Morgan Stanley: False Recovery (offshoring, outsourcing, unemployment)

[WhoCountsTheVotes]

Class War:

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

Contrary to popular spin, the US labor market is not on the mend. In the final five months of 2003, a total of only 278,000 new jobs were added by nonfarm businesses — a gain that is easily matched in a single month of a typical hiring-led recovery. Moreover, literally all of the job growth that has occurred over this period has been concentrated in three industry segments — temporary staffing, education, and healthcare — which collectively added 286,000 positions in the final five months of last year. The “animal spirits” of a broad-based hiring-led revival by US businesses are all but absent. Jobs may be rising in America’s low-cost contingent workforce (temps) and in high-cost-areas that are shielded from international competition (health and education), but positions continue to be eliminated in manufacturing, retail trade, and financial and information services.

The modern-day US economy has never been through anything like this. Fully 25 months into this so-called economic recovery, private-sector jobs are still about 1% below levels prevailing at the official trough of the last recession in November 2001; at this juncture in the typical recovery, jobs are normally up about 6%. Had Corporate America held to the hiring trajectory of the typical cycle, fully 7.7 million more American workers would be employed today. Moreover, the current hiring shortfall far outstrips that which was evident in America’s only other jobless recovery — the upturn following the recession of 1990–91. In that instance, it took about 12 months for the job machine to kick back into gear. By our calculations, the current job profile in the private economy is now 2.4 million workers below the trajectory of the jobless recovery a decade ago.

...

The global labor arbitrage remains at the top of my list of possible explanations (see my October 6, 2003 essay in Investment Perspectives, “The Global Labor Arbitrage”). It depicts the interplay of two brand-new forces — offshore outsourcing in goods and services together with the advent of Internet-driven connectivity. Such IT-enabled outsourcing has taken on new urgency in today’s no-pricing-leverage climate of excess global capacity. The unrelenting push for cost control leaves return-driven US businesses with no choice other than to push the envelope on productivity solutions. The result may well be a new relationship between US aggregate demand and employment

The “imported productivity” provided by offshoring has become especially evident in IT-enabled services — where the knowledge-based output of a remote low-wage white-collar workforce now has real-time, e-based connectivity to production platforms in the developed world. One of the clearest examples of this is a significant shortfall of job creation in America’s IT and information services industry. In the upturn of the early 1990s, employment in this industry had increased nearly 4% by the 25th month of that recovery; by contrast, in the current cycle, such jobs are down over 1% — even though the US economy is far more IT-intensive today than it was back then. At the same time, knowledge professionals’ headcount in India’s IT sector has risen from 50,000 in 1990–91 to an estimated 625,000 workers in 2002–03.

[papau]

1. Excellemt Discussion

:-)

[truthspeaker]

2. Morgan Stanley

a bunch of scruffy long-haired liberals?

[ProfessorGAC]

3. Wow! Economists Who Are Not Bought & Paid For

You can check the archives right here at DU. I've saying this for 4 months or more.
- There is no recovery, but rather stagnation.

- The joblessness is caused by the very indicators that some hacks are calling recovery.

- Profit growth based upon outsourcing off-shore is a fool's game.

And so on and so on. So many of the economists in gov't and in big business are conventionalists who are more worried about providing the results their masters want to hear than they are with facts and theoretical proof.

Finally, someone other than me, Krugmann, and a handful of my colleagues are speaking out. Thank goodness.
The Professor

[DBoon]

4. They ARE bought and paid for

By investors who need factual economic research, rather than by political operatives with an ax to grind.

In some cases people are will to pay big bucks for the truth. That is when you are most likely to hear the truth.

[ProfessorGAC]

7. I Buy That, Except. . .

. . .some of the economists from B&S and SL have been published as providing glowing outlooks of the economy. Not where it might go, mind you, but it's current status. That's simply not so. There is nothing in the data to support that a recovery is underway. There is nothing in the data to support that the economy is in good health, even in comparison to the late 60's, or the early 90's.

The economy is not strong right now and even many corporate and financial firm economists are rose coloring the outlook. I have to assume, since they've got the same education that i do, that either they slept through their classes, faked their theses, or know the truth and are lying.
The Professor

[KayLaw]

6. I believe you

But what do you think will happen now? Any guesses or thoughts on the future?

[ProfessorGAC]

8. My Models Are Predictive

Of course, like any other attempt to predict a near chaotic system, we have to take any predictions with an understanding of the level of uncertainty.

For the last 8 or 9 months, the models have been predicting a 3 month horizon of "more of the same". In other words, continued marginal growth, low job creation, and declining real revenues to the gov't. Since that means more borrowing, (deficits exert substantial leverage on real GDP growth), the stagnation cycle has become self-sustaining.

So, i don't see any downturn, but i also don't see things being robust any time soon. A year from now at best, is probably the best guess. (Emphasis on the word "guess".)
The Professor

[KayLaw]

9. Thanks Professor NT

[RainDog]

12. Do the models take into account the unprecedented

nature of our debt/dollar situation?

Why do you not see a downturn with the continued outsourcing of jobs?

If decent-paying jobs are going elsewhere, if jobs are growing in the lower paying service sector,

who is going to fuel a recovery in this country?

--and what about the recent reports that the CPI has been "faith-based" since 2000? --

with the dollar fall and with the revelation by Shell that they had fudged their reserves, with the rising cost of fuel, what's to stop inflation?

[ProfessorGAC]

16. Debt Is Considered. Currency Value, No

Debt is part of the equation, both national debt and average consumer debt.

The dollar issue is not part of the model, because the value of a currency has always been shown in these models to be an outcome of the economic condition as opposed to an input. While clearly there is an issue of trade imbalance that is affected by currency values, the NE is only <4% of GDP. So, even a 10% change is only exerting 0.4% or less on the economic growth rate. That's significant, but the other factors that influence NE are much more pronounced.

The models have been iterated and improved several times over the last 15 years, using some weighting factors based upon power analysis for the main effects and interactions. So, while they're far from perfect, i'm pretty convinced at this point that i've got all the bases covered as well as i can cover them. There are certainly small shifts that can occur in more than one area of the economy that would have a cascading effect (similar to the formation of a chaotic state). I admit i can't predict those.
The Professor

[kcwayne]

17. Clarification please

What is NE?

Also, to the question asked about the effect of employment (or severe lack of it), it seems that as significant numbers people are pushed out of the job market or into lower paying jobs that the money flow is being centralized into asset values of corporations as they reap greater profits from lower labor costs. At least this is true in the short term.

But if this trajectory is maintained, buying power falls off and corporations have a shrunken market, unless somehow those $100 a month laborers in China find enough spare cash to start buying something besides food and clothing, which I doubt will happen in my lifetime ( but I hope I am wrong on this).

If corporations are currently re-investing their accelerated profits, there seems to be no sign they are doing it here. There are signs they are investing in China and India. So the game seems to be to position your company to be able to survive in the short term by selling into what will be a declining US market, and use the cash to position for a future growth in the Asian marketplace (including India). Companies will need fewer and fewer people to manage their business in the US, causing more unemployment, and more business failures for service companies that survive by servicing US based facilities of these larger corporations.

Given this, I don't see how the economy in the US can improve, short of some fundamental paradigm changes that creates significant demand for products or services that cannot be more cost effectively provided offshore.

[Grins]

14. I agree...now a question...

I've been saying the same thing for a long time as well. CEO's are not building companies or creating jobs (supposedly thanks to tax cuts, esp. on dividends), they are going after the marginal dollars by layoffs and outsourcing. When this happened the last time (during Bush I), the company I worked for did the same thing and fired people - good people - but not the idiots who hired them. I called it "Management by Spreadsheet". They picked a number that would boost stockholder equity and managed to it, company be damned. (FYI, the company tanked after the CEO cooked the books. He recently pleaded guilty to filing false SEC reports. Could get a year in jail. Wanna bet he gets off?)

A favorite quote of mine: "If China and Japan do escape having to revalue their currencies against the Dollar over the next 12 months, they may have the administration’s need to fund the budget deficit at low interest rates to thank for it. Over the longer term, however, the outlook is much more certain. There is nothing than can prevent the imbalances in the US economy from coming unwound. Not even the United States can continue going into debt to the rest of the world at the rate of (US) $1 million per minute forever. The Dollar Crisis has only just begun. (Richard Duncan a former Salomon banker, and World Bank staffer, Sept. 2003.)

Question for you: What is supporting the Dow? If the last bubble was caused by lack of earnings to support outrageous P.E.'s (causing the Dow to fall from 11,000 to 7,000), what earnings are supporting today's Dow at 10,500? Great earnings reports?

[ProfessorGAC]

15. Good Question

Actually, i can find no strong causative link between market performance and the economy. The market booms sometimes when the economy is weak and other times when the economy is booming. It tanks when the economy is strong and tanks when it's poor.

There is such strong speculative, subjectively emotional, and instinctive elements in stock trading that i don't think it can be modeled. Too bad, because if it could be, i'd be really rich right now!

Remember that when interest rates are VERY low, the markets tend (not universally though) to show high activity since that's where there is money to be made. It sure isn't in bonds or notes, or jumbo commCD's. It's not even in corporate bonds. The money is in the equity markets, so the institutional investors have no place else to put the money.

What my work has shown in the past, however, is that as deficits reach a critical value (as fraction of GDP), the demand for cash forces bond values down, which increases the effective interest rate. As these guaranteed investments start to exhibit higher yields, the risk premium on equities shrinks. When it shrinks by a significant degree (as in the latter half of the 80's) money is drawn away from equities and venture capital into these highly secure, and better yielding investment. Since there's only so many investment dollars in the system, this constricts corporate growth, profitability, and reinvestment potential. Therefore, deficits become an economic drag.

But, as long as interests rates stay low, there is still way more money to be made in the equity markets. Never mind that so many firms are not showing better profitability because their total revenues are down. The dollars flow there anyway, because there's not many good options.

Where's Greenspan's talk of irrational exuberance now. It's more relevant now than when he said it.
The Professor

[phillybri]

5. I work at Morgan Stanley...Stephen Roach is a fairly bearish guy...

People don't really like him around here!

[WhoCountsTheVotes]

11. was he bearish in 2001?

just curious? :evilgrin:

[KoKo]

10. Kick! This is an excellent article. A must read for all of us.

:kick:

[LibertyorDeath]

13. Kick for the truth.