The aftershocks of the credit crisis will be a significant drag on job creation during the economic recovery, and those counting on a classic bounce-back may want to get a reality check from the housing and retail sectors.
“We haven't just gone through a business cycle, we've also gone through a major restructuring of the American economy," says Ken Goldstein, a labor economist at the Conference Board. “The workout from all of this will be very long and very slow. This is an awful lot to adjust to.”
This was reinforced Friday when the government reported that US employers unexpectedly cut 85,000 jobs in December, cooling optimism on the labor market's recovery.
In the case of the homebuilding industry, that adjustment could take until mid-2013, when the National Association of Home Builders expects production and employment to return to something resembling normal.
“In housing, we 're going through an abnormal cycle," says David Crowe, chief economist at the trade group. “We started losing jobs almost two years before the rest of the economy, in late ‘05, early ’06. We usually go in [top recession] first, but come out first. That’s not going to happen this time. We’re expecting weak job growth in general in 2010.”
The industry has already lost about a third of the 3.5 million jobsit had during the peak employment period of early 2006.
Employment in other parts of the housing/real estate industry shows a similar boom to bust pattern.
The number of members in the National Association of Realtors almost doubled during the 1998-2007 period, hitting 1.35 million in 2006. It’s down 22 percent since then. The NAR isn’t expecting existing home sales to return to their 2006 peak of 6.5 million units anytime soon. By 2011, they are forecast to hit 5.7 million.
Mortgage industry jobs doubled between the end of the last recession and early 2006 to 504,500, according to the Bureau of Labor Statistics. By October of 2009, about half had been lost.
“People saying ‘When are we going to get back to normal?’ Tell me what’s normal?” says Jay Brinkman, chief economist and SVP at the Mortgage Bankers Association. “Look at what drove the growth in past years. Easy credit, low interest rates, a low-risk premium, a combination of refinance, cash-out financing.”
Brinkman says employment levels will reflect that, as refinancing demand falls and borrowing criteria remain tough, and the lending market returns to more of a buyer-driven one. For one, there will be fewer mortgage brokers.
The housing correction will be felt far and wide.
“All of its attendant and ancillary production—appliances, carpeting, furniture—is not going to add to what is typical in a recovery,” says Crowe. Sales levels in some of those areas are at ten-year lows.
Retail Connection
“In the new cycle, there's a limit to how much companies can sell and make and therefore how many employees they can bring on,” adds Goldstein. “If the American consumer becomes a bit of a American saver, that bad news for some retailers, as well as some other folks.”
That’s already been the case, during 2008, when consumer spending contracted for two consecutive quarters for the first time in decades. Spending has rebounded somewhat, but it has been erratic, and certainly not reassuring for producers.
“We should not look for the retail sector to be a contributor to the jobs recovery as it was in other recoveries, “says Richard Hastings, who follows retail and real estate for Global Hunter Securities. The sector has matured. There are very high barriers to entry. You’re not going to get a fast-growing new retailer that would help create jobs.”
Hastings says job growth will also be dampened by narrower margins and enhanced productivity, thanks to technological improvements, affecting inventories, shipping and distribution.”
Retail’s contribution will be sorely missed. Between 2000 and 2007, the economy added 4.4 million retail jobs. Current employment in the sector—14.6 million—is back to its level of 1998.
Going forward, however, department stores alone are forecast to shed 159,000 jobs between 2008-2018, according to a recent Bureau of Labor Statistics analysis. Another
The job boom of recent years may hardly be coincidental. Retail and housing enjoyed something of a symbiotic relation during the credit boom.
“The structural changes are very important. Retail was an indirect source of jobs for real estate for years,” as national big-box store chains, and shopping centers sprouted up to serve new housing developments with hungry consumers. “When residential real estate story came to a crashing conclusion in 2006, that put an end to retailing growth story, as well.”
Hastings also points to an interesting symbiotic relationship between housing and retail during the boom-bubble period.
“The structural changes are very important. Retail was an indirect source of jobs for real estate for years,” as national big-box store chains, and shopping centers sprouted up to serve new housing developments with hungry consumers. “When residential real estate story came to a crashing conclusion in 2006, that put an end to retailing growth story, as well.”
“Some of those shopping centers in the high-growth markets of Arizona and California, where they were expecting the house tops to grow out to them, were stranded at it never happened, “adds Brinkman.
Big Three, Small Business
The new world order of borrowing and spending will also continue to affect the auto industry. U.S. auto plant employment, which dipped below 100,000 in 2009, won’t be a growth spot. Even at its current level of 112,000, it is half of what it was after the recession of 2001.
General Motors' new plant to build lithium ion batteries for green cars, which received Energy Dept. funding, will employ only about 100 people.
The days of producing more than 18 million vehicles—as was the case not too many years ago —are long gone. The number of auto parts jobs will reflect that. More than 100,000 in that category will disappear in the ten-year period ending in 2018, according to the BLS.
“It’s also a major fundamental change,” says Goldstein. “Who's going to provide the financing for [car] deals. People will get pushed back down to the used-car market.”
The credit-retail-housing triangle is also a major consideration for small business, a tradition job-creation engine.
“Absolutely,” says Martin Regalia, chief economist at the U.S. Chamber of Commerce. “Is it really a new norm? It is certainly a situation where we are not going to see the wealth gains driving a high rate of expenditures. It is certainly not going to be the profligate spending we say years ago.”
Regalia say that during extensive travel ahead of the holidays, he found members had adopted “a survival attitude.”
“Many have laid off individuals or cut them back,” says Regalia. “If things improved, they might be able to add hours or rehire. In terms of ret new job creation, I didn't hear much of that and none of them are talking about doing so on the expectation of [better times].”
Such pessimism is to be understood after a brutal recession and the somewhat jobless recoveries that followed the relatively shallow recessions of 2001 and 1990-1991.
Other economist say deep recessions—such as the one in the 1980s—bring strong recoveries and thus expect similar conditions this time.
“The primary structural problems I hear most frequently, they think there's a new norm of housing, those jobs are gone permanently, I kind of doubt that myself,” says Chris Rupkey of Bank of Tokyo-Mitsubishi. ”Structural changes play out over a decade. I'm a little skeptical about a jobless recovery.”
“It’s a hangover more than anything,” says Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative, Wharton School. “Consumers will go to spending Retailers will go back to opening stores. We will find a way to give and get credit again.”
Government Solution?
Role of Government
The Obama administration is trying to help that process for both business and consumers, by providing TARP money for small- and medium-sized businesses and buyer incentives on durable goods from autos to energy-saving devices.
The government is also intent on funding private sector job creation, which may underscore concerns about structural obstacles to a jobs recovery as much as social policy.
Some of the nation’s biggest unions have been working closely with the administration on job creation measures and are pushing for yet more.
Not only is there a firm belief that government needs to fill a void until the private sector recovers and contributes in a meaningful way but a new strategy is needed.
Unions say ever-increasing productivity is hurting job creation and a new focus is needed on the withering and neglected manufacturing sector, as well as a move away from low-skill, low-pay jobs.
“If nothing is done we have a pretty bleak prospect,” says AFL-CIO economist Thea Lee. “We’re in a deep hole in the labor market.”
The AFL-CIO, like others, is pushing for massive investment in infrastructure and green technology.
Education and health care are often cited as areas of potential growth, which will help the services sector, which looks threatened for the first time.
“The service sector can't grow if the other sectors can't grow,” says Anna Burger, secretary-treasurer of Service Employees International Union, SEIU, which counts 2.2 million members and is the fastest growing union in the U.S.
The SEIU, whose ranks also include government workers, would also like to see fiscal relief for cities and states, including the replacement of public jobs that were lost and the creation of new ones, in such areas as child and home care.
“We can create more public jobs at a faster rate,” says Burger. “Unless we invest in jobs, the process will be slow.”
Few these days would see to argue with that time frame. Even Nobel Laureate and legendary supply-side economist Martin Feldtsein is wont to say that it will take years to replace the jobs that have been lost.