I've heard it. You've heard it. It's the rallying cry of businesses across America. Companies can't hire because business is down, down, down. Sales are in the dumps. Customers have left town. Business just isn't what it used to be. That's why unemployment is nearly 10%.
I bought this narrative for a while. But then I looked at the numbers. And I realized it was mostly hooey.
Consider this. Revenue for S&P 500 companies was more than one-quarter of a trillion dollars higher over the past 12 months than it was in 2007, when business "peaked." It's similar for the 30 Dow Jones industrial components: over $30 billion more in revenue this year than in 2007. Ditto for Nasdaq components: Revenue was nearly $300 billion higher over the past 12 months than in 2007. That's a 15% gain. Same story for the Russell 3000 Index: Revenue is more than $400 billion higher now than it was three years ago. Some depression.
Oh, and corporate profits are at an all-time high, too. Not surprising given record revenue.
Maybe revenue and profits are up only because corporations derive so much business from abroad, in regions with booming economies? Maybe. But there are other measures of purely domestic demand that show our economy isn't nearly as bad as some pretend. Real (inflation-adjusted) GDP is higher now than it was in mid-2007. Real consumer spending just hit an all-time high. You would never guess this by reading the headlines. But look at the numbers. It's the truth.
So what is really holding businesses back from hiring? A combination of factors. It really is a lack of demand for some industries. Skills mismatch is another reason. Labor mobility another. Population growth coupled with sticky wages another. Higher labor participation rates among older workers yet another. Several headwinds are working overtime to ensure unemployment stays high.
But with revenue and GDP at record levels while unemployment is off the charts, other, less measurable forces seem at play. I'll highlight two.
The first is uncertainty. Businesses are simply shell-shocked. They just underwent what Warren Buffett called an "economic Pearl Harbor." Even if business by the numbers is back to normal, business by the emotions is anything but. This is standard fare in cognitive psychology: Our view of the future is shaped by the recent past, particularly when the past was painful. There's a post-traumatic stress element that lingers long after business rebounds.
Then there's uncertainty over tax policy, impending elections, monetary policy experiments, budget reform, health-care regulation, etc. There are question marks aplenty hovering over the future. Businesses will tell you they're waiting for certainty before hiring.
Which you could also classify as hooey. There's always uncertainty. The future is never known. Most of what changes is simply our perception of certainty. Think about it: What kind of certainty are businesses waiting for? The certainty they had in 2007, when everything felt great? Maybe the certainty of 2000, when the future never looked brighter? I hope not. The reality is that genuine uncertainty and perceived certainty tend to peak at the same time.
The second element holding back hiring that I want to mention is labor productivity. Businesses' first response to the recession was to drastically cut payrolls; not just fat, but meat and bone. Labor productivity -- the amount of goods produced per worker -- went parabolic. Businesses figured out how to make do with less. A lot less.
A threat to the unemployed is that the bulk of these productivity gains remain permanent. Will businesses ever go back to hiring two people for a job they now know can be handled by one? There's a decent chance the answer is no. Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) Charlie Munger alluded to this last month, saying, "I just see business after business after business which has just rationalized so that it can do credibly in terms of protecting its balance sheet and its earning power while utilizing fewer people." And that has nothing to do with a lack of demand. It's just a new, more efficient way of doing business.
During the presidential election two years ago, Phil Graham, who at the time was John McCain's economic advisor, sparked tremendous criticism when he said the nation was suffering from nothing more than a "mental recession." He was dead wrong at the time, because demand was falling off a cliff. But with the exception of jobs, his comment would be, I'll dare to say, mostly right today. In many ways, we have a jobs crisis not because of a lack of demand, but because we're suffering from a mental recession of fear and uncertainty.
Disagree? Fire back in the comments section below.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.