Job Creation Proceeds at Turtle Pace

Slow and steady may win the race but the pace of job creation by the US economy continues to move along at turtle speed. For the 20 million unemployed and underemployed people the pace of job creation remains painfully slow as revealed by ADP 's National Employment Report for October. During the month, private sector employment increased by 43,000 on a seasonally adjusted basis. ADP also revised its employment report for September stating that the economy lost only 2,000 jobs rather then the 39,000 it had previously reported. After an upward revision of 37,000 less jobs lost during September, during the past 60 days the private sector has produced 41,000 new jobs. For the worlds leading economy with a GDP of almost $15 trillion the lackluster growth in job creation is a troubling indicator of an anemic jobless economic recovery.

The October report arrests the September decline in job growth that reversed seven consecutive months of positive job creation. During that time the economy averaged employment gains of 34,000 new private sector jobs per month. This rate of job creation does little to reduce the negative overhang a 10% unemployment rate is having on economic growth. A stabilized and expanding labor market is a key ingredient for a sustained economic recovery. Over the past three years the economy lost over 9 million jobs. For a robust recovery to occur the economy needs to create 200,000 jobs per month for the next four years to return the job market to its pre-recession levels.

As we reported last month the expiration of the Federal stimulus program will force state and local governments to layoff workers. Sluggish job creation continues to pressure depleted unemployment funds and the expiration of benefits for many of the unemployed is draining buying power from the economy.

Soft consumer demand threatens retailers and leisure industry segments and has a spillover effect on the housing market. Joblessness is a principal factor in mortgage defaults and contributes to the growing inventory of foreclosed properties held by banks. The ADP report indicates that during October the US economy shed an additional 23,000 construction jobs. It is estimated that it will take 24 months for the housing market to absorb the existing inventory of foreclosed properties. A healthy turnaround in the construction industry will move in step with the improvement in the housing market conditions.

A sustained recovery will require sector leadership by Small and Mid-Size Enterprises (SME) as principal drivers of job creation. SME's sector strength has traditionally been in the construction, specialty retail, leisure and service sectors. Among these segments only the services sector continues to be a consistent driver for job creation.

Macroeconomic Factors

The principal macroeconomic factors impairing recovery are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The results of this weeks mid-term election and the return of congress to Republican control will encourage the federal government to pursue fiscally conservative policies that will dramatically cut spending and taxes for the small businesses and the middle class. In the short term spending cuts in federal programs will result in layoffs and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME's to invest capital surpluses back into the company to stimulate job creation.

Highlights of the ADP Report for October include:

Private sector employment increased by 43,000

Employment in the service-providing sector rose 77,000

Employment in the goods-producing sector declined 34,000

Employment in the manufacturing sector declined 12,000

Construction employment declined 23,000

Large businesses with 500 or more workers declined 2,000

Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000

Employment among small-size businesses with fewer than 50 workers, increased 21,000

Overview of Numbers

The 45,000 jobs created by the SME sectors reverses a decline from September and offsets the 2,000 job cuts by large companies. The strong growth of service sector jobs is a positive development. However the continued softness of goods producing segments and manufacturing continues to indicate the continued decline of US industrial capacity. The strong rebound in services may be the result of the expanding practice of companies utilizing outside contractors to fill human capital requirements. These types of jobs may mask an underemployed and transient labor pool forced to accept work at lower wage scales.

The stock market continues to perform well. Yesterdays announcement by the Fed to pump $600 billion into the banking system may allay bankers credit risk concerns and ease lending restrictions to capital starved SME's. Despite a projected GDP growth rate of 2%, ADP's employment figures indicates that the economy continues to dwell at the bottom of an extreme down economic cycle. The danger of a double dip recession still lurks as a possibility but is becoming more of a remote possibility. Interest rates remain at historic lows and inflation continues to be benign but its danger grows as a weak dollar continues to flounder forcing oil prices to climb while government debt levels continue to spiral upward. The balance sheets of large corporate entities remain flush with cash. Analysts estimate that over $1 Trillion in cash swells corporate treasuries remaining underemployed on lazy corporate balance sheets. The low interest rate environment has allowed companies to pursue deleveraging strategies considerably strengthening the capital structure of corporate America. To the dismay of politicians and the unemployed, economists speculate that deployment of this cash is still a few quarters away from finding its way into the real economy.

Solutions from Sum2

Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: Theme from Teenage Mutant Ninja Turtles

Risk: unemployment, recession, recovery, SME

G-20 Mulls Sustainable Recovery

Last year when the G-20 convened in November it was billed as the Bretton Woods II. The global economy was in the throes of a banking crisis that rivaled the Great Depression of the 1930's. Central bankers and political leaders were struggling to formulate the right mix of policies to strike the proper balance of interventionist programs needed to arrest the accelerating economic decline brought on by the frozen credit markets. Most believe it worked.

Today in Pittsburgh, conferees will begin to assess weather the accommodative monetary policies, massive capital infusion programs and historic low interest rates can continue to stabilize the global banking system and bear fruit of real economic growth. Though economic growth appears to have emerged in the US and the EU, there is a concern that recovery has become too dependent on the massive government stimulus programs. The development of a stimulus exit strategy will certainly be on the G-20 agenda. How to sustain economic recovery without the massive government spending programs is the primary challenge that G-20 leaders need to address.

Global trade agreements and a consistent tax policy across G-20 domiciles will also be areas of focus for conferees. Regulatory tax arbitrage is an issue that G-20 countries are keen to address. The days of utilizing domiciles with favorable tax laws to protect assets and revenue derived from a domicile with a less accommodating tax structure is an area that all tax hungry G-20 countries want resolved. Recognizing taxable revenue streams and repatriating capital gains taxes are particularly pressing concerns considering the massive budget deficits many countries are confronted with.

Global trade issues and the East/West balance of trade continues as concern for conference participants. The fall of the dollar and China's growing reticence to continue their purchase of US government debt is an interesting backdrop to the brewing trade spat over US tariffs imposed on the importation of tires manufactured in China. China has retaliated with an examination of US trade practices and American's need to keep their fingers crossed that China continues to regularly appear at the government bond auctions with its sizable check book.

You tube Music Video: Edvard Grieg, Anitra's Dance

Risk: trade, recession, political, economic

Mom and Pop Go Chapter 11

The Wall Street Journal ran an interesting article about the devastating effect the recession is having on family owned businesses. The SBA estimates 90% of U.S. businesses are family-owned. During 2008 about 4.3 million businesses with 19 or fewer employees closed according to the Bureau of Labor Statistics. If 90% of those firms were family controlled businesses more then 3.8 million families have lost their livelihoods and most likely have also lost a considerable amount of personal wealth. This drastic dissipation of wealth and family control of assets is yet another blow to the middle class. Its impact of entrepreneurial activity and capital formation initiatives may create additional headwinds for the economy seeking to overcome the deep recession.

John Ward a professor at Northwestern University observed "that the economic downturn is really just the latest setback for family-run businesses. In the 1970s and '80s, exorbitant income taxes and estate taxes forced many to close. Before that, the anti-establishment movement during and after the Vietnam War made many children reluctant to take over the family business."

Beth Wood, a family business market development specialist at MassMutual observes that family businesses are "often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis. They've seen reductions in top line revenue that they just can't react fast enough to. Problems securing credit in this recession have also prevented some family businesses from getting the funding they need."

Ms. Wood makes an interesting observation about the importance of business agility. The need to assess the rapidly changing market dynamics is a critical exercise that SMEs must undertake. Business as usual will not get it done. SMEs must begin to transform itself to better align its business model to rapidly changing markets. Conducting a thorough risk assessment and opportunity discovery exercise is critical to creating a sustainable business enterprise. Sum2's Profit|Optimizer is a critical tool that helps SME managers assess risks, spot opportunities and initiate actions to achieve business growth and profitability.

Family owned enterprises must overcome the gravity of generational business cultures that inhibit and resist change. SMEs will survive and thrive if they can identify emerging opportunities the current business cycle is creating. SME's will survive and thrive if they have the will, resourcefulness and a supportive culture to change. These are the qualities required for long term sustainability and growth. Business as usual is giving way to a "New Normal," where adaptability to structural market changes are keys to asset preservation and wealth creation.

You Tube Video: Willie Nelson, On the Road Again

Risk: family trusts, asset preservation, small business, bankruptcy

Rutgers Job Study: Full Employment By 2017!

Rutgers University has released a sobering study on expected recovery rates in employment levels for the United States economy. The study, America's New Post-Recession Employment Arithmetic indicates that the employment deficit has grown so large that it may take until 2017 for the nation’s labor market to return to its pre-recession level.The study, released by the Edward J. Bloustein School of Planning and Public Policy is a cause for concern. The study reports that the US economy has shed over 7 million jobs since the recession officially began in December 2007. This has reduced the total number of jobs in the United States by 5.8%, the largest drop during any downturn since World War II. The authors of the study, James W. Hughes and Joseph J. Seneca, project that the employment deficit will total 9.4 million private sector jobs by the end of the year.

The study estimates that if the economy adds more than 2 million jobs annually starting next year, it would take until August 2017 – more than seven and a half years – to both recover the jobs lost since December 2007 and create new positions for the roughly 1.3 million people who join the labor force each year.

Hughes and Seneca believe that a recovery in 2017 may be an optimistic assumption. An economic expansion that lasts for seven years is about 50 percent longer than the average for postwar recoveries. Hughes and Seneca refer to the last ten years as “The Lost Employment Decade,” because the U.S. is on track to finish this year with 1.3 million fewer total jobs than it had in December 1999. “This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade” the report states.

The past decade has witnessed a startling reversal in economic fortunes for the US economy. The U.S. finished the 1990s with 19 million more private sector jobs than it had at the start of the decade. Approximately 16 million jobs were created during the 1980s. Before the recession, annual rate of job growth was about 1 million jobs per year, about half of the growth rates of the previous two decades.

Hughes and Seneca believe that this will force states into fierce competition to realize job growth. States must respond by creating desirable environment for business based on costs, affordability, business climates, support infrastructure, labor force quality and tax policies.

We believe that joblessness and unemployment continue as significant threats to economic growth. The conception of the unemployment rate as a lagging indicator is emerging as a lead driver inhibiting economic recovery. High unemployment continues to inhibit consumer spending and works against a rebound in the housing market and related construction industries. Retailers are already bemoaning the bleak forecast for this years holiday shopping season. State and local governments reeling from dwindling tax receipts are beginning to crack under the strain to fund basic community services, public schools and social assistance programs.

The structural dysfunction of the American economy is a critical issue that must be addressed. A concerted program aimed at the development and incubation of SME manufactures will encourage the entrepreneurial energy and kick start badly needed economic drivers to ignite a recovery. Sum2 advocates the adoption of The Hamilton Plan and the creation of an SME Development Bank to reestablish sustainable growth and national prosperity.

You Tube Music Video: Bruce Springsteen Seeger Sessions, Pay Me My Money Down and Erie Canal

(RU and Bruce, Perfect Together)

Risk: unemployment, job creation, SME, political stability, recession

High Unemployment Spurs SME Bankruptcies

Two news items concerning the health of of the United States economy crossed my desk today. This morning ADP published its monthly National Employment Report for June. ADP announced that nonfarm private employment decreased 473,000 from May to June 2009 on a seasonally adjusted basis. Monthly employment losses in April, May, and June averaged 492,000. That equates to over 1.5 million jobs that were lost over the past 90 days.

The trend indicates that the rate of job losses is slowing; but the massive evaporation of jobs represents a serious erosion in buying power. The United States is a highly developed consumer oriented economy that is highly dependent on the discretionary buying power of consumers. Significant loss of jobs and the severe contraction of credit availability are severe headwinds that the US economy must overcome.

In recent years US job growth was fueled by small and mid-size enterprises (SME). Home based companies, specialty retailers and service oriented companies has fueled economic expansion and job growth. No more. The trend has been decidedly reversed due to the evaporation of consumer buying power, credit and capital constraints and other macroeconomic factors that conspire against the limited balance sheets of SMEs.

The USA Today reports, “The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings (36,106) compared with the same period last year (23,829), according to the Automated Access to Court Electronic Records. On average thus far in 2009, some 350 commercial enterprises file for bankruptcy daily — an increase of 240% from 2006.”

The two attributes that distinguish the US economic colossus are the work ethic of its people and a deep abiding commitment and belief in a entrepreneurial culture that rewards hard work and risk. It would seem that these two virtues are under siege and are being stressed to a breaking point due to the depth and pervasiveness of the global recession. One thing is clear, the indomitable spirit of the American people are being put to the test. In time this great nation of great people will rise to meet and surmount the challenges posed by this great recession. It remains to be seen however how this will change the spirit and character of the American psyche and how future generations of countrymen will view the generations that left them with a debt laden legacy.

You Tube Music Video: George Gershwin, Three Preludes, #2

Risk: work ethic, entrepreneurial spirit, economic recovery, depression