Some Good News and Some Cautions

Hard HatInitial jobless claims are down in Nevada! “Initial claims for unemployment in Nevada fell 5 percent in July from the same month last year, marking the eighth straight month that the claims dropped year-over-year.”  [RGJ]

Nationally, the numbers aren’t too bad either:

“The advance number of actual initial claims under state programs, unadjusted, totaled 280,502 in the week ending August 10, a decrease of 8,142 from the previous week. There were 317,680 initial claims in the comparable week in 2012.

The advance unadjusted insured unemployment rate was 2.2 percent during the week ending August 3, a decrease of 0.1 percentage point from the prior week’s unrevised rate. The advance unadjusted number for persons claiming UI benefits in state programs totaled 2,858,818, a decrease of 100,830 from the preceding week’s revised level of 2,959,648. A year earlier, the rate was 2.5 percent and the volume was 3,180,011.”  [BLS]

As always, looking at seasonally adjusted initial unemployment applications is rather like looking at the economic world via the rear view mirror.  That said, it is comforting to note that the numbers of long term unemployed persons is edging down: “Officials say the number of unemployment benefit recipients who exhaust their regular benefits is also down, from 53 percent in July 2012 to 47 percent this July.” [RGJ]  It does appear it’s getting a bit easier to find work in the Silver State, as opined by DETR’s Bill Anderson.

Ball and ChainThere are some obvious weights attached to Nevada’s employment recovery.

#1. The Bubble Factor — There’s no way to avoid the fact that the Nevada housing market, pre-crash and burn, was “overheated.” “Nevada’s construction industry shed about 66 percent of its workforce in six years, down from 147,700 jobs in May 2006 to 49,200 in May 2012. The sector has a labor force of 52,100 workers as of April this year.” [RGJ June 2013]

#2. Declining public sector employment — While it might be popular in some circles to grouse about public employees as Pigs At The Public Trough, unless one is satisfied with over-crowded classrooms, slower response times to fires and medical emergencies,  less police presence in the community, fewer and less extensive health inspections of medical clinics or restaurants,  and wider, bigger, and more spectacular pot holes, public employees provide essential community services.

And, the local governments which provide these services have faced the largest cuts.

Public Sector Employment NevadaAs continually repeated on this site —  Public employees do not soak up “sacred tax payer dollars” into large sink-holes — the wages and salaries are SPENT in local grocery stores, drug stores, garages and auto dealerships, furniture outlets, clothing and other retail establishments, cafes and restaurants, barber shops and beauty salons, home improvement stores, medical offices, hardware stores, sporting goods stores, and other businesses which need customers to survive and thrive.  Consider the profit margins for a moment.

It is common for a restaurant, for example, to experience a 0% profit during its first year of operation.  An established high end restaurant can expect returns of about 8% annually, a less expensive (in terms of profit to operation cost ratio) cafe might make as much as 35%.  [Restaurant.Com]  More generally, “The type of retail establishment you operate may dictate your ability to raise margins. Specialty retailers and general merchandisers — department stores — were the most profitable sector of the retail economy in 2009, according to “Fortune”magazine, with a 3.2 percent average profit margin. Food and drug stores operated on a 1.5 percent margin.” [HChron]  8%, 3.2% margins? 1.5% margins?  How many job losses in the public sector does it take to carve into these profit to operating cost ratios at the local level?

#3. The Spiral Effect — declining employment combined with declining property values have ramifications for local governments.  We can look to the Debt Limit calculations for local governments to see how spending gets squeezed.

As of June 30, 2007 when the Housing Bubble bloomed the Nevada debt limit for local school districts was $17,174,852; in 2009 it was $21,631861,623; as of June 30, 2012 it had dropped to $12,935,539,045.  Think of the Debt Limit as if it were a ‘line of credit’ available to a local government entity — and note that as the credit limit declines there can be fewer capital expenditures.  Capital expenditures for building, renovation, and major maintenance directly affect the construction sector.

Another form of the spiral more directly relates to retail spending for consumer products and home related expenditures.  Retailing is struggling back:  “After two years of decline in 2008 and 2009, retail ended each year on a positive note through 2012. The sector, however, is still down by about 10,000 jobs from 2007, when it closed the year with a labor force of 147,000 workers.” [RGJ]   One way to measure the relative health of our consumer based economy is to look at the amount of debt American families are willing to take on.  The New York Fed’s report for the second quarter of 2013 tells us:

“The latest Household Debt and Credit Report shows outstanding household debt declined by $78 billion from the previous quarter, due in large part to a decline in housing-related debt. Total auto loan balances increased $20 billion from the previous quarter, the ninth consecutive quarterly increase and the largest quarter over quarter increase since 2006.”

There’s a graph for this:

Total debt balanceNote that both trends are downward — for housing and non-housing indebtedness.  It isn’t outside the realm of common sense to observe that American consumers, once burned are twice shy.  One question which remains unanswered is whether the reduction in mortgage interest rates will give families enough slack in the budget to increase their optimism about their capacity to make purchases on credit.

The spiral effect related to consumer credit becomes a problem when consumers decline to make both major and minor purchases because (a) they are functioning on lower or stagnating wages and salaries, (b) are insecure about their future employment, and/or (c) while they may feel better about housing payments, the reduction thereof is insufficient to justify using more credit.  This has a profound effect for automobile dealers and commercial enterprises related to housing.

#4. The wage and salary wheel.  This sounds good: “Health care was the only sector to gain jobs in the recession. The industry had about 100,000 workers, up 20 percent from 2006. It also posted employment gains for each year during this period.”  [RGJ]  However, does this increase indicate a major spur for the Nevada economy.  Perhaps not.

One of the more disturbing charts in the June report from DETR shows what’s been happening with respect to personal income in Nevada.

Nevada Person Income GrowthThe trend since 2011 indicates that what we may have been doing is increasing the number of lower paying jobs while losing ground in higher paying employment.

If the trend in personal income growth declines, then how are we to expect the overall economy to increase?

Ball and ChainCutting the Chains  If the state of Nevada intends to secure higher growth rates, then it would be better to concentrate on those elements which are directly related to that growth.  Once more, let’s divest ourselves of the pleasant myth that by getting businesses to move to or to open in Nevada because we have a “pro-business” (read: Low Tax) environment we will boost the overall state of our economy.  National businesses will move here IF, and ONLY IF we have the infrastructure to support their operations (education, transportation, research..)  New commercial enterprises will open their doors here IF and ONLY IF there are customers for their products and services.

Once free of that continually trickling down ideology we can focus on rebuilding the public sector, which includes many of those professional occupations considered Middle Class (police, fire, teachers) and which provide support for those pillars (headquarters, back office, manufacturing and distribution, and research and development) which entice business enterprises to open in our region.

We should also be attending to the issues related to how we can escape the spiral effect and wage and salary wheels, which keep rotating, but require more than ideologic wish lists in order to alleviate the disinclination to take on consumer purchases or to be inclined to find room in the family expense accounting to increase what our friends across the Pond are wont to call the “custom.”

Until then, we’re weighted and freighted — and spinning our wheels.

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