The post unemployment recovery haze

Yesterday the National Bureau of Economic Research’s “Business Cycle Dating Committee” declared that the recession that almost all of us have limped through officially ended in June of 2009.  The economic damage has been deep: 4.1% of the economy was destroyed; net worth was reduced by 21% and 7.3 million jobs were lost.

The group is considered to be very conservative (and I don’t mean politically so) in its proclamations, making absolutely sure of itself before declaring anything.  How conservative?  So conservative that it has been 15 months since the end of the recession but they wanted to make absolutely sure before saying so.  But what does this have to do with today’s post?

While the recession may have been over for 15 months, the effects of the downturn will be with us for many, many years.  In particular I want to focus on the last data point from above, the 7.3 million jobs that were lost.  Unless you have been Rip Van Winkling your life away for the last year, you know that unemployment in the U.S. remains perilously close to 10%.  Furthermore, you know that the number, 9.6%, has been hanging out there for some time.  All of us know that eventually the unemployment situation will get better.  But here is the point of today’s post – for most of the unemployed things will get better quantitatively, not qualitatively.

The haze that will remain in most of the unemployeds’ life for years to come, if not the remainder of their economic lives is this: even once the unemployed get a new job, they will likely be underemployed relative to their previous position.  This is the dark underbelly of the persistent, almost disease-like, unemployment that the United States has witnessed.  Yes, you finally found a job and are finally making a quantity of money again.  But unfortunately, you are in a job that does not fully utilize your skill set and that does not offer the same upward potential that your previous work did.  So qualitatively your new work is a step-backward.

The problem with this of course is that most future employment advancement takes your current employment as a benchmark for what you are capable of doing.  Yes, you will get raises in the future, but they will be based upon your new, lower wage or salary base.  Yes, you will change jobs in the future, but the quality of new jobs you can shop for as a economic free-agent are based on what you are currently doing, not on what you did before the recession.  Obviously there will be exceptions to this.  However, historically it is the case that people exit recessions and a long unemployment situation as very underemployed.

I don’t have hard, quantitative data on the haze caused by the recession just passed yet, just an economic historian’s knowledge.  However, as investors you have to keep this qualitative certainty in mind going forward: the recession just passed has planted seeds in the economy that will take a decade or more to clear out of the U.S. (and worldwide) economic system.

That means that consumer spending is likely to be lower going forward. That means that all things that consumers buy will be consumed in lower quantities, including houses, cars, clothes, etc.  It means that staples will be a source of investment stability.  It means that things that get consumers excited enough to actually open their shrunken wallets will do well, like personal technology gadgets (e.g. iThings, TV things, entertainment things).  Education will do well as folks try and improve their situations.  But overarchingly what this all means is that gross domestic product is likely to grow more slowly than it has in the past.  That means that equity investments that are based here in the United States are also likely to grow more slowly than in the past.

One of the chief reasons that I retired from my job as the co-Portfolio Manager of the Davis Appreciation and Income Fund was that I honestly felt that equity investors would be fortunate to eke out 5-7% returns for the decade that followed.  This belief was strongly driven by my knowledge that equity values, as measured by P/E, has been grossly overvalued for almost 30 years.  Eventually this valuation bubble had to burst.  When it did, the correction in values, if it were sober, would necessitate very low returns for many years going forward.  My belief turned into a prediction turned into reality.

All of that said, returns in equities are still going to be more competitive than in most other asset classes.  However, this is also a strong argument to look at other investment opportunities.  For example, look to invest in “second world” countries that have strong natural resource bases with an educated workforce and geopolitical advantage.  Namely, India and Brazil, and to a much lesser extent (due to exorbitant valuations), China.  Look to invest in yourself first.  This means in your own educational richness – consider going back to school or starting your own business.

The good news is that human beings innovate.  Innovation is always the rock solid foundation underneath the economy.  People are not going to stop trying to make their lives, and other lives, better.  So good investments will always exist.  What is different now is that you will have to dig deeper to find them.

Jason