Fed Chair Yellen Paints Overly Optimistic Picture of Job Prospects Post Graduation

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, delivered a Commencement Address at the University of Baltimore's 2016 mid-year commencement.  The first half of her address was focused entirely on the job prospects of recent graduates as they attempt to break into their chosen careers.  Commencement addresses, by their very nature, are extremely optimistic, and Ms. Yellen's was no exception.  Unfortunately, reality is much closer to Thornton Mellon's view than Janet Yellen's.  (You may remember that classic commencement address in "Back to School" in which Mellon advises the class, "It’s a jungle out there.  You gotta look out for number one.  But don’t step in number two.  And so, to all you graduates, as you go out into the world, my advice to you is … Don’t go! It’s rough out there! Stay in school!")

Ms. Yellen opened her address by telling the graduates, "I believe, for two reasons, that the job prospects and career opportunities for new graduates at this time are very good. First, after years of a slow economic recovery, you are entering the strongest job market in nearly a decade. The unemployment rate, at 4.6 percent, is near what it was before the recession."

Followers of this blog are already aware of how little respect I have for that U-3 figure of 4.6%.  Rather, the number on which I place the most significance is the Labor Force Participation Rate which is currently sitting at a dismal 62.7%.  The current rate is en par with the levels last seen in 1978 and those levels tell us nearly 95 million Americans are out of work.  It's a far cry from the rosy picture painted by that 4.6% U-3 number.  Worse yet, it's not improving.



There are numerous causes for the decline that we've experienced since the turn of the century, however recession isn't one of them. Look at the strong upward slope of that chart right through 1990.  While the labor force participation was improving dramatically, we experienced three recessions.

• 1973 to 1975.  GDP: -3.2%
• 1980.  GDP: -2.7%
• 1990 to 1991.  GDP: -1.1%

According to the Fed Chair, the layoff rate is low and job openings are up over the past couple of years.  That, however, is at odds with what we're seeing in the workforce, especially in the higher paid fields.  The "job openings" statements are especially troubling since they only consider whether or not a company is hiring. What they do not consider is where they are hiring and if those hires will be Americans or will come from the hoards of H1b visa holders that are flooding the US job market at the expense of Americans that are routinely put out of work.

Lest their be any doubt that Americans are not being hired for high paid positions, take a look at the 2016 Green Card Report listed by job title.  The 2016 H1b Visa Report tells an equally dismal story.  The bottom line is, if you're considering a career in technology, you're living in the wrong country.  The opportunities for any highly skilled software developer in the US are dwindling fast, and that is not likely to change in the time it will take for anyone currently in the school system to see any benefit.

In fact, those prospects will get decidedly worse before they get better.  The latest craze whenever business leaders talk about technology is "cloud computing."  Few of them know what it means or why they want it, but you can bet that "moving to the cloud" is in everyone's road map. Of course, the fine print on those cloud services is all too often ignored until it's too late, but it will be a decade or more before businesses learn that they've been duped and the cloud solutions have cost them far more than any perceived realized benefits.  In the meantime, that move towards Software as a Service (Saas), Infrastructure as a Service (IaaS), or any of the other "as a Service" offerings with which companies are being inundated today will continue to drain the industry of skilled technology jobs.  Well, at least in the US.  India, on the other hand, is the prime benefactor.  The number of foreign applicants coming from India outnumber their nearest competitor (China) 7 to 1.  As I said, if you want a career in technology, you're living in the wrong country.  "But we are quite certain that a college diploma or an advanced degree is a key to economic success.Those with a college degree are more likely to find a job, keep a job,have higher job satisfaction, and earn a higher salary."

She's correct in the need for a college degree, although not necessarily for the reasons she mentions or for the reasons graduates may think.  A college undergraduate degree has one purpose: assist you in procuring your first job in a career field.  Once that job is secured, the rest is up to you.  The Fed Chair correctly notes that the need for a college degree is higher than ever.  What she did not mention, however, is the reason for that, and it has little to do with the complexity of today's jobs.

Obtaining less than a 4-year college degree has become too easy and, as a result, its value has diminished.  When I entered the workforce, the level of education that was the differentiator was a 2-year Associate's Degree.  Prior to that, it was a high school diploma. Today, it's a 4-year Bachelor's Degree.  The dirty little secret is that the differentiator will always be the level of education that weeds out the vast majority of potential applicants.  The degree is not so much a job requirement as it is a method of reducing the number of resumes to a manageable level.

That, in fact, is my primary reason for opposing free college education programs.  By increasing the number of 4-year degrees on the market, all that will be accomplished is to raise the minimum requirement one level higher, to a master's degree.  The net number of people eligible for a position will not change, despite an increase in the number that have a fancy undergraduate diploma that has suddenly become worthless.  

Ms. Yellen briefly touched on student debt, however she didn't go far enough nor offer any advice beyond a subtle hint that it's okay to take on that debt.  She couldn't be more wrong in that regard.  The best advice I've read recently is to not incur more total student loan debt than you can reasonably expect to earn in your first year after graduation.  What solid advice!  The fact is, education has grown absurdly expensive, and the primary reason it has grown out of proportion is the ease with which students are able to obtain loans.  The supply and demand dynamic that should result in the price of an education no longer applies, and as a result, the cost is allowed to skyrocket out of control.  With the exception of very few professions, there's no justification for it.  What's important is the degree itself, not the name of the college on that degree (again, with very few exceptions.)  All that diploma is doing is getting you into the job interview.  How you conduct yourself at that point is what determines if you get the job.  Yes, the cost of education is absurd, today, and it must be fixed.  The solutions, however, do not include transferring the cost away from the student and onto the taxpayer since that simply skews the supply and demand equation even further.

Finally, the major problems today's students will face in the workforce are coming from globalization and increased automation.  The Fed Chair stated, Like technological change, globalization has reinforced the shift away from lower-skilled jobs that require less education to higher-skilled jobs that require college and advanced degrees. 

What she neglected to mention is that the purpose of increased automation is not to simply increase the productivity of the workforce.  Rather, it's purpose is to completely eliminate the workforce. It is not just low-income unskilled jobs that are being eliminated.  It includes highly skilled high wage jobs.  Again, this is seen daily in the technology fields where automation and offshoring are the daily mantras.  Where "institutional knowledge" was once considered a key asset, it is today considered a major liability that inhibits the misconception that technology resources are interchangeable commodities that can be sourced elsewhere for a fraction of US labor costs.

So yes, I do believe Ms. Yellen painted an overly optimistic of job prospects to yesterday's graduates.  They face the worst job prospects I've seen in my lifetime, and they are likely to worsen over the coming decade.  Until "globalization" becomes a dirty word, the American worker will consistently lose to their foreign counterparts in countries without decent wage standards, environmental protections, or industry regulations.  Unfortunately, as the American worker finds it increasingly difficult to establish a career in a high paying field, that standard of living Ms. Yellen touted will begin to decline.  The point of equilibrium in this new world of "globalization" is not a point at which most Americans will want to live.  Without a bit of protectionism inserted into a world view, however, that decline is inevitable.

Showing Only 1.2% Growth, GDP Is Still Anemic

Is there truly an economic recovery in progress?  You'd never know it from the GDP which increased by a mere 1.2% in the quarter ending June 30th.  It continues a very sluggish trend that started in 2014 following what had looked to be a promising post-Great Recession recovery.

Quarterly GDP Growth 2012 to Present

Economists generally consider a range of 2.5% to 3.5% GDP growth to be healthy for the economy.  Lower than 2.5% and corporate profits suffer and with them, job growth also suffers.  Higher than 3.5% and the economy starts to experience inflationary pressures.  Now, that last point is significant in this case since we've been in an extended period of under-inflation.  The Fed mandate to maintain inflation at 2% needs a boost in GDP well above what we're currently experiencing before that target grows within reach.

Low inflation, in this case, translates to lower interest rates.  Following Friday's GDP report, the Fed Funds Futures market reacted sharply, reducing the probability of a September Fed interest rate hike to only 12%, and a December probability dropped to 30%.  As we discussed two days ago, interest rates will be depressed likely right through 2017.

Yesterday's announcement made mention of a slight increase in trade, saying it added about 0.2 percentage points to overall growth.  I've read some analysts point to that figure as evidence that the impact of the strong US dollar has stabilized, however I don't believe that to be the case.  Rather, what's driving the trade growth is a drop in US imports, not an increase in exports.  (Imports are subtracted from the figure, so if imports decline, it has a net positive effect on the trade number.)  Given the strength of the dollar, a reduction in imports is a very bearish signal, indicating a decrease in demand for materials and finished products.

Along those same lines, a major factor in yesterday's anemic announcement was continued reduction in inventory restocking by businesses in the US.  This is the fifth consecutive quarter in which inventory levels have dropped, and it's a further indication that there are strong downward pressures on consumer demand and on corporate sales.  Unlike analysts that are predicting a rapid end to that trend, I see just the opposite.  Until there is a healthy increase in the hourly wage statistics and a healthy increase in the Labor Force Participation Rate, I don't see any major driver for a change in inventory stocking behavior that would add anything of significance to the GDP.

When I consider the economic warnings hidden in the Schlumberger and Union Pacific earnings calls earlier this month, I begin to see a general underlying pattern of slowing growth, slowing demand for commodities and raw materials, and a potential crack in the expected rate of consumer spending over the second half of the year.  For that pattern to reverse, we need to see a weakening of the US Dollar, a dramatic reduction in the number of Americans that are out of work, and a return to a price of oil that provides healthy growth across a wide range of industries.  None of those appear to be on the short-term horizon, which leaves me pessimistic about future growth prospects in 2016 and into the first half of 2017.

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:

• Sales at retailers and restaurants rose 0.6%.
• Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
• Sales of building materials and gardening supplies were up 3.9%.

With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally.