So last week, Keith Hall of the Mercatus Center at George Mason University gave important testimony to the Joint Economic Committee. He outlined some devastating facts that all investors — and Americans concerned about the economy — need to be aware of, because they speak to just how bad things are right now.
- There are 102 million jobless people in the U.S., but less than 12 million are still actively looking for work, and therefore counted as “unemployed.”
- 4.6 million are “long-term unemployed,” well above historical 3% level.
This is a disaster. Chronic and widespread unemployment means that people are not spending money because they have no money to spend. That means these people are not going to be able to go to work, move up the ladder, earn raises, and accumulate wealth. The long-term unemployment rate is particularly troubling because it also suggests that this may become a permanent or near-permanent condition.
In October 2009, the unemployment rate was 10% and 41.5% of working-age people were without jobs.
- Today, the unemployment rate is 7.6% … but 41.5% of working age people are still without jobs.
- This means some 5 million people have left the workforce entirely, having given up looking for a job.
This is what is referred to as the Labor Force Participation Rate, or the U-6 unemployment rate. It is at a record high. People have left the workforce in record numbers and they are not returning. Now, things get even more insidious.
- The longer someone is out of work, the longer they will stay out of work.
- Re-employed workers take up to 20 years to catch up on lost earnings, due to skill mismatches between their old job and new job.
Ouch. So if you get laid off from your tech job and have to learn manufacturing, it may take up to 20 years to make back all the income you lost while unemployed and what you would have earned had you still had your previous higher-paying job.
These people have less in their pocket to spend.
- Slow economic growth creates long-term joblessness, which in turn holds back economic growth and increases government spending.
What does this mean for investors?
First, get the heck out of manufacturing stocks. Alcoa (NYSE:AA), Caterpillar (NYSE:CAT), Honeywell (NYSE:HON) did not report good numbers. Even 3M (NYSE:MMM), one of my longtime favorites, reported crappy earnings.
Pile into pawnshops and debt collectors as cash-strapped people tap these sources for quick funds to make the ends meet. EZCorp (NASDAQ:EZPW) is a diversified subprime consumer finance company with tons of pawnshops in the U.S., and it’s very cheap. Meanwhile, people have debts, and those who are unemployed long-term won’t be able to pay them. Somebody has to collect on them. Portfolio Recovery Associates (NASDAQ:PRAA) is the play here, and the company just blew away estimates.
Even wealthy folks may be worried, judging by the poor results from Tiffany (NYSE:TIF). They’ll probably move into safer plays like preferred stocks that provide healthy yields, such as iShares S&P U.S. Preferred Stock Index (NYSE:PFF). The banks should hold up just fine, of which Bank of America (NYSE:BAC) remains best-positioned given that it services — but does not own — 80% of the nation’s mortgages.
Lawrence Meyers owns shares of Dollar Tree, EZCorp, Portfolio Recovery Associates, Bank of America and PFF.