Friday’s jobs report was encouraging, but the official unemployment rate actually ticked up to 8.3%. This is the longest stretch above 8% since the Great Depression. The economic collapse in the 1930s is often blamed on tight fiscal policy and foolish trade restrictions. It took the onset of World War II for employment to improve. In every recession since, the economy naturally rebounded and moved toward full employment relatively quickly. This begs the question, is something different this time? Monetary and fiscal policy are accommodative, so those can’t be the culprits.
Some people blame globalization, but the US economy has been internationally connected since this country was founded. In the early days of the country, cities such as Boston and Charleston were almost entirely reliant on international trade. The internet makes it easier to offshore some service jobs, but we don’t view today’s globalization much differently than globalization of the last 60 years.
Job destroying technology is also nothing new. Between 1957 and 1964, factory output doubled due to advances in automation, and blue collar manufacturing jobs declined. Yet unemployment remained low. But maybe the rate of job destroying technology in the Internet Age is increasing faster than the economy can react. For example, Expedia pretty much wiped out travel agents. Netflix killed thousands of Blockbuster jobs. Even Personal Capital is attempting to make financial services more efficient by removing the need for traditional brick and mortar bank branches. Less tellers and less commission based investment advisors, but a better service delivered to the client for lower cost. Put simply, Shumpeterian job destruction is accelerating.
This could also explain the widening income gap. Jobs that can’t be automated away are being paid more, while those that can are being paid less. The competition isn’t as much someone in China as it is a machine or the internet. Ultimately, new industries will spring up to create new jobs, but there can be a long lag effect. Lest we start to sound socialist, we would like to point out that the very long term result should be higher living standards and more leisure time for everyone. This has been the general pattern since the beginning of time and we see no reason for it to stop now.
Hopefully unemployment drops rapidly, following the pattern of all recessions of the past 60 years. If it does not, it could create significant social problems, but stocks may decide to move forward anyway. America remains the most resilient economy in the world. Especially with current monetary policy, a return to high growth may be possible even if unemployment remains stubbornly high.
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