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It seems impolite to ask, what with employment growth sucking wind already. Companies added just around 100,000 jobs a month over the past year, a rate Fed chief Ben Bernanke dismissed Friday as "insufficient to materially reduce the unemployment rate."
Not a pretty picture
But it gets worse. Economists at Bank of America Merrill Lynch say one key to a jobs recovery is an improvement in housing -- because so much job creation is driven by new businesses that have in recent years been financed in part by home equity borrowing.
This sort of job creation has been missing the last couple years, thanks to the housing crash. If U.S. house prices embark as expected on a new decline, the long-awaited hiring renaissance could be put on hold yet again.
"There has been an adverse feedback loop where low home prices lead to tight credit, hurting jobs and prolonging the housing recession," writes economist Michelle Meyer.
Much of the concern about another housing downturn revolves around the banks. A sharp house-price decline could lead to more foreclosures, hammering profits and reducing lending, such as it is.
But Meyer points to another effect that could be equally powerful for the jobs market. She notes that falling house prices hit home equity, preventing small business owners from tapping a key source of financing.
A recent study by the Cleveland Fed found that at least a quarter of small business owners in 2007 used home equity to finance their business. With as many as 1 in 4 homeowners under water on their mortgages, many would-be employers are unable to borrow as they were during the boom.
"Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing," wrote Fed economist Mark E. Schweitzer and Case Western enterpreneurial studies professor Scott A. Shane.
That's important because a disproportionate amount of job creation comes from new business start-ups, which of course typically at least start small. Start-ups account for just 3% of overall employment but 20% of new jobs in any given year, according to Meyer.
When that engine sputters – as it has in recent years, with tight credit and consumer belt-tightening – it robs the economy of one of its driving forces. This has been the condition ever since the recession started, according to BofA.
Business formation peaked in the third quarter of 2007 and fell sharply for the next six quarters, bottoming in early 2009. However, there was little recovery since then with the pace of new business formation holding roughly steady at 1Q09 levels. Job creation from business formation continued to decline and as of early 2010 was still insufficient to offset the number of jobs lost from business closings.
This isn't the only problem in the jobs market, of course. There are lots of moving parts beyond housing, such as plunging labor force participation (see chart, right) as discouraged workers give up on trying to find work. And there is considerable imprecision in comparing and contrasting the many jobs reports, all of which have their pros and cons and some of which come out only after considerable delay.
"The surveys can't catch everything, but it's obviously correct that some older folks who lose their jobs are not going back into the work force," said Jeff Miller, a Chicago-area investment adviser who follows the economy at his A Dash of Insight blog. "And there are people who can't move to get a new job because they can't sell their house."
And it's worth noting that Meyer isn't calling for the jobs picture to grow even dimmer. She predicts the U.S. economy will add 175,000 jobs a month over the course of 2011, which will bring the unemployment rate down a shade, to 8.7% from the recent 9.4%.
Yet perversely, bad news for housing and jobs now conspire to keep the wind behind the stock market, which is addicted to free money from the Fed.
Indeed, some of the dynamics undermining U.S. workers – cheap financing for big, global companies that do much of their hiring overseas; rising productivity as employers stretch resources and trim fat; and a surplus of both workers and production capacity – spell good news, at least at the moment, for investors.
"We have bad news for an awful lot of people, but it's a Goldilocks economy for stocks," said Keith Springer, a financial adviser in Sacramento. "The Fed is trying to create a bubble of artificial demand to create the wealth effect. It doesn't do much for jobs, but for now it's pretty good at driving stock prices."
Housing collapse is a result of deflating money supply. With less money available, it becomes impossible to sustain current prices and salaries:
http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html
This is why we have high unemployment. The cure is to pay off debt. The cure is NOT deficit spending. Deficit spending is the morphine you take before your legs are cut off.
Prepare for the coming crash. It is likely to be the biggest economic collapse the world has ever seen.
I agree with RR, Chicago, IL : All americans and american banks MUST forget about 'home equity' forever. MUST to start thinking about other money sources. Take a look at Europian and Asian businesses, - they don't know what is 'home equity'.
"Turn out the lights.....the party's over" the fat lady is singin' on Wall Street while the suckers are sufferin' on Main Street
To the anti-free trade people:
America has two choices:
1. Isolation. America maintains high wages with an under-educated work force and the wealth that it has in isolation. Eventually, America will be left behind, but this can take many years (slow decay). Bit by bit, however, other countries in the world will have superior technology at cheaper prices and it will be very difficult for the US to catch up.
2. Competition: The US undertakes structural reforms and the painful act of correction, so that we have an educational system that produces workers with a skill set that is internationally competitive for the salary levels demanded. Switzerland and Germany have succeeded in doing this, so it is not impossible.
These are our choices. The seeming preference for choice #1 is depressing to me.
At first glance, that labor force participation chart looks nasty, until you actually look at it and see we're at 64.3% but the peak is only a hair over 67%. Does 3% really make that much difference?
Wow! Housing slump is bad for jobs. Welcome to the real world.
Start-ups account for just 3% of overall employment but 20% of new jobs in any given year.
I do get tired of this statistic. Small companies hire the most, but they also fire the most. The net is not going to significantly help the job situation, especially when it comes to living wages.
With most profits now coming from global companies with customers in emerging markets, local service jobs are not where the emphasis needs to be.
Another supposed genius with negative news. Don't these experts ever learn.
I find myself shaking my head at this article.
"Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing," wrote Fed economist Mark E. Schweitzer and Case Western enterpreneurial studies professor Scott A. Shane.
I thought the world was supposed to be wise to the fact that we need to *reduce* the amount we borrow? Yes, we do need to wean small business owners from borrowing money from their family shelter. If their business is viable they should be able to go to the bank and get money for it. Home equity financing is lazy. "Business formation peaked in the third quarter of 2007 and fell sharply for the next six quarters, bottoming in early 2009. However, there was little recovery since then with the pace of new business formation holding roughly steady at 1Q09 levels. Job creation from business formation continued to decline and as of early 2010 was still insufficient to offset the number of jobs lost from business closings." Availability of credit is just one thing that goes down during a recession. The other is *demand*. Why start a new business is the existing businesses in that field are already under utilized? The evidence that this recovery is credit restricted is very weak indeed - people keep repeating it like it's a fact but surveys of businesses say otherwise. If there is demand from customers, you will be able to put together a business plan and borrow the money. Companies are not credit constrained right now.
As a small busines owner/manager I think that the main incentive for me to expand my borrowing/spending to develop the business would be increased profits and a thriving economy with some future stability!
The world banking system has shot us all in the foot and we have some blame to share by over-borrowing, however, I think the main cause of the world recession is simple bad management of the world banking systems. This is costing me a huge amount of money in increased taxes and lost business revenue, yet the Banks still want to pay huge bonuses to their managers. Totally illogical and borderline criminal. Governments need to get a grip on these organisations as a whole, we can't afford for this to happen again ( but it will! ).
pro-entertainment
Economists should know that Developed countries are manufacturing base economies and Third World countries are service base economies. The USA decided to downgrade its status by switching to a service economy by exporting the consumer goods manufacturing sector to China and Third World countries. Now, it is the manufacturing of high-tech high-value export products that are slowly being exported. High-tech jobs are going mostly to China, with the technology and manufacturing know-how and training of Chinese engineers and technicians.
Caterpillar now owns a manufacturing plant in China. Goodrich Corporation has a Joint Venture with XAIC, one of China's leading aerospace companies. Honeywell International Inc. formed Joint Ventures with three Chinese companies to supply components for the country's C919 airplane. Parker Aerospace and China Aviation Industry Systems Company (AVIC Systems) also formed a Joint Venture. All these Joint Ventures are transferring technology, manufacturing know-how and also training of Chinese engineers and technicians.
Here is a very good article that describes the perils of these Joint Ventures. http://blog.seattlepi.com/aerospace/archives/171891.asp
The USA has given up all its manufacturing and technological advantages in the guise of Free Trade in both the consumer and high-tech manufacturing. The sad part is that the Obama Administration chose to include the people responsible for the impending demise of the USA in his economic team. Even service type jobs are also being exported to India such as Call Centers and Tax Preparation Services.
Too bad Ross Perot did not ascend the presidency when he ran for the office due to our partisan bias. The "giant sucking sound" was United States Presidential candidate Ross Perot's colorful phrase for what he believed would be the negative effects of Free Trade Agreements.
I like the chart showing the low labor force participation. It really explains a major component of our economic catastrophe. It's certainly true that the unemployment rate dropped largely because of people dropping out of the job market, or not being counted. Even so, I don't see the unemployment rate dropping below 9% in 2011. The housing market is truly abysmal, with houses even in nice, upper-income areas selling at rock-bottom prices that would leave most sellers in devastating debt. Business owners who do have money tend to also be in significant debt, with no way to make a true profit. And the profitable companies often don't pay decent wages, and of course there's an extreme lack of jobs available, so people are really working to the bone for peanuts, or just have insignificant part-time jobs. I also feel that the statistics for jobs can be quite wrong. Many employers hire the same person under different names multiple times, so they don't have to do a W2. And temp agencies have lots of "employees" who may not work much if at all, and may be counted multiple times if they're "hired" or working at different temp agencies, etc. The sad part is that there is lots of cash in the US, it's just been hogged up by a small percentage of the population, and they're not gonna distribute it, at least not in the US. Sadly, it's a downward spiral that will lead to losses for everyone. Things aren't getting much better and they could get a lot worse. But it's only hindsight that tells us this.
The housing bubble was what was holding up the employement rate for the last decade while manufacturing went overseas. Building unneeded over-priced (relative to real incomes)houses and selling/flipping overpriced houses employed construction workers, real estate agents, and all the people who sold raw materials, furniture and appliances that went into the houses (people remodel and buy new stuff when they move). Housing prices have a way to go to return to historical norms pre 2000 (ratio of salary to housing monthy payment). Then there are all the foreclosed houses that banks will be selling for the next 10 years as people with underwater mortgages walk away from their houses, that will keep the price of housing down. We need creation of jobs not realted to housign but this is going to take a while since no one want to admit that houses price cannot returen to pre 2008 levels given what people's slaraies are and unemployment.
Using home equity to start a business.....what happened to starting business the old fashioned way....SAVE and INVEST
The only thing that grows in this economy is taxes, fees and premiums.
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