Yoshikami: Unemployment Isn't Going to Fully Recover
After trickling forward in terms of job growth in the United States, the August numbers released Friday were met with alarm. The numbers suggest that companies have stopped hiring and are maintaining the status quo in terms of head count. Based on this release, data equity markets sold off and gold rallied as concerns arose about the strength of the US economic recovery. Banks in particular including much maligned Bank of America were hit as a result.
So why does unemployment matter, why is it high, and what do we expect for the future?
Unemployment is an important key economic driver as employment drives consumption. Without consumption, the US economy will stagnate because a significant percentage of US Gross Domestic Product (GDP) is consumption. Additionally, overall economic activity including real estate sales and other economic measures are impacted by higher unemployment. Jobs really do matter which is why the focus by politicians and the Federal Reserve is on job creation.
We believe that the natural unemployment rate in the United States will likely be closer to 7% rather than the historic norm 4%. Structural changes in economies across the globe are causing a shift in employment patterns. Jobs are being outsourced outside of the United States as higher-paying jobs remain within the country. This means that the job market is pushing down 2 differing paths.
Workers that have less education and lower level skills are finding it increasingly difficult to find employment while those with higher education are finding opportunities (at lower pay rates than they have been accustomed to in the past). The economy is in the midst of a structural change that cannot be denied and is a factor in the increases unemployment rate.
We expect the unemployment rate over the course of the next 12 months to drop slightly but not significantly so. This is a stumbling recovery and any expectation that job growth will surge back in our view is simply hopeful thinking. It remains to be seen whether the United States can remake itself as Germany has (where production and manufacturing is focused on higher end products). Fortunately, the United States does have a strong service sector that is exported overseas and this does help GDP growth.
In an environment where unemployment remains high, investing in staples assets makes sense as well as tailwind industries. Staples assets include companies that produce products that are needed by consumers and tend to pay higher dividend rates. In this environment, dividends matter.
Tailwind industries include technology and energy.Oracle , Apple , and Chevron are well positioned in this space. Additionally, healthcare assets tend to pay high dividend rates and hold appeal. Look at the opportunities in Johnson and Johnson . Fixed income assets provided opportunity for yields and additional capital appreciation as interest rates are likely to go lower than they are now. This may seem inconceivable but we think this outcome is likely.
Yes, unemployment matters and we are watching the trends. We do not expect unemployment to increase significantly but we expect job growth to return very slowly and, for that reason, economic growth remains on track for our initial year-end projection of approximately 1.8%.
Of course, equity markets do not move in lockstep with the economy and we believe markets can still recover in the latter half of this year as corporate earnings continue to be robust. Of course, part of the reason they are robust is unemployment is high and labor costs are lower. We believe this condition will give a temporary boost to corporate profits and positively impact stock market returns.
Our view has not changed on the economy; we believe a recovery is in place but it will be a slow one. Don't expect all the news to be positive as there is still tremendous uncertainty in the world. Still, we do expect a trickling forward economic growth pattern coupled with many bumps along the way. This expectation will leave you not surprised as the headlines scream conflicting messages. Ignore the noise.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.