The Death of Consumer Spending: A Tipping Point of Jobs

Mike Shedlock discusses job cuts in major companies, The Death of Consumer Spending, a housing slump, and what this all means for wages and compensation.

ON DEC. 5, Treasury Secretary John Snow said in an interview on CNBC, “We are about at a tipping point here where we’re going to see much improvement in wage rates and compensation.”

I concur that we are at a tipping point. I just have a small difference of opinion as to which way we tip.

According to, “Layoffs Rise 22% in November”:

“Led by sharp cuts in the automotive industry, planned job reductions by major U.S. corporations increased 22% in November, to 99,279, according to a monthly tally released Wednesday by outplacement firm Challenger, Gray & Christmas.

“Planned layoffs have increased three months in a row.


“So far in 2005, corporations have announced 964,232 job cuts, up 3.6% from the year-to-date total a year ago. Layoffs are likely to surpass 1 million for the fifth straight year. In 2004, 1.04 million job reductions were announced.”

Auto Layoffs

On Dec. 7, Ford announced it would cut 30,000 jobs and close 10 plants:

“Ford’s cost-cutting plan, which comes just weeks after General Motors unveiled plans to cut 30,000 jobs, is understood to include the closure of up to 10 component and assembly plants across Mexico, Canada and the United States. The board meeting will continue today, but it is understood that the directors have already accepted the redundancies and factory closures.

“The job cuts plan, which will affect only hourly paid workers in the North American region, is thought to have been dubbed ‘The Way Forward,’ and is expected to be revealed to employees on Jan. 23. It will be executed between next February and the end of 2011.”

On Nov. 21, GM announced it was “Slashing Production and Jobs”:

“General Motors Corp. said on Monday it would cut 30,000 North American manufacturing jobs and close a dozen plants as it struggles to compete with fast-growing rivals led by Toyota Motor Corp….

“The latest plan, which affects factories in the United States and Canada, allows GM to reduce costs by $7 billion by the end of 2006 — $1 billion above its previous target — and increases by 5,000 the jobs the company had said it would cut.

“The world’s largest automaker warned that it would take a ‘significant restructuring charge’ with the plan, but did not say how much it would be or when it would be taken.

“Merrill Lynch analyst John Casesa said in a note late on Monday that he expects the charge to range from $1-2 billion, ‘which is a tough number to justify without tangible results’…

“‘It’s a big move…We’re confident that this is what it’s going to take to get us going,’ Wagoner told a news conference in Detroit on Monday.

“The UAW responded to Wagoner’s announcement with an angry statement to the media indicating it would push to keep furloughed workers on GM’s payrolls for the duration of its current labor contract, which expires in 2007.

“That could mean that laid-off workers would continue to receive most of their pay and benefits, with the plant closings providing little immediate savings to GM.

“‘The UAW-represented workers impacted by today’s action are protected by our job security program as well as other provisions and protections of the UAW-GM National Agreement,’ the union said in its statement.

“‘The full cost savings won’t be realized until 2008,’ said analyst David Healy of Burnham Securities, citing the impact of the restrictive UAW labor agreement.

“Basil ‘Buzz’ Hargrove, head of the Canadian Auto Workers union, said the closing of one of GM’s assembly plants in Oshawa, Ontario, came as a ‘complete shock’ to him because it was the company’s most productive facility in North America.

“‘It’s a jewel, so to speak, and we couldn’t imagine them kind of killing the lead horse,’ Hargrove told local radio…

“Ford is expected to announce its own cuts in North American manufacturing jobs and a series of plant closings by no later than January. The No. 2 U.S. automaker announced on Friday that it was cutting 4,000 white-collar jobs, or about 10% of its salaried North American work force.”

There are several interesting things here:

1. GM is cutting its most productive plant.
2. The full impact of the savings will not be felt until 2008.
3. Somewhere between Nov. 21 and Dec. 7, Ford went from cutting 4,000 announced job cuts to 30,000 announced job cuts.

What happened? What happened is consumers are finally showing extreme signs of being tapped out. Discounts on cars no longer attract buyers. Furthermore, savings have been negative for three straight months and housing is slowing. That does not bode well for job creation in this writer’s eyes.

The Death of Consumer Spending: Outsourcing by J.P. Morgan

On Dec. 5, J.P. Morgan announced it would step up offshoring in India:

“JPMorgan Chase is planning to hire 4,500 graduates in India over the next two years with the aim of moving 30% of its back office and support staff at its investment bank offshore by the end of 2007.

“The plan is the most ambitious move by an international investment bank to take advantage of the low cost of highly educated staff in India.

“It underlines the shift in the use of such offshore facilities from traditional areas such as information technology support and call centers to core operational functions and other high-value tasks.

“The bulk of the bank’s processing of foreign exchange trades will be carried out at its centers in Mumbai and Bangalore.

“It is also moving over much of the processing of credit derivatives contracts, an area where U.S. and U.K. regulators have expressed concern about backlogs across the industry.

“Other investment banks are also investing heavily in India, including UBS, which plans to open its first ‘offshoring’ center in Hyderabad early next year with an initial plan for 500 jobs.

“Stefan Spohr, of consultants AT Kearney, estimates that U.S.- and U.K.-based investment banks now have about 6,000 staff in India, of which half are directly employed, representing less than 5% of their total headcount.

“But he predicts this could rise to as much as 20% in the next few years.

“‘This is not a trend that will go away. Global resourcing is becoming part of the way of doing business,’ he said. Industry analysts say salaries in India are 70-80% lower and total costs about 40% below U.S. levels.

“But Veronique Weill, head of operations at JPMorgan’s investment bank, said it was not just about cost savings.

“‘The quality of the people we hire is extraordinary and their level of loyalty to the company unbeatable,’ she said. JPMorgan is also seeking to tap talent that it can use elsewhere in the group and some of those hired for the new operations have already been transferred to the United States.

“The expansion in India is strongly supported by Jamie Dimon, JPMorgan’s famously cost-conscious chief executive designate, who recently visited the Mumbai facility.

“JPMorgan, which had only 200 offshoring staff in India two years ago, is currently hiring between 300-400 graduates a month and plans a total of 9,000 by the end of 2007.”

Let’s look at this closely, shall we?:

  • JPM had 200 workers in India two years ago and now plans to have 30% of its back office in India by 2007. 9,000 jobs will be lost
  • The quality of the people in India is “extraordinary and their level of loyalty to the company unbeatable”
  • Union Bank of Switzerland (UBS) is starting to outsource to India as well. More banks are sure to follow, in the United States and elsewhere
  • Salaries in India are 70-80% lower and total costs about 40% below U.S. levels.


The Death of Consumer Spending: A Telepathic Question

On that note, I just received a telepathic question. Here goes: Mish, so what? This is nothing new, the economy is expanding. We just added 215,000 jobs and things seem to be humming. The economy is absorbing round after round of mass layoffs. The U.S. consumer is like a Timex watch: takes a lickin’, but keeps on tickin’.

Fair enough. The U.S. consumer has been nothing short of amazing. Many people, myself included, have been wrong about the demise of consumer spending. Let’s look at some of the things that have kept the U.S. consumer tickin’:

  • Cash-out refis
  • Negative savings
  • Falling interest rates
  • Rising housing prices

The refi index is down 40% on the year and well over 80% from the peak, negative savings (spending more than you make in aggregate) is not sustainable, interest rates have risen 12 consecutive meetings with two more hikes priced in, long-term interest rates are at the top of the two-year range, and 60% of ARMs are due to reset up in the next year or so. To top it off, housing prices have turned down in many key bubble areas. That will limit cash-out refis and home equity lines to many struggling homeowners.

Still, as long as people have jobs, they have shown resilience by going deeper and deeper in debt to support lifestyles they cannot afford. So let’s take a good look at the latest job numbers.

The Death of Consumer Spending: November Jobs Report

The Bureau of Labor Statistics (BLS) is reporting that during the first eight months of the year, payroll employment grew by an average of 196,000 per month. The jobs needed to keep up with population growth is about 180,000 per month. This is extremely weak growth this far into a recovery. If September and October are factored in, the numbers look even worse. The reason the BLS is excluding September and October from the averages is to counteract the effect of Katrina.

“Total nonfarm payroll employment rose by 215,000, to 134.3 million, in November,” says the BLS. But how much of November’s gain was a rebound due to construction and cleanup activities related to the hurricanes? This is what the BLS has to say:

“In November, construction employment rose by 37,000, with a large increase occurring in heavy and civil engineering construction (14,000). November job gains in construction partly reflect rebuilding and cleanup efforts following Hurricane Katrina. Employment in the industry has been on an upward trend for more than 2 1/2 years.”

Note that construction has been fueling jobs for 2 1/2 years. What happens to those jobs in a housing slump? We will get back to that question a little later:

“Within leisure and hospitality, food services — which includes restaurants and drinking places — added 39,000 jobs in November. This followed declines in the previous two months that totaled 69,000. For the 12 months ending in August, the industry had gained 283,000 jobs.”

Obviously, we are adding lots of low-paying jobs at the expense of higher paying jobs. What happens to these jobs if consumer spending slackens?:

“The average workweek for production or nonsupervisory workers on private nonfarm payrolls fell by 0.1 hour, to 33.7 hours in November, seasonally adjusted. The manufacturing workweek decreased by 0.2 hour, to 40.8 hours, following a 0.3-hour increase in October. Factory overtime was down by 0.1 hour in November, to 4.5 hours.

“The index of aggregate weekly hours of production or nonsupervisory workers on private nonfarm payrolls decreased by 0.1% in November, to 103.2 (2002=100). The manufacturing index was down by 0.2% over the month, to 95.0…

“Average weekly earnings decreased by 0.1 percent over the month, to $549.98.”

If you dig for it, you will see that the government added 21,000 of those 215,000 jobs. Nearly 10% of the job gains for November were government jobs. Is this a good thing? Is this a sign of strength? I do see that manufacturing actually added jobs, but with 60,000 jobs or more coming out of GM’s and Ford’s buckets over the next year or so, it seems unlikely that manufacturing is going to be an ongoing pocket of strength.


If one looks at Table A-12, “Alternative Measures of Labor Underutilization,” one can get a better idea of the true unemployment rate. The number I like to watch is U-6: “Total unemployed plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.” The reported number for November is 8.7%. Nonseasonally adjusted, the number rose from 8.1% to 8.4% from October. No matter how you look at it, that is a lot of people unemployed and that does not count the underemployed engineers flipping burgers or working at Wal-Mart. But is it really 8.7%, or is it higher? Given the number of illegal aliens working in the United States, I hazard a guess that the unemployment/underemployment rate for U.S. citizens is north of 10%.

Clearly, there is a lot of weakness behind those supposedly strong numbers that Snow and Bush have been crowing about.

Let’s now return to the question we asked earlier: What happens to jobs in a housing slump?

The L.A. Times is reporting, “Mortgage Industry Job Losses May Rise With Interest Rates”:

“Ameriquest Mortgage Co.’s recent decision to slash 1,500 jobs is the start of a national shakeout in the home loan business — one that could cost tens of thousands of workers their jobs and squeeze weaker companies out of the business, industry experts say.

“As interest rates have risen, refinancings have faded and applications for loans to purchase homes have begun to decline, according to the Mortgage Bankers Association.

“Many borrowers already have taken out equity from their homes through refinancings and second mortgages. If home prices level off, as many predict, these homeowners will have less equity to extract and less incentive to refinance.

“Mortgage Bankers Association economist Doug Duncan said jobs would be lost as some companies pared their staffs and others were acquired or went out of business. The number of job reductions will depend on how high rates go, he said, with as many as 80,000 positions eliminated should 30-year fixed rates climb to 8.25%, up from 6.32% currently.

“In addition to layoffs, experts also expect a shakeout in the ranks of mortgage brokers, the independent loan originators whose numbers have swollen along with the home-lending boom that began in 2001.

“These brokers aren’t counted in the payroll surveys conducted by the government. John Marcell, president of the California Assn. of Mortgage Brokers, believes that they now total about 25,000 in the state, but predicts that’s about to change radically as ill-trained brokers who got into the business during the boom now find it harder to make a living.

“‘I would say probably half of what’s out there today could wash out,’ Marcell said.

“Any contraction could place a drag on the economies of mortgage hot spots such as Orange County, where several major lending companies are based.”

Now, I do not expect interest rates to hit anywhere close to 8%, but I still think that layoffs in this sector are going to be massive. Ameriquest fired the first warning shot of what is to come. Even among the survivors, those on commissions are going to suffer massively.

The Death of Consumer Spending: Housing Slowdown to Cost 800,000 Jobs

CNN/MONEY, reporting on the impact of a housing slump, says, “There Go 800,000 Jobs out the Door”:

“The expected downturn in the housing market could end up costing 800,000 construction and finance jobs, putting a big dent in economic growth over the next two years, a report from UCLA said.

“But even with economic growth slowing as much as 1 or 2 percentage points, the nation should be able to avoid a recession, according to the widely watched report from UCLA Anderson Forecast.

“The authors of the report admitted that they had forecast earlier this year that the slowdown in the housing market was going to start in mid-2005, which now looks like it was a little premature. But they noted that recent reports from home builders, real estate agents, and the government indicate the slowdown may have now begun.

“The report, released Wednesday, forecast a loss of 500,000 construction jobs and 300,000 jobs in the financial services sector from the housing slowdown, but noted that job losses would not spread across many industries, other than some limited pullbacks in manufacturing.

“‘We actually think that we’re being somewhat optimistic in saying we don’t see it spreading beyond that,’ Edward Leamer, director of UCLA Anderson Forecast, told ‘There will be weakness in retail, for sure, and in manufacturing. But not widespread losses.'”

They think they are being “optimistic”?!

Actually, I agree. Anyone who thinks we can lose 800,000 housing-related jobs over two years with no “widespread losses” in manufacturing or recession is an unbridled raging optimist in my book.

This “tipping point” talk from Snow is uncannily ironic. Yes, we have reached a tipping point, all right. It just won’t be in the direction he expects.

Mike Shedlock ~ “Mish”
December 13, 2005