So Thursday's decline is now dubbed the "Taper Tantrum," and clearly markets are nervous about the pace at which the Federal Reserve will withdraw its support for federal deficit spending. (Let's be clear: The Fed is enabling the deficit by buying the Treasury bond issuance. Absent that support, our federal government will either need to move closer to balance, or fully fund the deficit privately, thus risking the long-dreaded "crowding out" that can force interest rates up.)
The pace of Fed withdrawal will be driven by employment, and in that vein I wanted to share a very interesting analysis of job creation in the U.S. The analysis was done by Paul Dorfman, one of the brilliant senior staffers at the New York Stock Exchange. His insight was to cross-correlate market capitalization and company size with headcounts, in order to see what companies really matter to employment. His key conclusion: "America's smaller public companies hold a key to higher employment. We just need more of them. Big companies are great but they don't do the trick proportionately when compared to smaller companies that don't operate with the same economies of scale."
He elaborates on the critical statistic: "World-class publicly held companies like Google (GOOG), JPMorgan Chase (JPM) and Philip Morris International (PM) are great enterprises, each sporting roughly $150 billion in public market value (i.e. market capitalization less 'insiders' like directors, officers and larger shareholders). And plenty of people earn their livelihoods at these corporations. Google has about 33,000 employees, Phillip Morris, 78,000, and JPMorgan Chase 260,000. A lot of busy bees. But compare these staff sizes with the number of people working at the approximately 1,900 publicly traded companies with a public market value of, say, under $250 million, which cumulatively totals the $150 billion in value of these three companies: 2.4 million workers in all. That is nine times as many workers as JPMorgan and 33 times more than Google's staff."
We investors pay a lot of attention to the Dow 30 or the S&P 500 -- but, for our economy, it is the Russell 2000 that really matters. If small-caps are not thriving, the great American job machine will not rev up. One signal of the health of the small-cap economy -- and, thus, future job creation -- is the pace of initial public offerings. There are certainly more now than the dog days of 2008 and 2009, but we are not close to the robust new company growth we saw in the 1990s. We may not be again for some time.
Our policymakers would be wise to focus less on just lower interest rates, and more on initiatives to promote new business formation and training people for those new jobs. In fact, the Bureau of Labor Statistics recently reported, "Since the end of the recession in 2009, new job openings have increased by about 58 percent, while new hires have only increased by about 22 percent."
The jobs are coming -- but are our people ready for them?
You can read Dorfman's full piece here.