By Paolo von Schirach
July 6, 2013
WASHINGTON – In June the US economy added 195,000 jobs. In a “normal” world this would be unvarnished good news. The economy grows, and therefore it needs more workers. The unemployed find jobs, this way becoming consumers (and taxpayers), therefore adding to demand which in turn will stimulate more economic activities and thus more jobs, etc. etc.
These are not “normal” times
Except that we are not in “normal” times. In fact, from our new perspective, robust jobs growth is mostly a “problem” for investors. Yes, a problem because sustained jobs growth may trigger the phasing out of the Fed’s aggressive bond buying program known as “quantitative easing”, or QE3. In turn, the end of QE3 will cause the end of the Fed caused incentive to buy stocks, while staying away from low interest bonds, cash and other forms of investments.
Bond market troubles
If you are heavily invested in bonds, the “good” jobs report is really bad news. Anticipating a rapid QE3 phase out, the market caused yields to jump, while prices went down. Large US bonds investors are now stuck with a devalued asset. And higher bond yields caused some more bad developments.
A critical component of the US current recovery is the significant rebound of the housing market. But more demand for homes is in large part determined by extremely low mortgage rates. Well, the jump in the interest rate for US 10 year bonds is immediately reflected in higher mortgage interest rates. From now on mortgages will be more expensive, and this will depress housing demand.
Mostly low paying jobs
And one last point, just to cheer you up a bit more. A disproportionate number of the new jobs just created (75,000 out of 195,000) are in the low paying hospitality, restaurant and retail sectors. Look, more people employed is good. But more people employed in unstable “here today, gone tomorrow” restaurant jobs is not so good. Unfortunately, if we look at long term trends, America is losing higher paying jobs in manufacturing while employment growth is taking place at the lower end of services: nursing home staff, bus boys, janitors, store clerks.
Sure enough, better to have more people gainfully employed than collecting unemployment benefits or collecting nothing at all. Still, it would be unwise not not notice that the churning now under way is creating a new America with relatively few top of the line managerial jobs and vast armies of minimum wage or close to minimum wage salaried workers who have little chance of advancing. And this is because they lack the skills to make themselves desirable for high tech firms that will hire only trained workers.
Education and tax reform to jump start America
How do we change this worrisome trend? The number one, two and three priority is more and better education. Next in line are overdue changes in the tax code that will encourage the creation of new companies. America needs more innovation and more enterprise.
Otherwise, we shall soon have two, almost segregated economies. A small but productive sector of super smart people employed by world class high tech firms plugged into the global economy, and a much larger number of barely employed or semi-employed, low skills people who have zero chance to move up because they lack the education to get good jobs.