The Economy And The Massachussetts Effect

[In The Long Run]

There are two issues of particular concern for my column today; the economy and Massachussetts.

One is last week's UPS earnings preannouncement. Profits and shipments were up, which bode well for both the company and the economy. 

Volume increases by the major shippers, UPS and Federal Express, reflect increased orders and deliveries for businesses in general. But UPS is planning to lay of 1800 employees. Such productivity enhancements are good for the company but bad for the economy overall.

Productivity is defined in terms of hours of labor input required to produce a given amount of output.  Productivity levels increase as fewer hour of labor are required to perform the same task. In an expanding economy, productivity is a positive event. By producing a product less expensively, it can be sold, at profit, less expensively. In a contracting economy, the effect can be problematic. Productivity by layoffs reduces consumption in the overall economy.

The employed are ultimately the consumers. The unemployed cannot afford goods and services. With consumption representing over 70% of gross domestic product (the value of a country’s goods and services), it bodes ill for gross domestic product (the value of all goods and service in the country).  Significantly, blue collar companies pay salaries above the national mean.

Middle managers making above $75,000 and lower managers making $60,000 cannot expect to find comparable paying jobs in today’s job market.  Clerk and service jobs routinely earn less than $40,000 and with fewer health care an educational options.
It is still anticipated, broadly, that the worst has already passed in terms of layoffs, but it is disturbing to see these kinds of layoffs continuing.

The loss of the Massachusetts senate seat creates a major cloud in my serene long term market scenario.  I had predicated my remarks on the ability of President Obama and the Democratic congress to pass a Keynesian-FDR style recovery program that would include government employment and/or incentives to wide scale private employment.  Without casting aspersions on the motives of Republicans, their practice has been to obstruct efforts in public works and Democratic programs generally. 

Further their preference or an unfettered free market would call for the markets to reach the logical extreme before correcting.  That is productivity would rise at the expense of jobs as companies sought margin efficiency.  Their effort would increase margins to limit the effect of lost sales from lost consumption.  As consumers learned to adjust and necessities replacement took place, the economy would be expected to improve.  By necessity this would prolong and increase the recession, possibly to depression proportions.  Lending would be constrained by higher risk.  Government jobs would be lost through the lack of tax revenues.  Public works would also be thus constrained.  The resulting decline in GDP would raise interest rates and lower the value of the dollar yielding an inflation/deflation scenario.

All in all, this represents a worst case scenario.