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By Gary D. Halbert
April 13, 2004


1.  Top Execs Much More Confident & Ready To Hire. 

2.  How The Government Miscalculates Unemployment.

3.  How & Why Jobs Are Outsourced And/Or Offshored.

4.  Understanding The So-Called Unemployment Dilemma.

CEOs Are More Confident, So Why Aren’t They Hiring?

In a little-publicized report released on April 5th, the Conference Board (best known for its consumer confidence studies) reported that the confidence of US chief executives has surged to its highest level in 20 years.  According to the report, the index of business confidence rose to 73 in the 1Q of 2004, up from 66 in the 4Q of 2003.

The Conference Board also reported that over half of all CEOs surveyed anticipate an increase in hiring over the next year, and the percentage of CEOs who anticipate a decrease in hiring fell to only 12% from a whopping 47% only a year before.

Another report issued by the Institute for International Economics, a Washington think tank, expects the global economy to expand by 4.75% in 2004.   This is more good economic news since an expanding global economy will potentially help our dismal balance of trade.

You wouldn’t know it from listening to the evening news, but the US is once again leading the charge in the global economic recovery.  The latest global economic forecast notes that the US economy now accounts for 22% of the global GDP.  Compare that to Western Europe that has been lagging far behind, experiencing almost zero growth from 2002 through the middle of 2003.  Obviously, the red-hot economies of China, India and other Asian countries will also have a positive effect on global growth, but the US economy is strong and getting stronger.

So, with the US economic recovery in full swing and the global economy expanding likewise, why hasn’t the employment picture been brighter?  In this issue of the Forecasts & Trends E-Letter, I’ll tackle some of the hard questions related to employment, and come to a conclusion that might surprise you.

Numbers Don’t Lie, But…

Before delving into the issue of why employment hasn’t improved as quickly as the economy, I think it would be beneficial to discuss how unemployment is actually measured.  The most universal gauge of employment comes from the Labor Department (DOL).  The DOL’s latest report put the unemployment rate at 5.7% in March.  A 5.7% unemployment rate is actually low by historical standards and means that 94.3% of the workforce is employed.   But based on the same DOL data that is used to calculate the unemployment rate, the US has lost apprx. 2.2 million net jobs since President Bush took office, as the media constantly reminds us.

Like most government-generated statistics, the DOL unemployment data has its share of shortcomings and questionable assumptions.  A recent editorial in the New York Times, of all places, sheds some interesting light on the shortcomings of these numbers.  For example, the DOL’s payroll survey counts the number of “jobs” and not the number of workers.   There is a big difference, as we will see below, and this creates some inherent faults in the official unemployment rate. 

Other surveys, such as the Labor Department’s own “household survey,” indicate that there has been a net increase of over 400,000 jobs created since Bush took office in 2001.  This is significant, since the household survey counts people who become frustrated while seeking another job and just stop looking.

How to explain the discrepancy between the two surveys?  First, the DOL’s payroll survey makes some specific assumptions in its calculations that create the illusion of more lost jobs during periods of low worker turnover, as has been the case since 2000.  Deciphering all of the Labor Department’s complex data is difficult, but the Times article estimates that as many as one million jobs have been “artificially lost” simply due to the questionable assumptions used in the payroll survey alone.

An even bigger discrepancy arises when we consider which workers are counted – and which are not – in the Labor Department’s payroll survey.   The payroll survey generally does not count consultants and self-employed individuals, which now make up an ever-increasing part of our workforce.  In fact, the trend toward “outsourcing” of jobs has created the situation where many people actually do the same job, but do so as outside consultants rather than as payroll employees.  From the DOL payroll survey perspective, when an employee is converted to a consultant, a payroll job has been lost, but in reality, the worker is still employed.

The number of self-employed people in the US has been rising steadily in recent years. Small businesses actually make up the backbone of the US economy.  Some argue, however, that the increase in the number of self-employed individuals is a bad thing.  They point to the fact that some workers have been unemployed so long that they are forced to open their own business or drop out of the labor force.  Yet, few people are able to just drop out of the labor force, and it is impossible to know how many people become self-employed out of necessity versus those who do so by choice.

It is interesting that the Labor Department itself knows the limitations of its unemployment statistics, and it warns against using the real-time payroll figures in the footnotes of its monthly release.  Yet politicians and the financial media pay little or no attention to these footnotes, especially when it suits their purposes.

The Employment “Dilemma”

There’s an old joke about the difference between a recession and a depression.  The punch line is that it’s just a recession if someone else loses his or her job, but it’s a depression if you lose your job.   That’s pretty much how the current unemployment situation is in the US.  The numbers do not look too bad if you have a job, but they’re terrible if you don’t have a job, or work in an industry where jobs are threatened.

I am fortunate to be in a position to have direct access to feedback from readers in all kinds of employment situations through responses to my E-Letters.  I often get responses saying how well a reader’s business prospects are, or how their company is looking for qualified workers.  However, I also get plenty of responses from people who have been out of work for a long time and cannot find another job in their former industry.

Many in this latter group talk about those “lucky enough to have a job.”   However, the real issue with 94.3% of the workforce currently employed is being lucky enough to have the same job you originally trained for.  Workers tend to want to get another job in the same industry as their old one, and sometimes this is just not feasible.

A prime example of this is the current glut of people who are qualified for tech-related jobs.  The tech bubble of the 1990’s produced a huge demand for qualified computer, telecommunications and electrical engineer positions.  So much so that many who were studying to go into other fields changed their majors in college and prepared for the brave (and highly paid) new world of high-tech employment.

[I recall that in the height of the tech boom, the siren song of high-paying tech jobs was so strong that public schools complained about the shortage of math and science teachers.  In fact, recent reports indicate that this is still a problem.  I’ll probably get a lot of negative comments from saying this, but perhaps some of those looking for work in the tech sector should go back to school for their teaching certificates.  Our public schools and universities can certainly use them.]

The bottom line is, there is an excess of qualified tech employees and not enough jobs to go around.  Even some of the jobs that still exist are being sent overseas where labor costs are cheaper (I’ll discuss more about this later on).  The end result is that there are a lot of tech-savvy workers who can’t find a job.

Enormous Productivity Gains

As I have discussed in previous E-Letters, one of the major factors contributing to the slow growth of employment during this recovery is increasing productivity.  As technology helps to make businesses more efficient, fewer employees can perform more work.  Said another way, demand for an employer’s product or service has to increase more now than in the past to justify the need for a new employee.

According to a recent Issue Brief from the Congressional Budget Office (CBO), manufacturing productivity has increased at an average annual rate of 3.3% since 1979.  However, since the peak of the business cycle in March of 2001, the productivity pace has increased to an average rate of 5.5% per year.  That is much faster than the average annual rate of productivity growth experienced in previous postwar recessions.

An increase in worker productivity is a good thing, right?  The answer is yes, but not everyone agrees.  Some believe that the big gains in productivity in recent years have come largely as a result of employees being forced to work longer hours (and thus more stressful conditions) for the same pay.  While this is true in some cases, it has largely been the great strides in technology that have made it possible for fewer people to do the same amount of work.

This is where I believe the CEO confidence survey mentioned earlier is important.  Employers will not add employees until they feel confident about the future prospects of their businesses.  As this happens, I think employment will continue to rise.  This will not only help the unemployment numbers, but also those stressed out employees who are trying to do more than one person’s job.

Outsourcing Versus Offshoring

Another hot topic with the press is the practice of “offshoring,” meaning that jobs are replaced by overseas workers who will generally work for less money.  This is different from “outsourcing,” which is the practice of sending work out to third-party vendors or consultants rather than having it performed by employees.  I guess you could think of offshoring as outsourcing on steroids.  However, this practice has a historical precedent.

Back in the days before computers, the Internet and satellite hookups, foreign labor came to America by way of immigration.  These immigrants were faced with opposition from those already in the US who feared that they would take jobs at lower pay.  Between 1870 and 1910, for example, an influx of mostly European immigrants boosted the US labor force by 24%.  This huge increase in the number of workers resulted in lower industrial wages.   While US labor unions fought hard to stem the tide of immigrants, they had little long-term effect.

Today’s technology allows employers to access an offshore labor pool without having to bring the worker to America.  Protectionists are once again clamoring for legislation and restrictions that would keep these jobs in the US, but such actions would have only a limited effect in a global economy.  They would also have a minimal effect on unemployment.  (Even a Kerry spokesman has admitted that the offshoring trend caused “a relatively small fraction” of the jobs lost during Bush’s tenure.)

Nevertheless, political pressures are growing to “do something.”   One action being considered is a requirement that governmental entities only do business with contractors who do not practice offshoring.  While such legislation would be pleasing to certain voter constituencies, these restrictions will have little effect on offshoring by private business.

Fortunately, there may be a silver lining in the offshoring cloud.  A recent study by Global Insight, Inc. sponsored by the Information Technology Association of America claims that as many as 90,000 net new jobs were created as a result of tech jobs being sent offshore.  According to the study,

“The cost savings and use of offshore resources lower inflation, increase productivity, and lower interest rates.  This boosts business and consumer spending and increases economic activity.”

While this study is still being subjected to a lot of scrutiny, it does bring out that a loss of jobs in one sector of the economy may bring about new jobs in other sectors.  In fact, recent news stories have highlighted how even small companies are able to benefit from offshoring.  Some companies have been able to move some of their activities overseas at a lower cost, thus allowing them to add more domestic employees in other areas.   In one case I read, a small company moved its computer programming offshore, and this saved enough money to allow them to hire even more employees in other needed areas.

There is, of course, a flip side to this coin.  Those workers whose jobs have been moved overseas will have to be retrained for another kind of job, or else seek employment in a different field.  This will, no doubt, lead to frustration on the part of these workers that will serve as a fertile bed for politicians to plant the seeds of discontent.

More Smoke Than Fire

I can certainly sympathize with anyone whose job has been eliminated, but I do not think it is proper to play on this sympathy for political gain.  As noted above, the unemployment numbers are faulty in the first place, but never mind that, especially in an election year.  Politicians on both sides of the aisle are spinning the employment/ unemployment numbers (good or bad) to suit their purposes.

While politicians will try their best to explain why we have unemployment and what they intend to do about it, it is important to note that the employment rate is largely an element of the economic cycle and trends in productivity.  To the extent that we are part of a global economy, and in a time of great strides in productivity, the trends in employment are mostly beyond the control of any country, much less any single politician.

Unfortunately, that will neither stop the politicians from trying to convince the electorate that they have the key to reducing unemployment, nor the journalists (who are not known to be very good at economics) from writing articles about simplistic solutions that sound feasible, but are just not practical.

No matter how low the unemployment rate may be in historical terms, the public is being assaulted with constant negativity.  Yet in my opinion, much of this negativity is unfounded.  As noted above, the current unemployment rate of 5.7% is historically low.  In fact, it is only 0.1% higher than the unemployment rate in April of 1996 when Bill Clinton ran for re-election and boasted about the low unemployment rate.  The media actually praised him.  But that was then and this is now.

The Good News – CEO’s Ready To Hire

Unemployment analysis and politics aside, the best news is that top executives are now more confident about the economy and hiring plans than at any time in the last 20 years according to the latest Conference Board survey.  The CEO’s assessment of the overall economy improved markedly in the 1Q, with 90% of them seeing better conditions ahead.  Over half of CEOs plan to increase hiring during the rest of this year. 

There is a very good chance that employment will actually surprise on the upside in the next 6-12 months.  Due to worries about the future and the major increase in productivity, CEOs have been able to avoid hiring new people over the last several years.  However, with the economy on a continuing solid growth path, and with inventories low, we could see hiring enter an increasingly strong period just ahead. 


The first conclusion I hope you draw is that we’re not as bad off as most people think, or should I say as some politicians and the media tell us to think.  The second conclusion is that the employment picture is set to improve, perhaps surprisingly, as suggested by the latest survey of CEOs.

The ongoing “employment dilemma” has been overblown by the politicians.   The current unemployment rate of 5.7% (meaning that 94.3% of the workforce is currently employed) is historically low.  Given how the DOL actually calculates its numbers, the real unemployment rate is probably less than 5.7%.

Yes, I know there are many people still out of work and have been for a long time, and I also know that some workers will have to train for other types of jobs.  But this is a natural, recurring part of our economy.  A historical perspective allows us to see that jobs will be outsourced and/or offshored as long as we continue to have innovation.  However, this displacement of jobs always comes with an offsetting increase in new and different jobs over time. 

The key to maintaining high-paying jobs in the US is to continue to let the free market work, avoid protectionism and focus on education.

Best Wishes,

Gary D. Halbert


Not a jobless recovery after all.

Bush gets a passing grade on the economy.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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