With 15 million people out of work, according to The New York Times, the economy will not grow at a fast enough rate – at least 2.5% -- to push job growth above the 300,000-per-month level needed to bring down the unemployment rate significantly. This inadequate job creation rate -- coupled with corporate outsourcing -- will keep demand for workers low and put pressure on wages to fall or, at best, remain flat.
The New York Times notes that it would take 12 years to soak up all these workers if job growth was at 208,000 a month, a level significantly above recent results.
Consumer spending accounted for 70.8% of economic growth in the first quarter of 2010. But consumers are unlikely to open their wallets and purses further due to four factors:
- Unemployment likely to remain above 9% throughout 2011. According to an October survey of professional economic forecasters, unemployment will still be at 9.2% in December 2011, and
- Strong downward pressure on wages. A PlanSponsor survey of 313 companies expects 2011 salary increases of between 0.5% and 3%, a figure that is likely to be somewhat higher than the increase in the consumer price index when food and fuel inflation is stripped out. Unfortunately, wage earners still have to pay for those excluded items. Meanwhile, outsourcing to lower-wage countries continues apace: According to China's Ministry of Commerce, the value of Chinese international service outsourcing contracts exceeded $10 billion through October 2010, up 152% from the previous year, with the global outsourcing total is expected to rise to $1.6 trillion by the end of the decade.
- Consumers' reluctance to add to their heavy debt loads. According to Bloomberg, consumers are rapidly deleveraging. The ratio of debt payments to disposable income fell to 12.46% in the first quarter of 2010 from a 2008 peak of 13.96% in 2008. That level is expected to continue to fall to a "sustainable range" of between 11% and 12% according to Richard Berner of Morgan Stanley (MS).
- Foreclosures in the millions. Capital Economics expects a 5.5 million-unit shadow inventory of houses at the end of 2011. And S&P counts $480 billion worth of foreclosed mortgages. Moreover, with millions of mortgage holders behind in their payments and mortgage balances exceeding the value of the houses they back, the pressure on consumers to repay that debt is likely to limit further consumer spending that might have stimulated the economy.
One factor that could make consumers spend is a rising stock market. Certainly Fed Chairman Ben Bernanke thinks that his Nov. 3 decision to buy $600 billion worth of U.S. Treasury securities has been driving up the stock market. And he thinks that the rising portfolio values this will bring will revive the "wealth effect," that sense of affluence that leads consumers to spend more.
The official inflation rate is expected to rise from 1.1% in 2010 to just 1.5% in 2011, despite skyrocketing prices for many commodities, such as wheat, cotton, soybeans, corn, oil, gasoline and gold. Those increases will derive from strong demand for these commodities in emerging markets, combined with speculators betting on rising prices and a dropping dollar.
These price increases will filter down to the real prices that people pay for goods that they need each month. But thanks to the government's practice of excluding volatile food and energy prices from official inflation calculations, incomes will not be adjusted for inflation and consumers will continue to be squeezed.
Corporate and Bank Balance Sheets
Corporations will continue to hoard their money, with total cash on corporate balance sheets still hovering around $1.84 trillion according to the Federal Reserve. Meanwhile, according to the FDIC, banks continue to attract deposits. They held $8.2 trillion worth of deposits at the end of June 2010 -- paying interest rates of 0.2% while using that money to buy $1.2 trillion worth of U.S. government securities (10-year government securities that yield around 3%.)
If there is a hint of hope about this outlook changing, it comes from Ian Shepherdson, chief U.S. economist at High Frequency Economics, and a man who's respected for calling the housing bust early. According to The New York Times, he foresees economic improvement.
That's because in November 2009, commercial and industrial bank credit was $1.32 trillion and was declining at a rate of $7 billion a week. Between October 2008 and the low point in June 2010, total commercial and industrial bank credit fell 25%. However, Shepherdson sees that the data have recently turned positive, and he expects they should continue climbing, albeit slowly. "Getting to zero is not bullish at the moment." he told The New York Times.
Corporate Investment Triggers
The single most important factor that will control when the U.S. starts to display real economic growth again is when companies choose to invest their cash hoards in job-creating growth initiatives. In 2011, the most likely match to ignite those mountains of financial gunpowder will be strategic acquisitions.
During 2010, for example, many large technology companies used their financial resources to acquire smaller companies that were growing faster. Such behavior can lead to an acquisition spree, which would boost growth – although not necessarily new hiring. In order to get job-creating investments, the information technology industry will need to serve up a new concept that yields a big boost in corporate productivity.
Unfortunately, prospects for a new idea of the magnitude of the Internet -- which helped contribute to more than 22 million jobs between 1993 and 2000 -- don't appear too bright.
The keys to U.S. economic recovery are a boost in consumer spending coupled with a corporate investment boom. An investment boom could lead to hiring, and the hiring would make consumers feel like spending more. That increase in consumer spending would spike demand, which would lead companies to hire more people to meet the demand.
With such a virtuous cycle, we could be off to the races. But for 2011, the U.S. economy appears unlikely to get out of the starting gate.