The Oser View: July 2009

The Census Bureau reported this morning that monthly sales for retail and food services increased 0.6% in June following a 0.5% increase in May. Hooray! Well, not so much. The increases were entirely due to rising gas prices (up 5% in both May and June) and to a bump in automobile sales (up 2.6%) as buyers snapped up bargains.

In dollar terms, retail sales in June were $342.1 billion, sort of. The number is adjusted for “seasonal variations and holiday and trading-day differences” to make month-to-month comparisons more meaningful. (We actually spent $350.7 million in June.) But, the number is not adjusted for price changes. This means that stable or outright falling sales are weaker than they appear, since a modest amount of inflation is the normal condition of our economy.

The chart below shows monthly retail sales in billions of dollars going back four years.

As you can see, spending is back to the level of summer 2005. We are now spending $35-40 billion less each month than two years ago. The economy is improving, but it’s a slow process with many a mile to go.

Yes, the financial crisis is over. The big banks have been saved, and Treasury Department staffers no longer keep cots in their offices. How I miss those days when the action was in boardrooms 60 stories up instead of homes and workplaces all over America!You have perhaps read or heard that the recession is abating or that recovery can be looked for later this year. In a technical sense this may be true. The following table shows actual and projected annualized percentage changes in Gross Domestic Product:

Period	Percentage Change
3^rd Quarter 2008 – actual	-0.5%
4^th Quarter 2008 – actual	-6.3%
1^st Quarter 2009 – actual 2^nd Quarter 2009 – projected	-5.5% -1.8%
3^rd Quarter 2009 – projected	+1.0%
4^th Quarter 2009 – projected	+1.9%
1^st Quarter 2010 – projected	+2.2%

What does this actually mean? GDP is the total income of every entity in an economy or the total expenditure on goods and services of every entity in an economy, depending on how you want to look at it. Either way it’s a measure of total dollars earned or spent. Here is the same table as above, but this time including the total dollar amounts, actual and projected:

Period	Percentage Change	GDP in billions
3^rd Quarter 2008 – actual	-0.5%	$11,712.4
4^th Quarter 2008 – actual	-6.3%	$11,522.1
1^st Quarter 2009 – actual 2^nd Quarter 2009 – projected	-5.5% -1.8%	$11,360.5 $11,309.4
3^rd Quarter 2009 – projected	+1.0%	$11,337.7
4^th Quarter 2009 – projected	+1.9%	$11,391.5
1^st Quarter 2010 – projected	+2.2%	$11,454.2

As you can easily see, the bottom number in the third column is lower than the top number despite nine months of growth. In fact, if GDP actually reaches $11.45 trillion in next year’s first quarter, it will be almost exactly where it was in the first half of 2007. And, assuming a fairly conservative “normal” growth rate of 2.5% a year, GDP would be running at an annualized rate of $12.2 trillion by the first quarter of 2010 had there been no recession.

If the lost GDP were divided equally among the entire labor force of the United States, this loss of roughly $750 billion means that each working adult will earn or spend $4,800 less a year than he or she otherwise might have. Of course, the lost GDP is not divided equally, and here is where the long-term consequences of our current economic problems are most ominous. The growing income disparity among Americans was a hot topic earlier this decade. The recession has certainly taken a slice off many previously high earners, but the impact has been greater on those at the bottom of pile.

About a third of the civilian labor force has, at most, a high school diploma. Over the last 12 months, however, 46% of increased unemployment was in this category. And the jobs low-skilled workers can qualify for are evaporating quickly. The chart below shows the change in the percentage of jobs classified as production work at durable goods manufacturers over the last 60 years:

These are the “guys on the line,” the people who make, or used to make, the heavy equipment, machinery, and appliances built to last. In 1953, they represented more than 12% of the work force; today, they are barely 3% and falling fast. When Senator McCain told unemployed plant workers in Ohio their jobs weren’t coming back, that was straight talk for sure. What was once the high road to the middle class has become a dead end. In June, just 623,000 people—a mere half a percent of all those employed outside of government—were motor vehicle and parts production workers. And that number was down from 909,000 a year earlier.

It’s a bit difficult sifting through the mounds of highly detailed Bureau of Labor Statistics data to reach meaningful generalizations, but the average hourly wage last year for production workers doing jobs like drilling, grinding, boring, extruding and punching was somewhere in the high teens. This is a bit less than double what people make in occupations like food preparers and servers, building and grounds cleaning, and personal care and service occupations. Workers without training or sufficient skills, which includes a large percentage of those with no more than a high school education, who lose production jobs have little alternative but to compete for personal service jobs that pay half of what they previously earned. They, their families, and communities will bear the full brunt of the recession, and many will never approach their former earnings for the rest of their working lives.

That a large number of such workers are African-American is clearly documented by Bureau of Labor Statistics data on median weekly incomes for the first quarter of 2009.

	Median Income	Pct of Median	Pct of White Men
All Workers	$738	-----	-----
Whites – All	$758	102.9%	-----
Whites – Men	$855	115.9%	-----
Whites – Women	$666	90.2%	77.9%
Blacks – All	$577	78.2%	67.5%
Blacks – Men	$595	80.6%	69.6%
Blacks – Women	$559	75.7%	65.4%

It’s a measure of how far we still have to go as a society that such data must still be reported along racial lines. Urban African-American communities in the North today are no longer growing. The old pipeline of migrants from the rural south in search of manufacturing jobs dried up long ago. Affluent African-Americans can and do live wherever they choose. But, non-African-Americans have shown no inclination to move to predominantly African-American neighborhoods. Thus, fewer internal resources can be brought to bear when earnings decline. Another concern is the lack of outside resources. In the recent past, big banks brought financial services into low-income urban neighborhoods largely to meet their Community Reinvestment Act obligations. They needed a good CRA rating to get regulatory approval to expand their branch networks and acquire other banks. In the next few years at least, they will have far less incentive to lend in poorer communities. Their focus will remain on building capital levels and what are called “fortress” balance sheets.

We at ShoreBank are seeing a significant portion of the economic progress of the last 30 years being eroded in the neighborhoods we serve, now being disfigured by a growing number of boarded-up homes and businesses. At some point, when the economy finally begins to improve, we and our neighborhoods will start rebuilding. I am troubled that there may be fewer resources both from inside and from outside the neighborhoods with which to address this task. A second revitalization may be even more difficult than the first.