Three Long Waves

Our economic slump is pushing four years now. The evidence is easy to find: huge deficits, slow growth, mortgage defaults, declining real estate prices, high unemployment and an economy that can’t produce enough jobs. There are less obvious consequences too. Here's a look at three changes that are taking place. None of them good.

A Bubble in Lawyers

An interesting article from the American Bar Association on the current status quo of lawyers coming out of law school, things stink for the new crop of lawyers. In 2008, when the skids were coming off the economy, what did many college graduates do? They thought, “The hell with getting a job in the middle of a recession.” They went to law school instead.


How did so many people get the money to get a law degree? They borrowed it from Uncle Sam of course. The (virtually) unlimited amount of federal dollars for graduate level education was part of the HERA stimulus bill. Now all those new lawyers are looking for a job in a crowded field, and they’re up to their eyeballs in debt. From the ABA article:

-In 2010, 85 percent of law graduates from ABA-accredited schools boasted an average debt load of $98,500.

-Assuming a total debt of $150,000 (the amount currently carried by several thousand law graduates), the total monthly payment is $1,743.46 a month for 10 years. The median starting salary for a lawyer who graduated from law school in 2010 is $63,000 (Debt=40% of take home pay).

-Heavy loans now threaten to consume the future earnings and livelihood of the nation’s young lawyers.

-The influx of so many law school graduates—44,258 in 2010 alone, according to the ABA—into a declining job market creates serious repercussions that will reverberate for decades to come.

-Direct federal loans have become the lifeblood of graduate education, and they shelter law schools financially from the structural changes affecting the profession.

-Given the likelihood of some form of curb in federal student lending, there are gut-wrenching times ahead for law schools. 

-Bad things happen when lawyers and law professors stick their heads in the sand.

Rents on the Rise

It’s not surprising that rents are rising. Last year the increase was, on average, only 2.5%. This year it could be double that. People do need shelter, and are forced to rent because:

-Rents are still cheaper than buying

-There is no upside to ownership

-Few have the 20+% down payment required to buy

-Few can qualify for a mortgage given tighter lending standards (FICO scores)

Some data points from Bloomberg (Link).

-U.S. apartment vacancies dropped to a 10-year low in the fourth quarter, allowing for rent increases that are likely to continue this year.

-The vacancy rate was 5.6 percent in the previous three months and 6.6 percent a year earlier. The vacancy rate has fallen for seven straight quarters.

-For all of 2011, 37,678 rental units were completed, the lowest annual total in 31 years.

Rising rents could have a significant consequence on Fed policy this year. Ben Bernanke has sworn not to ignore his obligations regarding inflation. Ben looks at Core CPI and has said repeatedly that Core CPI above 2% would not be tolerated.

Bernanke faces the problem that core CPI has a 21% weight based on “Owners Equivalent Rent”. A 5% increase in this category would, by itself, cause a 1% increase in Core CPI.

Oddly, the lingering recession is the reason for the higher rents. One would expect that rents would be muted while the economy is weak. That was not the case in 2011. Additional upward pressure on rents will put a floor of 1%+ on CPI in 2012. As a result, there is very little wiggle room for all the other components that make up the index if it is to remain around 2%.

This must drive Bernanke crazy. In the end, it will force him to abandon his prior pledge on inflation.

Declining Labor Force Participation

Tomorrow, the Non-Farms Payroll numbers will be released. I think this data series is mostly noise. Monthly changes in employment can’t be accurately measured when the (non cell phone) sampling is done with only 0.01% of the workforce.

I will be looking at the Labor Force Participation Rate (LFP). This important number may have hit a new 30-year low in December. In November it stood at 64.0%.

It’s not surprising that the LFP is in decline. After three tough years, people are leaving the workforce. Some are retiring early and getting Disability Insurance/early Social Security benefits. Some just fall off the grid and work for cash in the black economy. Either way, they don’t show up in the survey data so the LFP falls. This is a terrible development for local, state and federal government tax receipts.

The following chart is from 2007, before the SHTF. This was forecast data for future LFP based on the thinking at the time. Needless to say, we missed the estimates. It’s interesting to note that the current LFP of 64% is about where we were expected to be in 2025. That four-year-old estimate got crushed by a four-year recession.