Will QE3 Really Generate Jobs?
As investors have continually anticipated during 2012, the Federal Reserve announced that they would once again embark on another round of monetary stimulus. This will be the third round of Quantitative Easing in the current economic cycle, but this iteration may become known as QEternity as the new Fed program of printing money is completely open ended. There is no stated cap to the amount of money the Fed will print and there is no limit over the time during which this will occur. Make no mistake, this is a very big and aggressive shift in Federal Reserve behavior. Why now three plus years into an economic recovery? Also different is that the Fed is verbally targeting employment with the current round of stimulus. They tell us QE3 will see the Fed purchase $40 billion of mortgage-backed securities each and every month until "substantial" improvement in the job market and general economy occurs. Just one small problem, they did not tell us what "substantial" means in terms of either actual job numbers or GDP, so there are no hard numbers against which investors can benchmark progress. We guess gauging "improvement" in the economy and US job market specifically is now the subjective domain of the Fed.
Remember that under Quantitative Easing I and II, the Fed printed roughly $2 trillion in new money. And yet still we've experienced the weakest US jobs recovery in a half-century. Will printing even more money under QE3 really generate jobs in the US and what do mortgage backed securities have to do with jobs? We're asking these questions as we believe there is at best a very weak linkage between Federal Reserve printing of money and actual jobs creation. Moreover, the structural issues the US employment market is facing strongly suggest the true motivation of the Fed in unleashing unprecedented and unlimited QE3 is asset reflation, not jobs creation, despite this being quite the noble perceptual focal point. The key point is asset reflation. This is exactly where theoretical success, or otherwise, of QE3 will be measured by the Fed itself.
For a decade and a half we have implored readers to think in global terms. The Fed linking their current money-printing program to domestic US employment health once again highlights for us this key macro. In thinking about the anomalistically weak employment recovery in the current cycle and current Fed intentions, it's very instructive to look at the longer-term character of US employment recoveries over the last forty years. There is a much larger message across historical context that essentially makes the Fed targeting job acceleration disingenuous at best.
In the chart below we are looking at the number of years it has taken for employment levels to reach prior cycle high points, new all time highs, after hitting interim recession period low points. There is a distinct pattern that emerges over the last three decades of ever increasing employment recovery periods. Starting in the 1980's, employment recovery in each economic cycle has taken ever longer to achieve. We've simply estimated recovery time for the current cycle based on employment gains to date since 2009.
Just why has it taken a greater number of years for the US employment base to recover in each economic cycle? The first and easiest answer is globalization. Today, the largest portion of many blue chip multinational corporate revenue streams come from outside the US. Hence, growth of employment outside of the US for many large US based companies simply matches their geographic revenue growth sources. As non-US corporate revenue sources continue to grow ahead, so will demand for non-US employees by these same companies. It's simply the evolution of the global economy.
The prior decade truly was the decade of US manufacturing outsourcing. On a base of 17.5 million US manufacturing jobs in 2000, manufacturing sector employee count dropped to near 11.5 million in early 2010 and has recovered slightly to roughly 12 million at present.
Although we have talked about a bit of a US manufacturing renaissance recently, we're not about to completely replace the remaining 5.5 manufacturing jobs lost since 2000 any time soon. This is not a cyclical issue, but rather a structural US employment problem begging for investment in retraining and education, not necessarily investment in mortgage backed bonds. Will printing more money really change this?
We know that in the 2007-2009 economic downturn, one of the most notable US job sector casualties was construction, especially residential and retail related commercial. Although the housing market has shown signs of stabilization and marginal improvement, we're still over 3.2 million US construction jobs shy of where we stood in 2007.
We're not about to have another housing and construction related boom anywhere even close to the magnitude of 2003-2007, so again how does printing more money influence this second structural issue for US employment? The Fed buying mortgage securities may lower mortgage interest rates a bit further, but the bulk of the magnitude of the drop in rates for this cycle is already behind us. And despite all the talk of a big revival in US residential housing, notice how construction employment has actually declined in 2012. Go figure, right?
As we wrote about last month, the US is experiencing the weakest service sector recovery in a half century at least. Remember, the US service sector dominates the US economy. The culprit this cycle is clearly financial "services". The US service sector dominates US employment. Finally, the engine of US employment growth, small business, has simply been left behind in terms of cyclical recovery. The NFIB small business optimism index just about says it all.
Although noble, the Fed targeting the US employment level as a rationale for further money printing is a bit disingenuous given these facts. Globalization, the changing nature of US domestic job skills needs, and the structural headwinds facing manufacturing and construction tell us meaningful US employment acceleration will be an uphill battle. Employment recovery in each economic cycle of the last thirty years has been an uphill battle. Moreover, in the current recovery 68% of jobs created (approximately 1.9 million) offer wages of $14 or less per hour. In the prior economic downturn, almost 80% of jobs lost (5 million) paid $14 per hour or more. Employment recovery is not just measured in body count, but in quality measured by wages and benefits.
The Fed's QE I saw its greatest success in reflating a broad spectrum of financial asset prices. We saw very much the same outcome, although to a lesser degree, with QE II. And so QE III will all of a sudden be effective in creating domestic jobs? Again, a noble perceptual focal point, but one not supported at all by the data or character of the current economic cycle itself. The new QE III is once again all about asset reflation, as have been the prior two Fed balance sheet expansion stimulus programs. Make absolutely no mistake about it and act accordingly.