Whats Taking So Long?? Why this recovery is gonna take time – Part II

Beyond the immediate question marks raised by economic and policy-making uncertainty, a set of other problems are retarding hiring and are likely to hamper recovery for the next few to several years because they are structural in nature. Problems cited by McKinsey in its June, 2011 report, “An Economy That Works,” include:

Debt and inflation – No one knows exactly how the unprecedented US debt will affect the country’s economic future, but U.S. indebtedness creates a lag on federal dollars going into the economy, puts upward pressure on interest rates – which will slow reinvestment – and generates conditions ripe for inflation. We have seen prices inflating. According to a CFO Magazine poll (The Deep Dive That Rising Feeling, Sept., 2011, http://www.cfo.com/article.cfm/14596346?f=search ) 59% of respondents felt inflation has already had impact on their business, with about half of them absorbing elevated costs (a temporary measure for most) and almost as many beginning to raise their prices.

Technology – has made it increasingly possible for companies to distribute work without hiring new full time employees, according to the McKinsey report. Jobs are being “disaggregated” into tasks which can be assigned to existing workers in diverse locations, and the internet allows increasing reliance on at-home employees who use shared office space when required to come into the main office.

Labor unpreparedness – Beside an insufficient number of college graduates, numerous studies have identified that American education is not providing students with the skills required by employers. The McKinsey report’s survey indicates that “40 percent of executives whose companies plan to hire next year said they’ve had unfilled openings for six months or longer because they cannot find qualified applicants.”

Combination of recession with financial crisis – In a McKinsey Quarterly interview, Harvard economist and coauthor of This Time is Different: Eight Centuries of Financial Folly, Kenneth Rogoff, asserts that when recession is combined with financial crisis (banks failing, credit evaporating), as we have recently experienced, the effects are amplified and protracted. In fact, he feels this recession has not ended, and that we are actually facing a long-term contraction. 

…So, you’re the employer… You’re afraid to hire if you don’t know whether your company can withstand the combined macro forces of international economic crises, changing tax laws and domestic stagnation. You won’t hire if you can get the work done cheaper by redistributing it internally. And you can’t hire if you can’t find qualified personnel to do the job.

In commercial real estate, the uncertainty and economy-retarding forces translate into heightened demand and rising prices in a few “gateway“ locations like Washington DC and New York, perceived to offer security to fearful investors, and a slogging stagnation in most other places.

Changes that are needed to propel employment and promote recovery are likely to be structural in nature, and so, will require real time to develop and implement, weakening the inertia of this recovery.  Immediately ahead, we will need to find ways through political gridlock in Washington to develop definitive tax and economic policies.  But deep additional changes will be required, including:

As recommended by McKinsey:
• Revamping education to provide job-ready labor
• Deregulation to allow new businesses to start and grow

As recommended by Rogoff:
• In the short term: writing down and forgiving mortgage debt and structural reform, and then further out, more fundamental changes such as:
• Stripping the Code of subsidies for debt – both for corporate tax law that favors debt, and for home mortgage tax deductions
• Indexing debt instruments to other economic indicators (e.g. indexing mortgage loans to regional housing prices) in order to put a leash on debt levels and make debt less affected by systemic risk
• Regulating financial lobbyists, who Rogoff cites as having fallen out of touch with the risks of the financial innovations they had promoted.

Contributor: Chris Campbell
Managing Director
Net Lease Capital Advisors
Email: ccampbell@netleasecapital.com