Saturday, September 5, 2009

Stagflation, anyone?



The US economy has reached a critical point where it can potentially fall into the same stagflation that plagued the seventies, when employment figures were low, businesses profited, Wall Street was bullish, and inflation ran rampant. If business executives continue to be rewarded by the company bottom line, instead of taking the long view at company AND employee wellness, the US economy will fall into the same high pattern that plagued European countries.

Without the various boom and bust cycles in the US during the last few decades, European economies would be hard pressed to find growth and employment gains. Now that the US economy is exhaust after the financial meltdown, the construction industry is dormant, and Wall Street is struggling to resume its earlier glory days, if businesses continue to focus on profits instead of people, the respite purchased at the cost of millions continuing to consume using up their employment benefits, paid for by government deficits, the day of reckoning will soon be upon us.

We cannot assume that the same conditions will prevail indefinitely. Businesses may profit temporarily during this respite, when millions living on government benefits continue to support the recovery, but their benefits will eventually stop.

We cannot assume that a recovery will be fueled by another boom like in the past. Even China is careful in managing its recovery to avoid the same boom-bust pitfalls that ruined the US economic health.

If the system of government regulations, business worldview, and national culture does not choose carefully, the terrible days of high inflation, low employment, and stagnant economy will return with a vengence. What is the Treasurey Department, and the highly paided executives doing about this potential disaster? Celebrating with champange because there are a few months of profits? Perhaps it's time for action and not celebration.


Employers kept Americans’ working hours near a record low in August, signaling that economic growth is poised to reward companies with added profits while postponing any recovery in the job market.

The average workweek held at 33.1 hours, six minutes from the 33 hours in June that was the lowest since records began in 1964, the Labor Department said yesterday. The report also showed that while payrolls fell by the least since August 2008, the unemployment rate rose to a 26-year high of 9.7 percent.

The preconditions for gains in payrolls, including giving the army of part-timers longer hours and taking on additional temporary employees, weren’t met last month. At the same time, with economic growth forecast to resume this quarter, the figures set the stage for a surge in worker productivity and drop in labor costs that will stoke corporate profits.

“It’s disappointing and it tells us that we are not quite there yet,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Federal Reserve. “It’s great for business and terrible for households” for coming months, Feroli said.

There were almost 9.1 million Americans working part-time last month who would rather have a full-time job, up 278,000 from July, yesterday’s report showed. It almost matched May’s reading, when it reached the highest level since records began in 1955.

Total Hours

The index of total hours worked, which takes into account changes in payrolls and the workweek, fell 0.3 percent last month to the lowest level since 2003.

“It tells us payrolls aren’t turning positive any time soon,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said on a conference call yesterday, referring to the workweek figures. “This wasn’t a friendly report.”

A measure of unemployment, which includes the part-time workers who would prefer a full-time position and people who want work but have given up looking, reached 16.8 percent last month, the highest level in data going back to 1994.

The workweek for factory employees, which held at 39.8 hours last month, leads total payrolls by about three months, LaVorgna said. Once it reaches at least 41 hours and once payrolls for temporary workers stabilize, then an increase in total employment can be expected months later, he said.

Payrolls for temporary workers started turning down in January 2007, 11 months before the recession began. They dropped by another 6,500 workers in August, the government’s report showed yesterday.

On the Mend

At the same time, the report did underscore that the economy is on the mend and pulling out of the deepest recession since the 1930s. The drop in payrolls slowed for the sixth time in seven months, to 216,000 in August. Declines in temporary jobs have also slowed in recent months. Companies cut 90,400 temporary staff in November of last year.

It’s a step in the right direction, Tig Gilliam, chief executive officer of Adecco Group North America, said in an interview. “That has to happen first,” he said. “That is a pre-indicator for improvement in the overall market.” Adecco SA, based in Glattbrugg, Switzerland, is the world’s largest supplier of temporary workers.

Gilliam projects the U.S. economy will not start adding jobs until early 2010 and that unemployment will reach at least 10 percent next year. The jobless rate climbed to 9.7 percent last month, the highest level since 1983, from 9.4 percent in July, yesterday’s report showed.

Total Hours

Total hours worked are down at a 2.8 percent annual pace so far this quarter, according to calculations by Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York.

Morris, who projects the economy will expand at a 4 percent to 6 percent pace this quarter, says that means worker productivity may exceed the second quarter’s 6.6 percent jump, which was the biggest gain in almost six years.

“This is set to flow straight into the corporate bottom line,” he said in an e-mail to clients. That indicates the “strong” earnings for companies in the Standard & Poor’s 500 Index in the three months to June will continue this quarter, he said.

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