Thursday, March 22, 2012

Spring is a Time for Optimism

It sure felt like spring was in the air when the February jobs report was released showing an increase of 227,000 jobs. While that was a bit higher than most analysts expected, what actually was most impressive was that February was the third consecutive month in which the economy created over 200,000 jobs. As any statistician will tell you, one occurrence is often perceived as an episode; two back-to-back occurrences give you a reason to pause and observe; however three consecutive occurrences is defined as a trend. And while this continuing upward trend in jobs is not that steep, it appears to be spreading a great deal of optimism.

What was equally exciting to see was that in addition to the higher than expected job growth in February, the economy simultaneously witnessed an increase in the employment participation rate. In other words, people who had previously been sitting on the sidelines unable to find a job in the past are now encouraged to once again join the workforce and start looking. The fact that several hundred thousand Americans re-joined the workforce and the overall unemployment rate still remained steady at 8.3 percent is a good sign. And lastly, amid all this optimistic news it was also reported that average weekly wages increased as well. Having all of these indicators trending upward at the same time gives one reasons to hope.

Here in Minnesota the trends and the optimism are equally on display. The January jobs report indicated that our state economy added 15,500 jobs and the state unemployment rate dropped to 5.6 percent; more than 2.5 percentage points lower than the national average. Over the past year the state economy has now added a “net” 29,000 jobs. The strength of the state’s private sector was substantial when you take into account the continuing loss in government jobs during the same period of time. For example, in January the private sector actually created 17,200 new jobs, while government shed 1,700 for an overall net gain of 15,500. These contradictory trends have been quite consistent throughout the year with the private sector actually creating close to 37,000 new jobs in the past year, while government agencies shed a total of 7,900 jobs. And while one could argue that the loss of government jobs seems to be slowing down the overall jobs recovery, one cannot deny the fact that in the fourth quarter of 2011 Minnesota’s private employers reported close to 50,000 job openings; an increase of 47 percent from the same quarter the year before. Without question Minnesota’s private sector is both growing and gaining traction.

The housing market in Minnesota has been weak for years and has created a significant drag on the economy. But now even the housing market seems to be trending in a more positive direction bringing a bit more optimism for 2012. Realtors report that the number of homes receiving offers continues to rise, while the number of new listings entering the market declines. And while the average price of homes has not significantly risen, it is fair to say that the continuing decline in the average price of homes seems to have bottomed out and may be in a position to increase from this point forward.

Locally here in south central Minnesota, the economy actually has been quite robust. While the Mankato/North Mankato metropolitan area typically doesn’t receive much statewide attention, some might be surprised to learn that over the past year the Mankato/N. Mankato area has outpaced the all other metro areas in terms of job growth. In fact in the past year jobs grew at a rate of 3.6 percent in the Mankato area. Not that impressed? Well over the same period of time jobs in the Twin Cities metro grew at 1.1 percent; in Rochester the rate was 0.2 percent; and in Duluth net jobs declined by a rate of -0.9 percent. With that as a reference, how does 3.6 percent seem now?

Let’s remember that spring is the time of year that always brings out the optimist in all of us; but this spring the economic optimism may well be warranted. At the same time one must be careful not to be unrealistically optimistic. The recent February forecast of a $323 million budget surplus is a good example. While a multimillion dollar surplus is always a good thing, let’s remember that this surplus was created as a result of reduced government spending, not because of a fast-growing economy. In fact since the November forecast the combined revenue increase as a result of income, sales and corporate income taxes was a very modest $45 million, or an increase of 0.2 percent.

So while the economic recovery continues in Minnesota and across the nation, let’s remember that the recovery can’t afford any sudden jolts. And while some may imagine jolts such as a natural disaster or unexpected geo-political events, it also includes unwise tax and economic policies designed to speed up the recovery. While it’s hard to admit, sometimes the smartest thing a policymaker can do is to sit back and just let the economy continue its course.

The Myth of the Job Creators

Every decade or so a new a word or phrase becomes so popular and so over-utilized that it is rendered virtually meaningless through its overexposure. In fact, for much of the last decade the word "Entrepreneur" seemed to fall into that category. Captured by the outstanding success of people like Steve Jobs, Jeff Bezos, Bill Gates and Mark Zuckerberg, Americans, led by the popular and business media began to characterize the entrepreneur as a tech-savvy, risk-taking, swash-buckling savant of a business person. As a result of this national obsession on entrepreneurship, colleges and universities began offering degrees in entrepreneurship, policymakers passed legislation to facilitate greater entrepreneurial behavior, and even local communities started looking in the mirror trying to assess how "entrepreneurship-friendly" they were. At the same time it became evident that the young son who put up his capital to purchase and expand his father's local hardware store; the farmer who takes financial risks every day; or the local business person who quietly, but successfully owns and operates a small manufacturing plant are just not sexy enough to wear the label "entrepreneur."

Now the latest phrase being put on a pedestal is the "Job Creator." And not surprisingly, given the deep drop in employment since the beginning of the recession, politicians are trying to do everything they can for this new category of economic hero. In fact, in today's highly-charged political environment, it seems like every single piece of legislation at the state and federal level must be labeled as either beneficial or detrimental to the job creators. But who exactly are these job creators and why are they so important? Similar to the "entrepreneur" is there some special personal attribute that distinguishes "job creators" from the rest of us?

It seems reasonable to me that at its core a job creator is one who creates new jobs in the economy. So maybe the first step in understanding the job creator is to understand how exactly a new job is created. And at the heart of my argument on job creation are two simply economic principles: supply and demand. Simply stated, when the aggregate demand for your goods and/or services increases to the point where you may not be able to adequately supply your customers in a timely manner, you risk losing some of those customers to your competitors. Accordingly, the business owner has a choice: (1) risk losing some customers or (2) create a new job that will allow the business to better meet the increased aggregate demand of its customers. Viewed this way, the decision to create a new job is a simple, rational business decision based upon the increased aggregate demand for the business's goods and services. The more the demand increases and sustains the more jobs the business will create. Likewise, as we saw during the recent recession, the more the demand drops off, the more likely it will force business owners to make the similarly rational business decision to shed jobs to meet this new level of reduced demand. As they say... its just business.

But also bear in mind what this simple explanation doesn't suggest. First, it doesn't suggest that the creation of a job is an act of charity or benevolence. Jobs are not created as a function of kindness or goodwill. Nor does it suggest that providing a tax break or other fiscal incentive to a business will lead to new job creation. Unfortunately, politicians on both sides of the aisle seem to believe that such incentives will work, as that's the only real tool they have in their toolbox. So new incentive programs are proposed all the time for high tech jobs, green technologies, returning veterans, etc...

But if you agree with my simple explanation, the only factor that can truly drive and sustain real job growth is a significant increase in the aggregate demand for goods and services. Accordingly, while policies to lower the cost of business such as the lowering of tax rates, tort reform or regulatory relief may be helpful, they will be disappointing as job creation stimulants. On the other hand, policies designed to put more spending money in the hands of middle-class Americans might be more effective, as that is where true aggregate demand originates.

But what is most disappointing to me is the seemingly accepted view that these simple economic principles are somehow personified as individual attributes of the "job creator." And therefore satisfying or appeasing the job creator is the correct path to employment growth. To me this view is disingenuous, as it simply denies the economic reality of how jobs are actually created.

Another way to look at it is to ask, if the CEO whose business demand picks up and hires 100 new workers is personified as a job creator, what is he or she called when demand weakens and they are similarly forced to shed 100 jobs: a jobs destroyer?