Friday, August 20, 2010

Jobs, Jobs, Jobs! Revisited

In my April 5, 2010 blog, I indicated that the jobs picture seemed to be turning around. At that time, the new jobless claims had dropped below the magical 450,000 count and a trend downward seemed to be developing. In addition, my expectation was that job creation would pick up substantially during the second quarter in a manner similar to that of the second quarter of 1975. To put it mildly, this did not happen. The new claims for the past week exceeded 500,000. The trend that had been favorable in April and early May has been reversed and is not looking very good. New jobs formation that was very strong in April petered out in May and has not recovered any meaningful strength. This decline can be attributed to a number of reasons. The first is the sovereign debt problem that began with Greece in the later part of April and then spread to Spain, Portugal, Ireland, and others. As thought, the “other shoe” had been dropped and liquidity in the markets began to dry up. A flight to high quality, such as U.S. Treasury Bills, followed. While the U.S. House of Representatives was able to pass a jobs bill, the Senate has not addressed the bill and is unable to get much of anything done. Increasingly, the likelihood of Congress not acting on tax reform is looming large. Without corrective action the tax rates will return to the higher levels of 2001. In particular, the increase in taxes for dividends and capital gains is weighing heavily on business. It is difficult to tell what the “deal” is since Washington is giving no clear direction. Small banks that traditionally fund small businesses are reluctant to make business loans. Small businesses, even if loans were available, are reluctant to expand because they cannot figure out what the “deal” is on taxes. A small business is a business with fewer than 500 employees. In 2004 the Small Business Administration, Office of Advocacy, indicated that there were 17,000 large businesses, while 24.7 million small businesses represented 99.9% of all the businesses in the United States. While these numbers seem impressive, it should be noted that only 5.7 million small businesses actually had employees. Imagine if each of the small businesses with employees added one more person! I think small business, not large business, needs to be the target to create jobs and get the economy moving again. Ed Mallon