hiring parties, sign on bonuses, one billboard advertised $7,000 sign on bonus for Corrections Officer. But the problem is totally across the board, it's not in low paying jobs or in certain sectors - it's on Wall St. And it's on Main St. It’s everywhere.
But why? What is actually going on?
It has major consequences as I just read that “Blackrock is bumping pay by 8%”.
It is shortages which are reported as caused by a number of factors: such as
- Planet changes,
or the elephant in the room which is Fed Policy.
The Fed created 85% of all money in existence in the last 18 months. Think about that for a moment. So this affects the economy in a number of ways, the most obvious of which are 'markets-ups' - but that also has created a labor shortage because of stimulus which is definitely an important driving factor.
I have heard people state that after making money trading Bitcoin they simply don't feel like going to work at Starbucks in the morning the next day. That's a tangible example, but there are hundreds of others.
How about the employees that have taken early retirement, such as Police officers fearing the backlash of the "Black Lives Matter" movement. Those officers need to be replaced, and hence the job openings with no one to fill. What about people not working to avoid the VAX mandates?
What we have is a complex set of trends and events. The question is: What will be the result of this to America’s labor force and its Productivity in the long run?
Here is the Spoiler alert: Lower Productivity and Weak Profitability!
The S&P Operating Margins are a good place to begin. Operating Margins are before Tax and Interest – both themselves under serious pressure!
- We just passed a massive bill labeled the “Inflation Reduction Act” which will mandate a 15% minimal corporate tax. CEO’s are paid to increase profitability. A 15% bottom line hit will be passed on to the public.
- We have rising interest rates driven by an increasing Fed Funds Rates expected to reach 4% before topping out in 2023.
Both these will impact corporate productivity. But it is worse because Operating Margins are at all time highs with mounting pressures on wages, benefits, input costs, local taxes, utilities and even insurance. These are pressures that must be overcome to reverse the current slide in Productivity.
How much harder and smarter can we work – most workers today tell me they are stressed out!
For 45 years corporate America has been able to dictate to Labor and Unions because of:
- Out-Sourcing and
This is because of Globalization and the cheap labor arbitrage of Asian and Chinese work forces.
My colleague, Charles Hugh Smith’s research suggests that this contributed to approximately $50 Trillion being siphoned off from workers between 1975 & 2018.
This additionally helped the statistical measure of US Labor Productivity improvement during this era.
We should expect going forward for Corporate Margins to normalize. Minimally we should expect a 50-61.8% retracement. We actually think it will be worse because the corporate 45 years of feasting on a fat “hog” is highly likely over.
It will also be worse due to the extensive list complex set of trends & events we listed earlier. As such we hope to explore these factors impacting Operating Margins and US Productivity by discussing the subjects outlined here.
So how bad is the current decline in US Productivity? Why is it currently falling and why are we paying workers more to produce less?
Which by the way matches a US Economy consuming more than it produces? How long can both go on??
Nonfarm productivity declined at a 4.6% annualized rate in the second quarter, marking the second consecutive decline. The trend in productivity growth has worsened compared to prior to the pandemic, and the surge in unit labor costs makes the Fed's challenge of getting inflation back down to its 2% target all the more challenging.
Frankly, I don’t recall seeing Productivity charts going NEGATIVE before?
The second quarter's contraction comes on the heels of the sharpest decline in 74 years which was negative 7.4% in Q1.
Smoothing through the see-saw ride of quarterly productivity growth the past year suggests it has worsened compared to before the COVID-19 pandemic.
Productivity growth was down at an annual rate of -0.4% over the past four quarters compared to the pre-pandemic average increase of 1.3%.
Weak productivity growth makes the Fed's inflation challenge even harder. If workers are more productive, companies can afford to pay them more without pressuring profits or fueling a wage-price spiral. This isn't what we're seeing today.
Unit Labor Costs, that is the productivity adjusted cost of labor, rose at a 10.8% annualized pace in Q2. This marks the second consecutive quarter of double-digit gains and suggests businesses continued to pay workers more to produce less. Output is still normalizing from pandemic-driven demand. But with labor being the biggest expense of many businesses, if labor costs continue to soar amid falling productivity, businesses will be forced to shed labor to protect the bottom line.
Businesses will be forced to increasingly seek to invest in labor-saving technology to boost productivity. We are already witnessing this in AI Robotics which no doubts are only at the early stages o deployment.
Today's tight labor market has forced employers to step up compensation and has pushed “real” labor costs for employers well-above levels consistent with the Fed's 2% inflation goal.
Of course Unit Labor Costs growth is exaggerated over the second quarter, and even first, but it is still way too strong even when smoothing over a year or two.
The Fed simply can't get to 2% inflation with this sort of productivity and wage growth.
Labor costs tend to be a stickier contributor to inflation, thus the Q2 productivity data position forces the Fed to continue on its tightening path until it sees wage growth subside and inflation moving meaningfully lower.
The reasons labor productivity has collapsed range far and wide. But they all come back to a few critical elements:
- Over Regulation,
- Over Taxation,
- Monetary Expansion,
- Credit Market Manipulation and,
- A near total intervention of economic and business life by a grossly out of control “Tax & Spend” Regulatory State.
Remember, production determines consumption. Production has collapsed.
An extended period of economic decline will follow.
Let’s start to break down some of the major labor productivity issues to learn more, but first we should consider how much of the problem is actually global in scope?
Global labor markets have been tight for a few years as unemployment rates have been steadily following. The consensus is this is to an aging population, lower birth rates and relatively low levels of immigration.
I say relatively only because we have seen, mass refugee and asylum seekers in the EU. However, so far they have not been major contributors to the labor force because of a lack of education, skills or training, communications abilities or a desire for cultural adaption. They have been a drain on social services which lowers overall productivity.
Stagnant labor supply is also a long-term worry, because a limited supply of workers could constrain the economy’s growth potential in the long term. An undersized labor force means fewer workers to build cars or clean hotel rooms, limiting how much actual output the economy can produce. Departures from the labor force tend to be “sticky,” meaning that those who drop out for a considerable time can find it hard to return.
In the US Wages and salaries for private-sector workers rose 5.7% in the second quarter from a year earlier. The swiftest pace since records began in 2001, and wage growth accelerated again in July
This has been the swiftest pace since records began in 2001, and wage growth accelerated again in July aggravating productivity.
Demographics as I said are cited as a global problem and this is true for the US as well.
The population of the U.S. changed between 2010 and 2020. America's population expanded by 22.5 million, but of this net increase only +1.2 million were under the age of 55; the vast majority of 21.4 million were 55 or older. This is a little understood statistic.
The consistent feedback I hear is that the work environment has become increasingly more difficult. I have seen notes at places I have visited reading
“We have to do more and more with less and less! Soon we will be doing everything with nothing!”
Work environments are seeing unscheduled multiple shifts being demanded because of workers shortages resulting in a caustic culture and aggressive behavior amongst fellow workers. This is particularly noticeable in health care and airports where worker shortages are clearly evident.
This leads to poor people interactions.
- Starting from demanding, abusive and irate customers,
- To lack of training, staff turnover to workload levels.
- All this has made work itself more risky and unpleasant,
Another sign I have seen more than once is one that simply reads:
“There not paying enough to put up with this!”
Training is another big problem for both the work environment and fill the millions open jobs available.
Thirteen years ago, TV personality Mike Rowe began a campaign to bring awareness about the 2.3 million skilled jobs that were open across the country.
“Today, that number is approaching 11 million,” said Rowe on Facebook. “Of note — most of those open jobs do not require a four-year degree; they require training.”
How can we be surprised by the nearly 11 million open jobs and labor shortage when there’s a massive skills gap and has been for years?
“It’s a reflection of what we value. Unfortunately, many Americans don’t value skilled labor,” according to Rowe’s vast firsthand experience.
“If you’re not grateful to the people who bring you affordable energy, plentiful food, smooth roads, heating, air-conditioning, steel production, or indoor plumbing, you probably won’t encourage your kids to explore careers in those fields. So why then, would anyone be surprised, when millions of people choose to accept money from the government, instead of exploring ways to get the training they need to fill any of those open positions?”
- Corporations Are Not Investing in Job Training,
- Companies used to invest in training as “apprenticeship programs”,
- Let me tell you what it was like 50 years ago to give you a clear contrast!
- Youth / Parents Are Not Investing In Job Training
- Academic Schooling in the vast majority of instances is Not Training,
- It is Education which only prepares you to be more readily trainable,
AS TRAINED WORKERS RETIRE INSUFFICENT TRAINED BACKFILLS ARE BEING PREPARED!
Again knowledgeable people like Rowe are afraid. He says “things must sometimes go ‘splat’ before the masses wake up.”
Rowe is not certain what “splat” will look like, but if he were to guess, he said “it will involve a serious spike in the cost of food, energy, and construction; a lot of packages are not going to be delivered on time.”
There is little double Covid has made a serious problem much worse, very quickly.
Temporarily it left us with Enhanced Unemployment Benefits for too long, fear of COVID keeping people from going back to work and a lack of child care.
On a more permanent and structural basis we lost 1.3 million because of care giving and 2.6 million because of retirement.
Then we had government public policy regulations concerning Covid Mandates. These are being challenged in the courts but has still left many 10’s of millions out of work. Public services government workers including first responders, military members and air traffic controllers to private employees such as pilots, corporate workers that enforced the covid dictated mandates.
Don’t think for a moment these people have went back to their former employers. As someone recently said – “Over my dead body” There is a lot productivity killing anger, resentment and frustration that was injected into the US labor market because of the Covid Mandates.
In parallel we are witnessing what is referred to as the “Great Resignation”. People are quitting in numbers we have not seen before. The reasons are varied according to surveys from:
- Pent-Up frustrations and lack of job opportunities now allowing for Resignations to..
- Job Burn Out, to …
- Wanting more Meaning & Contentment, to …
- Needing more Freedom & Autonomy
At the top of the list is better pay and benefits. The $50T being squeezed from the work force over the last 45 years we referenced earlier.
The problem is receiving a “Living Wage”. Two wage incomes are no longer sufficient. Extra part time work is required or simply accepting a lower standard of living to survive.
Tight job markets are now the catalyst for the major increases in wages and benefits.
The shift from Defined Benefits to Contributory Benefit plans was a massive shift in America in the early part of this century but was swallowed as part of the $50T capital grab.
The power is now back in the hands of workers. Decimated Unions are only now beginning to flex their new found and atrophied muscle.
If all these issues associated with monetary, fiscal and public policy issues weren’t enough we have an unprecedented shift in generational attitudes and priorities that don’t necessarily bode well for labor productivity.
We have a new social media and diversity driven workforce that does not support the status quo! It is not a generation that often attends rallies but rather is like molasses flowing into the machinery of capitalism and productivity. The later will have to change to accommodate the former!
The older generation failed to grasp this but even Gen X’ers like Elon Musk are somewhat cynical.
I quote him: “Americans try to avoid going to work at all” as opposed to Chinese workers, who “won’t just be burning the midnight oil but will be burning the 3 a.m. oil.”
The fact is that millions upon millions of Americans were happy to sit at home and do nothing for almost two years while collecting government payouts and living rent free.
Some have even tried to start an anti-work movement, demanding even more money and more respect for no-skill labor.
The Baby Boomer Generation raised by what is termed the “Greatest Generation” is inevitably fading away from its dominating influence over the last 60 years.
The Baby Boomers have been steadily replaced in influencing cultural and workforce norms by Gen X and Gen Y.
The Gen X’ers born between 1965 and 1980 are now 42-57 in age and total 65.2 Million.
The Gen Y’s born between 1981 and 1996 are now 26-41 in age and total 72.2 Million.
The attitudes of this 137.4 Million working age workers now dominates the work force.
However Gen Z (Zoomers) born between 1997 and 2012 are now 10-25 in age and total also approximately 72 Million. This group still mostly students are already having an impact on retail, fashion, music and media industries to name only a few. This group added to Gen X and Gen Y is the new work force.
- Gen Xs are beginning to fill the leadership roles as baby boomers retire.
- Where boomers have the experience, Gen Xs also have the qualifications,
- They are the first generation to use computers in their homes and schools. Brought up in an era of technological and social change, they’re tech-savvy and open to change.
- They thrive on diversity, challenge, responsibility, honesty, and having creative input.
As an adaptable and fiercely independent generation, Gex Xs are more peer-oriented than previous generations striving hard for a balanced work and family life.
- They are the First generation to use computers in their homes and schools.
- Big spenders and possess purchasing power when it comes to the higher-end purchases.
- More diverse than any previous generation as a result of immigration and a growing female workforce.
- Tech-savvy, having built the bridge from analogue to digital. They’ve developed some of today’s most influential websites, which have revolutionized how the world operates and where we source information, for example YouTube, Amazon, Wikipedia, and Google.
- They are in the prime of their working lives and highly invested in their jobs.
Gen Y (Millennials):
- Millennials are the most educated generation in Western history.
- 34% of 25 to 29 year-olds Americans held a bachelor’s degree, master’s degree, professional degree, or doctoral degree last year – a higher share than in any year in data going back to 1968, according to Matthew Chingos, a senior fellow at Brookings. The share will probably increase as Millennials, usually described as those born after 1980, mature.
- The Millennial women are outperforming the millennial men in the classroom. Overall, Millennial girls tend to outperform boys in elementary and secondary school, getting higher grades, pursuing tougher academic programs, and participating in advanced placement classes at higher rates.
- Additionally, 57% of today’s undergraduates are women, and women are now earning 170,000 more bachelor’s degrees each year than men.
Mainstream media has drawn a picture of Millennials as lazy, narcissistic, and entitled selfie-lovers.
What is well established is they are Diverse, Civic-Oriented Global Citizens with strong Progressive Liberal leanings and views.
Together Gen X & Y reflect:
- More Diverse (Minorities & Single Parents)
- Computer Communications Oriented,
- Witnessed Women Emerging To 50%+ of Labor Force & Career Oriented,
- More Left Leaning, Liberal, Progressive and Collectivism Oriented,
- More Focused on Work-Personal Balance,
- More Highly Educated (but Less Trained)
- More Indebted at the Beginnings of their Careers,
- More Status Conscious,
- Less Loyal (Companies Less Loyal) & Portable
Their ATTITUDES THAT IMPACT LABOR & PRODUCTIVITY include:
- Jobs are only an Indicator of Success to them - not the Measure,
- Diversity, Inclusion and Equality is their signature hallmark,
- Their Labor Must Offer More than Wages,
- They are intolerant of Formality & Restrictive Rules,
- They have a highly competitive and different Moral Code: “Everything is Fair in “Love & War”
Though Companies Have Changed - This Change will accelerate!
How productivity will be altered is still to be determined.
However, I think an article I read today reflects on that. The article was entitled: Apple Employees Form Resistance Against Company's Return-To-Office Plans
The labor public petition statement in this conflict tells us a lot about the rapidly changing US labor forces attitudes and expectations.
Let me share some of their demands and expectations – I quote:
- This uniform mandate from senior leadership does not consider the unique demands of each job role nor the diversity of individuals,"
- Reasons that include "disabilities (visible or not); family care; safety, health, and environmental concerns; financial considerations; to just plain being happier and more productive."
- The workers demandthat Apple "allows each of us to work directly with our immediate manager to figure out what kind of flexible work arrangements are best for each of us and for Apple,"
- "These work arrangements should not require higher level approvals, complex procedures, or providing private information."
- The employees circulating the latest petition want Apple to "encourage, not prohibit, flexible work to build a more diverse and successful company where we can feel comfortable to “think different” together."
This all sounds nice but try and understand how management will now actually control the labor force towards being more productive. I understand that the employees believe what they are saying but my experience is that people must be managed. By that I mean consensus only goes so far before management must make hard decisions that always alienate some - the more hard decisions being made the more people who become alienated. In the economic world we now live in management must make tough decisions continuously to stay competitive and highly productive.
I will have more comments on this when we discuss the Zoom Economy in a moment.
Gen Z’s are even more Left leaning AND Woke than Gen Y’s. They strongly support social movements such as Black Lives Matter, transgender rights, and feminism. Like it or not, the Ms and Zs will set soon set policy while Gex X will be the forgotten generation.
The US Labor force is about to change in profound and unstoppable ways. The question is whether this makes us more productive?
Yes Happy Employees are Productive Employees but maybe the question is more about what an employee is today? I wish I had time to discuss the emerging concept called “Quiet Resignation” where “employees” establish their self determined blend of blend of work-personal balance and productivity. It defines the cancer growing in the American work force. I encourage you to Google “Quiet Resignation” to learn more.
Let’s talk about what is referred to as the Zoom Economy and the Gen Z Zoomer generation.
JPMorgan Chase CEO Jamie Dimon has been blasting working from home and Zoom as “management by Hollywood Squares”:
He states that his experience is that :
“Remote work creates a working environment that’s less honest and more prone to procrastination”.
He states that:
- It doesn’t work for people who want to Hustle,
- It doesn’t work for Culture,
- It doesn’t work for an Apprenticeship Program,
- It doesn’t work for Spontaneous Stuff,
- It doesn’t work for Idea Generation.
Dimon further argues in his battle against working from home that it damages the U.S. drive for diversity.
Dimon called the office a “Rainbow Room” and said that workers who stayed home were denying themselves “opportunities to meet other people --- if you live in certain parts of our country and go eat out there, it is all white,” meaning remote workers may end up having a more uniform experience than if they traveled into work.
Let’s try and draw some conclusions here.
The hard facts are that to achieve profitability and productivity:
- CORPORATIONS MUST ENDORSE & EMBRACE THE NEW ATTITUDES,
- THE 45 YEARS OF LABOR “SQUEEZE” FOR PROFITBAILITY ARE OVER,
- NEW PROGRAMS & RESTRICTIONS WILL PLACE PRESSURES ON MARGINS,
- PRODUCTIVITY & PROFITABILITY WILL BE UNDER SIGNIFICANT PRESSURE!
- AI ROBOTICS ARE A CENTRAL SOLUTION TO “LABOR” PRODUCTIVITY
This graphic shows the result of a recent survey by PwC Pulse.
The first three reflect what employees are demanding.
The remaining six are about primarily reducing employee headcount
We can expect automation through AI robots to rapidly increase to achieve the profitability / productivity requirements in an increasing competitive world.
As a reminder Capitalism is founded on the theory and basic understanding that savings being invested into productive assets makes the labor force more productive which in turn increases their standard of living.
We now have a society with shrinking savings being replaced by credit being spent instead on consumption which does not increase productivity!
Therefore in a society consuming more than it produces we are on the inevitable road to a reduced standard of living.
A road that will mirror a fall in asset valuations!
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
I would like take a moment as a reminder:
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussion purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2022 turn out to be an outstanding investment year for you and your family.
Thank you for listening.