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Major U.S. Jobs Cuts Coming in 2017 Lombardi Letter 2017-11-28 02:40:21 U.S. job cuts daily job cuts U.S. job cuts 2017 unemployment rate forecast 2017 U.S. economic outlook company layoffs 2017 Donald Trump Trump policies. Unemployment may be under 5%, but the U.S. economy is weak. Investors should expect to see the unemployment rate climb as jobs cuts and interest rates rise. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/03/major-job-cuts-2017-150x150.jpg

Major U.S. Jobs Cuts Coming in 2017

U.S. Economy - By John Whitefoot, BA |
major job cuts 2017

U.S. Jobs Cuts 2017

The U.S. unemployment rate is under five percent, and jobless claims are at a 44-year low. What more do you need to show that the U.S. economy is running full-steam ahead and the future looks bright? A significant rise in U.S. jobs cut in 2017 will bring the state of the U.S. economy into better focus this year.

The fact is, the U.S. economy remains fragile and the economic outlook is muted. U.S. businesses are optimistic, but they might want to temper their enthusiasm: American debt is near pre-recession levels; wage growth is non-existent; secure, well-paying jobs aren’t materializing; and underemployment remains high.

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President Donald Trump may be hoping his economic policies jolt the U.S. economy into overdrive but, in the current environment, it’s going to get a lot worse before it gets better. You can read it in the headlines: commercial bankruptcies and daily job cuts are on the rise.

The unemployment rate forecast for 2017 is expected to drop to 4.5% in 2017 and 2018. But the opposite will happen. The unemployment rate will rise in 2017 and 2018 as the U.S. economy contracts, consumer and business sentiment tumbles, stocks correct, spending slows, corporate profits take a dive, and businesses do what they can to stay profitable; that means laying people off.

Most of the job growth since the so-called recovery that began back in 2009 has been in the low-paying retail and food services industry. Americans have been out of work for so long or in part-time jobs that have nothing to do with their educational background that they’ll probably never find high-paying jobs that they used to have.

To see the health of the U.S. economy and job market, it’s better to look at the real unemployment rate than the official unemployment rate.

The real unemployment (U-6), is a broader measure of unemployment than the official unemployment rate (U-3). The U-3 rate is the one cherry-picked by the Oval Office and most often cited by the media when the Bureau of Labor Statistics (BLS) releases its monthly jobs data. Unfortunately, the U-3 rate only counts those who have looked for a job in the past four weeks.

The U-6 includes those who are “marginally attached” or “discouraged.” The marginally attached are those who have looked for a job in the last year, would like to work, and are available to work. Discouraged workers are those who have simply given up looking for work. U-6 also includes those who have part-time jobs and want full-time work; this group is known as America’s working poor.

The official unemployment rate is under five percent but the U-6, underemployment rate, is double that. (Source: “Table A-15. Alternative measures of labor underutilization,” Bureau of Labor Statistics, last accessed March 2, 2017.)

According to a Gallup study, the underemployment rate is actually over 14%. (Source: “U.S. underemployment rate from January 2016 to January 2017 (by month),” Statista, last accessed March 2, 2017.)

Because of the mismatch in jobs and the number of people working part-time that would like full-time work, Federal Reserve Chair Janet Yellen considers the underemployment rate to be more of an accurate measure.

Speaking of mismatch, you can probably expect stocks to continue to rise on the irrational exuberance of Donald Trump’s untested policies and for the official unemployment (U-3) to decline. But again, these two measures are misleading indicators of the U.S. economy.

Business Optimism and Commercial Bankruptcy’s on the Rise

Business optimism was pretty flat in the lead-up to the November 2016 election. But, since then, business optimism has been soaring. Corporate America believes that President Trump’s economic policies and tax cuts will fuel sustained economic growth and bolster their bottom lines.

The majority (59%) of businesses are optimistic about the U.S. economy while 84% expect revenue to grow. About half (47%) expect to increase their corporate headcount but 48% (up from 38%) are worried about legislative pressure (up from 38%), and 38% (up from 28%) are worried about increased taxation. There is growing optimism but there is some caution too. (Source: “Private companies start 2017 with an optimism surge,” PwC, last accessed March 2, 2017.)

According to the Federal Reserve’s Beige Book, a survey of economic conditions across the country gather from the central banks, businesses continue to be optimistic about the near term. (Source: “Beige Book – March 01, 2017,” Board of Governors of the Federal Reserve System, March 1, 2017.)

This optimism isn’t being felt by everyone. After years of declines, both commercial and consumer bankruptcies are on the rise. Commercial bankruptcies have been the most surprising, rising throughout 2016. January 2017’s 398 commercial filings represent an 18% increase from the 337 filings recorded the previous month. (Source: “January Total Bankruptcy Filings Up 5 Percent from 2016,” American Bankruptcy Institute, February 3, 2017.)

The rising number of bankruptcies isn’t entirely surprising. Gross Domestic Product (GDP) growth hasn’t exactly been stellar or reliable. The U.S. economy grew just 1.9% in 2016, 2.6% in 2015, 2.4% in 2014, and 1.7% in 2013.

Corporate bankruptcies are up because Americans, who are responsible for more than 70% of the country’s GDP, simply don’t have enough money to support the economy. At least the bottom 99% don’t.

Household debt is at its highest levels since peaking in 2008. In fact, over the last 10 years, U.S. household debt has increased 11%, with the average household now owing more than $132,000. (Source: “Household Debt Nears Pre-Recession Levels, Study Shows,” NASDAQ, December 14, 2016.)

That debt is going to be an even greater headache. Thanks to the sub-five-percent real unemployment rate and growing optimism, chances are good that the U.S. Federal Reserve will raise its rates two, maybe three, times in 2017. This will be a milestone for those saddled with unmanageable interest-sensitive credit debt. It’s also tough to keep the economy on track when half of the country can’t afford an emergency expense of $400.00. (Source: “66 million Americans have no emergency savings,” CNBC, June 21, 2016.)

RIP 2017 Wage Growth

The average American will not be able to rely on the generosity of their boss for a wage increase in 2017, either. The demand for waiters, waitresses, and other part-time jobs is robust, but wage growth is seriously lagging.

Average hourly earnings increased 2.5% year-over-year in January, the slowest pace since August 2016. Meanwhile, hiring was at its quickest pace in four months. In December 2016, incomes adjusted for inflation and taxes posted the smallest annual gain (2.1%) in three years. Year-over-year growth in wages and salaries fell for a second straight period. And real hourly compensation growth of just 1.1% was the smallest increase in two years. (Source: “More Gauges Tell Same Story: Lasting U.S. Wage Growth Remains Elusive,” Bloomberg, February 7, 2017.)

To say the average American is making the same money and paying more for the same things is an understatement. New research shows that the bottom 50%’s share of income in the U.S. is “collapsing.” Between 1978 and 2015, the income share of the bottom 50% of Americans fell to 12% from 20%. Over that same time frame, real income for that group slipped one percent. (Source: “Global Inequality Dynamics: New Findings from WID.world,” The National Bureau of Economic Research, February 2017.)

It’s not exactly apples to apples but, in China, the bottom 50% saw their income increase by 401%. France, a developed country, is a better comparison; their bottom 50% saw their income grow by 39%.

For the top 10%, the wage growth was a little more substantial. Between 1978 and 2015, incomes for the top 10% in the U.S. increased 115%, 1294% in China, and 44% in France.

That data is from 2015. What about recent data? Worse. The top wage earners in the U.S. took home 5.05 times what their lowest-income counterparts did; the widest wage gap going back to 1979.

Suffice it to say, solid hiring has not translated into higher wages and the shrinking of the wage gap. To be counted in the top 10%, you had to earn at least $2,095 in a typical week (around $110,000 annually). Those in the bottom 10% earned less than $145.00 ($7,540 annually). (Source: “U.S. wage disparity widened again last year,” Daily Herald, February 5, 2017.)

Those interested in business cycles may be interested to know that wage disparity tends to be countercyclical. Wages rise during periods of slower economic growth and shrink when the business cycle accelerates, or is in the expansion phase. With stocks soaring and years of anemic GDP growth, one has to wonder how close the U.S. economy is to the peak and when the Great Contraction is going to begin.

Trump’s Economic Policies Could Raise Unemployment

Americans responded pretty favorably to Donald Trump’s first address to Congress in February. Even the odd Democrat offered up a clap of the hands. But there are growing concerns that Trump’s “America First” platform could stall U.S. growth.

He promised that his $1.0-trillion infrastructure program would be governed by two principles: Buy American and Hire American. As president of the biggest economy in the world, Trump’s job is to represent the interests of the U.S, not the rest of the world.

What this will look like, we don’t really know yet. But one thing is certain: it’s going to get a lot more expensive for companies operating outside the U.S. to do business with us. On the campaign trail, Trump said he was looking at imposing a 35% tariff on U.S. companies that move jobs overseas. In addition to a possible 45% tariff on goods coming in from China, he was not opposed to a five-percent tariff on all goods imported into the United States.(Source: “Trump is reportedly considering a 5% tariff on all imports,” Business Insider, December 22, 2017.)

Imposing tariffs, leaving the Trans-Pacific Partnership (TPP), and wanting to renegotiate the North American Free Trade Agreement (NAFTA) may put more money into government coffers, but at what cost? Is the U.S. prepared for a trade war? At 1.6% growth, the U.S. economy is hardly a bastion of self-reliance.

According to the World Bank, the total of exports and imports measured as a share of U.S. GDP was approximately 28% in 2015. Without this, total U.S. economic output would fall to $12.6 trillion from $16.7 trillion. The free flow of goods and services is a major driver of domestic U.S. economic activity.

In addition to tipping the U.S. into a recession, whether it’s a broad-based five-percent tariff or a 35% tariff, it could also put the brakes on the glacial global economic growth.

What about Trump’s proposed tax cuts designed to help the working-class families who ushered him into the White House? When it comes to one of his major campaign platforms, not much. Trump said he wanted to make child care in America more affordable. His current proposal doesn’t do much for middle-income Americans who need the help the most.

Research done by the non-partisan Tax Policy Center shows that 70% of the benefits will go to those families pulling in $100,000 or more. And 20% will go to those making $200,000 or more. The average middle class family earns about $56,000. For cash-strapped Americans trying to make ends meet, it helps, but not a whole lot.

In the halcyon days of yore, Capitol Hill could count on middle-class America to keep the economy going. Not anymore. Wage growth is dead for middle-class Americans. As we have also seen, so too are secure, well-paying jobs.

“Layoff Are Difficult But Necessary”

Since the so-called economic recovery began, the majority of jobs that have been created have been low-paying, part-time jobs. Consumer confidence levels are at 30-year highs but GDP growth remains stubbornly low. Add in stagnant wages, rising inflation, and household debt levels approaching pre-recessionary levels, and you can see a perfect storm emerging: consumers tightening their belts and rising unemployment in 2017.

The dominoes have already started to fall.

Robert Niblock, CEO of Lowe’s Companies, Inc. (NYSE:LOW) said recently that he regrets the impact that recent layoffs have had, but is pleased with the streamlining efforts. The company laid off close to 3,000 employees in the early part of 2017. He did not rule out future jobs cuts to reduce costs and make the company more nimble. (Source: “Lowe’s CEO: Layoffs are difficult but necessary for a changing company,” The Charlotte Observer, March 1, 2017.)

While Lowe’s has struggled to compete with Home Depot Inc (NYSE:HD), the company’s share price has still done well since the middle of 2011.

Lowe’s is hardly alone in its struggle to stay profitable…or alive.

In 2016, mall stores including Aéropostale Inc (OTCMKTS:AROPQ), Pacific Sun, and American Apparel Inc (OTCMKTS:APPCQ), sought bankruptcy protection while Sports Authority just decided to call it a day.

American Eagle Outfitters (NYSE:AEO), Chico’s FAS, Inc. (NYSE:CHS), Finish Line Inc (NASDAQ:FINL), Men’s Wearhouse Inc (NYSE:MW), Office Depot Inc (NASDAQ:ODP), and Childrens Place Inc (NASDAQ:PLCE) are in the midst of multi-year plans that will see hundreds of stores close.

United States Job Cuts

Month Job Cuts
March 2016

48,207

April 2016

64,141

May 2016

30,157

June 2016

38,536

July 2016

45,346

August 2016

32,188

September 2016

44,324

October 2016

30,740

November 2016

26,936

December 2016

33,627

January 2017

45,934

February 2017

36,957

(Source: “United States Challenger Job Cuts,” Trading Economics, last accessed March 2, 2017.)

In February 2017, fashion house BCBG Max Azria Group, LLC filed for bankruptcy protection. In March 2017, Vanity, a woman’s clothing chain, said it will close its 140 stores after more than 50 years in business. Meanwhile, appliance and electronic retailer hhgregg, Inc. (OTCMKTS:HGGG) is closing 88 of its stores amid bankruptcy rumors.

Over the last couple of years, virtually every major department store, including Kohl’s Corporation (NYSE:KSS), Macy’s Inc (NYSE:M), Wal-Mart Stores Inc (NYSE:WMT), and Sears Holdings Corp (NASDAQ:SHLD), have closed hundreds of stores to stay profitable and compete with online giants like Amazon.com, Inc. (NASDAQ:AMZN). It might have stemmed the bleeding but didn’t stop it. And more closures are on the way.

Most recently, Sears, J C Penney Company Inc (NYSE:JCP), Macy’s and Kmart Corporation, four one-time stalwarts of the U.S. retail landscape, continue to close stores due to “market conditions.” J C Penny announced it is closing up to 140 stores that will leave 6,000 workers without a job. Macy’s expects to close 100 stores, Sears will shutter 150 stores, and Kmart’s blue light special will dim in 108 stores.

This does not bode well for shopping malls across America. When an anchor store like Sears closes, the ramifications are felt throughout the mall. Fewer shoppers, less foot traffic, less sales. Moreover, many malls have co-tenancy clauses that allow tenants to terminate their lease or renegotiate terms; at least until another major retailer steps in to the empty anchor space.

That’s been a tough sell for more than a decade now. After Montgomery Ward declared bankruptcy in 2000, closing the remaining 250 stores, approximately 33% of the shopping malls where it operated closed. (Source: “Sears could kill hundreds of American shopping malls,” Business Insider, September 29, 2016.)

Fast forward to 2017, and using the same metrics, the demise of Sears could results in the death of 200 shopping malls. Credit Suisse Group AG (ADR) (NYSE:CS) identified at least 184 shopping malls in the U.S. as being at risk of closing. Sears anchors 110 of these locations.

Yes, you might read online that the retail environment is evolving and that the sector isn’t going anywhere…people love to shop after all. But this misses the broader picture. Whether it’s to compete with online companies or a result of weak economic projections, more and more retailers are laying people off and shutting doors.

It’s important to pay attention to what’s happening on the retail level since the sector employs such a huge number of Americans and consumer spending accounts for more than 70% of the country’s annual GDP. Retail employees are the canary in the mine for the broader U.S. economy.

Company layoffs might be necessary, but it helps if there’s something there to replace those lost jobs. Right now, there isn’t. And, with an absence of decent jobs to replace those low-paying jobs, these newly unemployed Americans will have to wait at the back of the breadline.

Thirty years ago, few probably would have called working the cash register in a retail store their “career.” A job, yes, but a career, no. This isn’t the case today. The employment landscape has changed and people are settling into whatever job they can find. And staying put. Until they get laid off, of course.

U.S. Economic Outlook 2017

The world’s most powerful nation is not churning out the kind of numbers one would expect. Again, GDP was just 1.9% in 2016, a big drop from the 2.6% GDP growth in 2015 and only slightly above the 1.7% increase in 2013.

Donald Trump may have campaigned on generating annual GDP growth of four percent, but those days may be over for now. For now, the U.S. economic outlook for 2017 looks extremely uncertain.

The stock market has been soaring since Donald Trump won the U.S. election, but those meteoric gains are due to unbridled enthusiasm and hope, not fundamentals. The current bull-market, which is the second longest in history, will celebrate its eighth anniversary on March 9, 2017. But it’s on its last legs.

The official unemployment numbers, which look great, really mask what’s going on in the United States. American workers are discouraged and are dropping out. Fortunately for the White House, this will make the unemployment data look even better. But it doesn’t put what’s really wrong with the U.S. economy in the spotlight.

Stocks are up but the U.S. economy is struggling. Wages are stagnant, people are in debt, and they can’t find secure well-paying jobs. More and more companies are filing for bankruptcy or shutting their doors, laying people off. More and more Americans are going to find themselves unemployed in an economy that cannot make room for them.

Recall if you will that the 2008 financial crisis was precipitated by rising interest rates intended to curb the real estate bubble. One thing it did for certain was make it harder for people to pay off their debts. Savings were wiped out and foreclosures were similar to those witnessed during the Great Depression.

Over the last eight years, artificially low interest rates have decimated retirement savings. It has also fuelled the unsustainable stock market rally. Fundamentals have taken a back seat to technicals and sentiment.

The U.S. economy is weak and Americans are having a difficult time keeping it afloat. Even if the U.S. economy continues on the same trajectory, unemployment is going to rise, simply because there’s no legitimate reason for unemployment to go down.

As for the stock market, regardless of what precipitates the next major stock market correction or crash, it will come out of the blue, or appear to, just like all the other ones have. But it’s been years in the making. Even if it’s just a technical recession, consumer sentiment will tumble, people will stop spending, corporate profits will fall, and Wall Street will stop spending, lay off employees, and unemployment will soar.

Janet Yellen pays attention to the U-6 rate. You should too the next time the BLS announces its monthly jobs data.

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