A Mismatch Made in Heaven

A Mismatch Made in Heaven (or not)


When last I posted we were awaiting the August employment data and although the economy bled jobs over all (and added a below replacement rate number of private sector jobs) the data was not as bad as many on the street had feared. However, the good news may end there.

Today’s Fed Beige Book report indicates that although the economy is growing it is experiencing “widespread deceleration.” Adding to the unemployment woes are what the report termed “a mismatch between job requirements and applicant skills.” Minneapolis Fed President, Narayana Kocherlakota, speaking today in Missoula Montana stated: The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.” The problem lies on where businesses are seeing demand. Much of the demand for goods and services is coming from abroad. This is also were most lower-skilled jobs are being created. Here at home, businesses are looking for workers with specialized skills to aid in the research, development and distribution of products and services. Workers looking for jobs in manufacturing, construction, retail or real estate services are being left on the sidelines without the necessary skills to fill job vacancies.

Another problem is that there are not enough jobs at the top of the economic food chain to provide jobs for large numbers of displaced workers even if they acquired the desired skills. A comparison between the jobs market and the food chain is warranted. As with the food chain, a smaller number of highly developed life forms are necessary to keep the chain functioning. A company may need 50m R&D professionals to develop products which will be built and purchased in Asia. The result is that many workers remain unemployed.

The current dynamic is one in which corporate profits could remain high, but so does unemployment. Some economists are forecasting an unemployment rate over 10% in the coming months. There is little evidence that businesses are poised to begin hiring en masse. Tax and health care policies which are viewed in a negative light by many business owners and executives are not helping the employment situation.

Persistently-high unemployment may be part of the “new normal” frequently mentioned by Pimco’s Mohammed El-Ehrian. In a recent presentation at a major bank Mr. El-Ehrian mentioned that policymakers are using cyclical tools to try to fix structural problems. What he is saying is that the economy is structured differently than it was just a few years ago. Investors and prognosticators, especially in the equity markets, are waiting for a reversion to the economic mean. What they fail to understand is that the mean changes. It is a moving target. The best hope for America may be to increasingly focus on developing small business and fostering more entrepreneurism. However, such an economy runs counter to the ideology of many Americans. Like it or not, behaving like an ostrich does not do any good.

Meanwhile, in spite of all of our problems, the U.S. remains the world’s safe haven and the dollar the world’s reserve currency. This was evidenced by today’s very strong 10-year auction. Today’s auction saw the strongest indirect bidding in a year. Indirect bidders include foreign central banks. The yield of the auction came in a basis point below the WI trading level. If not for Portugal’s successful bond auction allaying fears of a European debt crisis, prices of long-dated treasuries may have recovered. However, markets are looking for any positive signs, no matter how thin, so treasuries ended the day in negative territory.

I am not sure if I will be continuing this blog. Those of you who know me in my professional life remember that, until two years ago, I published a widely-read market commentary piece at my place of employment. That publication has returned. The fact that I am writing professionally again and that some readers at work have mentioned this blog in e-mails makes me uncomfortable. I have not yet made my decision and will keep my readers posted.