COMMENTARY | Bloomberg reports that Warren Buffett is betting against a double dip recession.
Buffett seems adamant that “We’re seeing growth around the world, but it’s not mushrooming.” He states that “jobs come with demand” and he sees this demand everywhere except housing.
Despite the statistics from the Bureau of Labor Statistics, Buffett, in an interview with Bloomberg stated, “We will come back big time on employment when residential construction comes back”. “The unemployment rate will drop to 6 percent “within a few years,” he said.
The June employment figures from the Bureau of Labor Statistics were dismal. The figures show 9.2 percent unemployment; only 18,000 jobs were added for the month of June.
Employment by companies is at a low since 2010 but Buffett feels that employment gains will return “big time” when the housing industry returns.
The figures also show that the average workweek for all non-farm private payrolls edged downward as well, falling .1 hour to 34.3 hours in June. In conjunction with this, hourly earnings for all private non-farm payrolls decreased by 1 cent.
Buffet’s view on the economy is optimistic considering the numbers from the BLS. The key to recovery according to Buffett is housing. However, the collapse of the housing industry has damaged the real engine of the economy, the middle class.
The recession has hurt the middle class most. Being comprised primarily of wage earners, their wealth has not been in stocks but in their homes. The collapse of home values has reduced middle class wealth by 55%. On top of this, they have suffered from job loss, and it is their wages that are in decline as shown in the BLS figures.
Buffett’s optimism assumes the housing industry will recover and bring back jobs. The industry may recover eventually, but not soon.
In the ‘Real World Economics Review, Issue 46’, author Dean Baker indicates that the “central element in the current financial crisis is the housing bubble”. He explains how the housing bubble coincided with the stock market bubble. He also details how the loss of wealth took place with the housing market crash.
With decreasing home values, people lose confidence in the economy and reduce spending. This leads to a contraction in business. As businesses eliminate employees and the banks reduce credit availability, the middle class consumption engine shuts down.
The stock market has rebounded because businesses found they were able to increase productivity with fewer employees and expand overseas. This is the mild economic expansion taking place. This has not helped the middle class
Those who left the stock market for have not seen their wealth return. Those who felt that their real estate holdings were a safer bet for their economic safety have awoken to a rude surprise.
This economic malaise could continue for some time as the middle class continues to lose wealth, wages remain stagnant and job growth remains anemic. The reality of the employment figures by the Bureau of Labor Statistics should be a warning.