A Welcome Break from Muddling Through

01/12/2011 1:28 pm EST


John Mauldin

Chairman, Mauldin Economics

The US economy could grow nearly 3% this year without seriously denting unemployment, writes John Mauldin, editor of Thoughts from the Frontline.

I think of a Muddle Through Economy as growth around 2%. That is enough to keep things going forward, but not enough to substantially dig into unemployment or raise incomes. The entire last decade was a Muddle Through decade, with growth averaging 1.9%.

I still think we are in for a repeat, over the coming decade, of slower growth on average than we would like, but not this year. I think the US grows at 2.5% to 3% of Gross Domestic Product this year.

Let’s look at some reasons why.

First, the Bush tax cuts were extended. Not doing so would have put us into recession. One could make an argument that not extending them for the rich would not have pushed us back into recession, but it would have been the wrong policy at a time of high unemployment.

Don’t Eat the Rich—They Do the Hiring
Somewhere between 50% and 70%, depending on whom you want to listen to, of the “rich” are small business owners. Small businesses are the backbone of job creation in the US. Yes, some rich lawyers and bankers get by with lower taxes, but that is the price of leaving businesses with more of their profits to reinvest.

Bill “Dunk” Dunkelberg, chief economist of the National Federation of Independent Business, notes that prospects for future job growth look better than at any time since the beginning of the Great Recession. Look at a graph from his latest survey:

Click to Enlarge

“The good news is that the two job creation indicators, job openings and job creation plans, both reached new recovery highs. Owners reporting hard-to-fill job openings rose four points to 13%, the best reading in 24 months. This indicates that the unemployment rate should improve in the months ahead. Plans to create jobs gained two points, rising to a net 6% of all owners, the best reading in 27 months. These indicators point to a pickup in job creation activity in the first quarter of 2011. But the small business sector continues to underperform on job creation in this recovery compared to other recovery periods.”

I know that everyone expects me to tell them that the December headline payrolls number of 103,000 was too soft. And on the surface they would be right. But there were revisions of plus 70,000 for the last two months. We have now seen four months of upward revisions in a row.  And the household survey showed an increase of 297,000 jobs.

Plenty of Time to Get Discouraged
The negative is that it will be years before we get back to a 5% unemployment rate. We will need five or six years of 2.5 million to 3 million jobs a year to get there. We have never done even two years in a row like that. Unemployment is still going to be a headwind for some time to come, and that is likely to keep a lid on incomes, which is not good for final sales.

As economist David Rosenberg notes: “While the details were obviously better than the headline, it would be a mistake to read much into the unexpected decline in the unemployment rate. While some of this ‘decline’ did indeed reflect the rebound in household employment, it was largely due to the sharp decline in the labor force participation rate, which tumbled to a 27-year low of 64.3% in December. The culprit: discouraged workers soared to a new record high of 1.32 million.”

My deep fear is that we are creating a structurally unemployed or underemployed class of workers, people with skills that are not keeping up with the times or who are chronically undereducated. The McCormick reaper and the tractor put tens of millions of farm workers out of a job, forcing them to go to the cities and learn new skills. Who would want to go back to the 1860s, when the majority of the US population worked on farms? But that was a time of tremendous upheaval. I think we are facing such a time ourselves.

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