Economist David Rosenberg has gone from perma-bear to cautious optimist, but there's one thing still keeping him up at night: the precarious jobs market.
After years of telling clients that the U.S. was vacillating between serious recession and, yes, a depression, Rosenberg now believes the recovery is on fairly solid footing. He has cited less-frugal governments, a rebounding housing market and better prospects in Europe as some of the sources for his optimism.
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"So with all that uplifting economic commentary, the question is what can go wrong and what is it that we could be missing?" he said earlier this week. "My principal concern actually comes down more to what I am seeing on the supply side of the economy as opposed to the demand side."
Rosenberg, who is chief economist and strategist for Toronto-based Gluskin Sheff, delivered the comments before the U.S. Senate Budget Committee in a panel discussion on "The 2014 Outlook: Moving from Constant Crises to Broad-Based Growth."
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His presentation began with the new Rosenberg citing his reasons for economic optimism but soon gave way to a dissertation from the old Rosenberg on possible headwinds to the recovery. And chief among those was the employment dichotomy: On one hand, the headline unemployment rate is falling, on the other the labor force is contracting and productivity is ebbing to a point where he fears the jobs mismatch that has created a 36-year low in labor-force participation could become epidemic.
"Labor force growth in the past year is running at a fraction of 1 percent as is productivity, which means we have an historically extremely depressed potential growth rate on the supply side of the economy," he said. (Thursday's nonfarm productivity release for the fourth quarter of 2013 was a better-than-expected 3.2 percent, but average annual productivity is up just 0.6 percent year over year, according to the Bureau of Labor Statistics.)
The unemployment rate has fallen from a recession high of 10 percent in 2009 to 6.7 percent, its lowest since October 2008. January's employment numbers are being released Friday.
However, that has come not only with a sharply declining participation rate—at 62.8 percent the lowest since January 1978—but also a growth rate that is sharply inconsistent with similar unemployment rate drops historically.
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"Only three other times in the past six decades has the unemployment rate fallen this far this fast," Rosenberg said. "Today we accomplished this feat with only 2.4 percent growth, which is disturbing because it means that it is not taking much in the way of incremental economic activity to drain valuable resources out of the labor market."
Amid the job market inertia, the stock market index has surged more than 160 percent—perhaps to the detriment of the employment picture.
Companies have hoarded the more than $1.9 trillion on their balance sheets while using borrowed money—margin debt on the New York Stock Exchange is at a record $444 billion—to buy back shares and boost dividends. Capital expenditures and hiring have remained low on the priority list as investors have penalized companies that have tapped into cash reserves for business investment.
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"The data tell us that we have seen inadequate real business fixed investment to the point where the erosion in the capital stock is now impairing productivity growth," Rosenberg said. "In fact, the average age of the private sector capital stock is fast approaching 22 years—that is total plant and equipment. The last time the private sector capital stock was this old and obsolete was back in 1958."
Rosenberg set forth a few solutions to the jobs dilemma: Reducing taxes and regulation is one, as he cited concerns from 43 percent of respondents to the latest National Federation of Independent Businesses who said those were the main concerns of small business owners.
He also encouraged a stronger focus on education to help the skills mismatch that are so prevalent in today's tech-centric workplace.
"Something must be holding back 'ex ante' expected rates of return on long-term capital projects, or containing the animal spirits of CEOs and CFOs, and maybe this all boils down to merely injecting some certainty or clarity from a public policy standpoint to entice the business sector to reinvest in the real economy and arrest this disturbing downtrend in productivity," he said.
—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.