On the subject of outsourcing, I got this back on Jan. 14th from a friend ... personally, unless this trend simply peters out on its own, IS and other professional jobs are going to continue to suffer - who can compete with someone willing to accept a 5th of the pay?
Global: False Recovery
Chief Economist for Morgan Stanley Stephen Roach (New York)
The Great American Job Machine has long powered the US business cycle. It
drives the income growth that fuels personal consumption. That internally
generated fuel is all but absent in the current upturn. The US economy is
mired in a jobless recovery the likes of which it has never seen. This has
profound implications for the economic outlook, the political climate, trade
policies, and the global business cycle.
Contrary to popular spin, the US labor market is not on the mend. In the
final five months of 2003, a total of only 278,000 new jobs were added by
nonfarm businesses — a gain that is easily matched in a single month of a
typical hiring-led recovery. Moreover, literally all of the job growth that
has occurred over this period has been concentrated in three industry
segments — temporary staffing, education, and healthcare — which
collectively added 286,000 positions in the final five months of last year.
The “animal spirits” of a broad-based hiring-led revival by US businesses
are all but absent. Jobs may be rising in America’s low-cost contingent
workforce (temps) and in high-cost-areas that are shielded from
international competition (health and education), but positions continue to
be eliminated in manufacturing, retail trade, and financial and information
services.
The modern-day US economy has never been through anything like this. Fully
25 months into this so-called economic recovery, private-sector jobs are
still about 1% below levels prevailing at the official trough of the last
recession in November 2001; at this juncture in the typical recovery, jobs
are normally up about 6%. Had Corporate America held to the hiring
trajectory of the typical cycle, fully 7.7 million more American workers
would be employed today. Moreover, the current hiring shortfall far
outstrips that which was evident in America’s only other jobless recovery —
the upturn following the recession of 1990–91. In that instance, it took
about 12 months for the job machine to kick back into gear. By our
calculations, the current job profile in the private economy is now 2.4
million workers below the trajectory of the jobless recovery a decade ago.
Forward-looking financial markets have long presumed that America’s
backward-looking malaise is about to change — that hiring is just around the
corner. The optimists have continually drawn encouragement from declining
levels of jobless unemployment insurance claims, improved purchasing
managers’ sentiment, and a pickup in employment as reflected in the
so-called survey of households. It’s only a matter of time, goes the
argument, before businesses resume hiring. After all, Corporate America is
now making money again, and such sharply improved profitability is presumed
to allow businesses to step up and deliver on job creation. Furthermore,
hiring is widely thought to be on the other side of America’s latest
productivity miracle; the argument in this instance is that there’s only so
much that companies can get out of their workforces before they have to
start adding headcount again. Yet we’re fully 25 months into recovery and it
just isn’t happening. In my view, this is not a story of those ever-fickle
lags. Something new and far more powerful appears to be at work.
The global labor arbitrage remains at the top of my list of possible
explanations (see my October 6, 2003 essay in Investment Perspectives, “The
Global Labor Arbitrage”). It depicts the interplay of two brand-new forces —
offshore outsourcing in goods and services together with the advent of
Internet-driven connectivity. Such IT-enabled outsourcing has taken on new
urgency in today’s no-pricing-leverage climate of excess global capacity.
The unrelenting push for cost control leaves return-driven US businesses
with no choice other than to push the envelope on productivity solutions.
The result may well be a new relationship between US aggregate demand and
employment
The “imported productivity” provided by offshoring has become especially
evident in IT-enabled services — where the knowledge-based output of a
remote low-wage white-collar workforce now has real-time, e-based
connectivity to production platforms in the developed world. One of the
clearest examples of this is a significant shortfall of job creation in
America’s IT and information services industry. In the upturn of the early
1990s, employment in this industry had increased nearly 4% by the 25th month
of that recovery; by contrast, in the current cycle, such jobs are down over
1% — even though the US economy is far more IT-intensive today than it was
back then. At the same time, knowledge professionals’ headcount in India’s
IT sector has risen from 50,000 in 1990–91 to an estimated 625,000 workers
in 2002–03.
I don’t think these trends are a coincidence. More likely than not, they are
the flip sides of the same coin — a shift of comparable-quality labor input
from the high-wage US services sector to the low-wage Indian services
sector. And, of course, this trend is only the tip of a much bigger iceberg,
as offshoring now spreads up the value chain to include professions such as
engineering, design, and accounting, as well as lawyers, actuaries, doctors,
and financial analysts. Long dubbed the “nontradables” sector, the
IT-enabled globalization of services is now in the process of transforming
this vast sector into yet another tradable segment of the US economy —
posing a formidable challenge to the once unstoppable Great American Job
Machine.
There can be no mistaking the important implications of this jobless
recovery. Lacking in job creation as never before, it follows that there is
equally profound shortfall of wage income generation. Normally, at this
juncture in a US business cycle expansion, private wage and salary
disbursements — fully 45% of total personal income and easily the largest
component of household purchasing power — are up by 8% (in real terms). Yet
24 months into the current expansion, this key slice of income is actually
down nearly 1% — the functional equivalent of about a $350 billion shortfall
in real consumer purchasing power.
Lacking in such internally generated income, saving-short American consumers
have had to draw support from secondary sources of purchasing power — namely
massive tax cuts, an outsized build-up of debt, and the extraction of cash
from over-valued assets such as homes. This is a tenuous foundation of
support for any economy. It has led to subpar national saving, a record
current-account gap, and sharply elevated household debt service burdens — a
steep price to pay in order to fund the insatiable appetite of the American
consumer. A persistence of this jobless recovery will only up the ante on
these imbalances — raising serious questions about the ultimate
sustainability of the current upturn, in my view. For a US-centric global
economy, that’s an equally disconcerting risk.
Nor can the political implications of America’s jobless recovery be taken
lightly. If the economy falters for any reason between now and the upcoming
presidential election and the unemployment rate starts to rise,
labor-related issues could figure prominently in the political debate. That
raises the risk of trade frictions and heightened protectionist perils. In
the event of unexpected economic distress in an election year, the Bush
administration — already quick to use steel tariffs as a politically
expedient policy ploy — could well embrace the cause of China bashing, which
has become popular sport in Washington today.
Targeting India as a threat to once-sacrosanct service-sector jobs is also a
possibility in such an environment, as would be as assault on US
multinationals that are leading the charge in offshoring; there are already
rumblings of just such a backlash (see Senator Charles Schumer and Paul
Craig Roberts, “Second Thoughts on Free Trade,” The New York Times, January
6, 2004). As remote and patently destructive as these measures might seem,
the risks of such possibilities can only increase if job-related issues rise
to the fore in a politically charged climate. Negative implications for an
already weakened US dollar would be especially worrisome in that context.
Downside risks to global growth would undoubtedly intensify as well.
None of this was supposed to happen. Typically, the demand response to
policy stimulus elicits hiring and income creation — providing incremental
injections of purchasing power that then spur a sequence of self-reinforcing
cycles of more spending, hiring, and income. Such “multiplier effects” are
the essence of any dynamic, self-sustaining model of the business cycle.
They convert the policy-induced sources of cyclical uplift into autonomous,
self-sustaining growth in the private sector. This is the core of the
internal dynamics of the all-powerful US business cycle.
Unfortunately, the theory behind such a cyclical dynamic just isn’t working.
Starved of job creation and wage income generation, consumers need
supplemental sources of growth. To date, America’s monetary and fiscal
authorities have been more than happy to comply. The Fed has provided the
interest-rate support to asset markets that drives the wealth effects
underpinning consumer demand. Washington’s penchant for deficit spending has
also provided an extraordinary boon to household purchasing power. Yet there
’s little opportunity for removing these life-support measures. To the
contrary, until the economy kicks in on its own, the monetary and fiscal
authorities could well be called upon to keep upping the ante. Therein lies
the conundrum: With the Fed’s policy rate now near zero and America’s budget
deficit at a record, the authorities are all but running out of options.
In the end, America’s protracted shortfall of jobs and internally generated
income has created a new and powerful leakage in the system — a leakage that ultimately renders traditional multiplier effects all but inoperative. Not
only does that draw into serious question the case for a cumulative and
self-sustaining recovery in the US economy, but it could well elicit
dangerous policy responses from Washington. Jobless recoveries unmask the
false foundations of a cyclical upturn. That’s precisely the risk financial
markets are missing.