In the financial world everything is competitive.  Going along with the culture, of the three major sectors – investment banking, private equity, and hedge funds – where has employment expanded the fastest?  Here’s a look at employment growth by these three sectors since 2008.

Total Employment Growth Since 2008

In total growth terms, private equity has experienced the strongest recovery, up 4.3 percent since January 2008. In second place is hedge fund employment, up 3.3 percent. Coming in last is the investment banking sector, still down 4.7 percent.

1 Growth in emp

Employment Growth by Month

The total growth outcome leaves some questions.  The following is a look at employment growth since 2008 by these three sectors broken down by month.  Some interesting trends emerge.

First, the recovery has not been smooth for any of the three sectors, although private equity comes somewhat close.  The investment banking sector has gone through the choppiest recovery when measured by magnitude and frequency of declines.  The sector reached a low of -9 percent growth in both January 2011 and May 2012.  The best growth figure the sector has had since 2009 (relative to 2008) was in August 2010, where it was almost flat, to where employment stood in January 2008. The smoothest recovery has occurred in private equity.  The sector bottomed out at about -4.6 percent in May 2010.  The sector’s recovery has been relatively non-choppy, with consistent gains since May 2010 (with the occasional hiccup).

Second, the timing of the recession’s effect was somewhat different for all three sectors. The investment banking sector peaked in August 2008 at 2 percent. In contrast, hedge fund employment peaked in October 2008 at 8 percent followed by private equity employment, which peaked in December 2008 at 2 percent.

The bottoms did not coincide either, with investment banking bottoming out in September 2009 at -8 percent (at least for the initial bottom), hedge fund employment in November 2009 at -13 percent, and private equity employment reaching the bottom around May 2010 at about -5 percent.

Finally, investment banking employment growth continues to lag, while hedge funds and private equity are taking off.

2 total emp change since 2008

The Investment Banking Sector’s Trouble

What’s behind the weakness in the investment banking industry? One main force appears to be most influential in the investment banking industry’s troubles.

The detrimental factor is the passage and implementation of Dodd-Frank in July 2010.  Interestingly, employment in the investment banking industry shows as clearly being adversely affected by Dodd-Frank.  In fact, employment in the investment banking industry was just about positive in July 2010.  Following passage, employment in the industry went south quickly.

Conclusion

Overall, private equity is in first place for employment growth (up 4.3 percent) among the three large investment industry sectors.  In second place is hedge fund employment (up 3.3 percent).  Last place belongs to the investment banking industry, still down 4.7 percent from where it was in January 2008.  Only time will tell if the investment banking industry will ever catch up with its finance industry cousins.

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It’s been well over a century since there was a question about where the most powerful and innovative businesses were located.  Over this time frame the United States has been the leader in military might, has been innovative and productive, and has had the most influential financial system.

That is changing, however.  And it’s changing quickly.

Here are three graphics that show why markets increasingly view the American economy as a “has been,” heading in another direction – China.

Global Employment Growth – 2007 to Current

Perhaps surprisingly, the behemoth of the group is not business in the U.S. or the E.U., but China.  The dominance amounts to the location of about half of all global jobs created since 2009 (sample is 65 countries; see table that follows).  Overall, of the approximately 102 million in net new jobs, 53 million have been created by individuals and businesses in China.

Far behind in second place are businesses and individuals in Indonesia at approximately 14 million.  Rounding out the top five are Turkey at 7 million, Philippines at 4 million, and the United States at 400K fewer than the Phillippines.

In a somewhat sad note, the other end of the net job creation scale is heavily comprised of E.U. member countries, including Spain at -2 million net new jobs, Greece at -1 million, Italy at -800K, Portugal at -600K, and Romania at -400K.

Growth in Employment since January 2009

IB-Global Employment Growth

 

Productivity

The second graphic shows the relatively mediocre performance of the American economy based on productivity.

On top, in terms of productivity, are workers in China, having experienced productivity growth of nearly 38 percent since 2009.  Next on the list are workers in Indonesia at 15 percent growth.  The remainder of the top five productively growing economies include Russia at 11 percent, South Korea at 9 percent, and Spain at 8 percent.

On the other end are the U.K. at 1.6 percent, Italy at 1.9 percent, and Switzerland at 2 percent.

The lackluster American experience is clearly shown with productivity in the U.S. smack dab in the middle at 6 percent.

Productivity Gains since 2009

Employee Earnings Growth

The third figure supporting the view that markets are increasingly giving American economic conditions a ho-hum view is employee earnings growth as measured by growth in unit labor costs. As a note of explanation, unit labor costs represent the percentage of output going to workers.  When worker pay is going up as a percentage of output, employee pay is usually going up. Unit labor costs have grown the fastest in China, up 65 percent since 2009.  Other high-growth earners include workers in Indonesia (up 47 percent), Australia (up 13 percent), South Korea (up 7 percent), and Canada (up 7 percent). On the south end, as with employment and productivity, business conditions in E.U. member countries look terrible.  On the bottom is Spain at -9 percent, Japan at -5 percent, and Switzerland at 1 percent.

Unit Labor Costs since 2009

Overall, although the U.S. still has a very influential military and large economy, the recent growth trends have led markets to increasingly abandon the U.S. as a global leader for growth, instead switching attention to such countries as China and India.

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Over the past thirty years there has been an emergence and almost deification of retail sales as the driver of economic growth.  For instance, in the U.S. it is quite common to hear economists talk about how 70 percent of GDP growth stems from consumer spending and therefore if consumer spending dries up, so does GDP growth.

Ignoring for the moment the illegitimacy of the argument once one begins to consider productivity, investment, and other real growth drivers (i.e. the consumer is a follower, not a leader), here is a look at the global retail sales recovery according to national statistics.  This matters for investment banking professionals in that it affects where future global deals may be sourced, as well as affecting investment bankers’ advice on marketing and overall strategy.

Global Retail Sales Growth Since 2007

Likely unsurprising, the country that has experienced the largest growth in retail sales is China at about 183 percent.  In a distant second place is Brazil at 148 percent growth since 2009. The third fastest growing consumer base is Canada at 68 percent, followed by Russia at 61 percent and South Korea at 46 percent. The bottom end of the spectrum includes Spain at -16 percent, Japan at 4 percent, Mexico at 7 percent, Italy at 7 percent, and Switzerland at 8 percent.

Interestingly, right in the middle of the group is the United States at 33 percent, grouped with Sweden, Norway, the U.K., Australia, Belgium, Germany, the Netherlands, and France.

The shifting of the global consumer to non-western countries largely indicates that investment banking professionals should give greater attention to how strong demand for their services will perform in fast growing countries.  Focusing only on so-called “advanced economies” may leave investment bankers in the out in coming years.

Retail Sales since 2007

Can the BRICs Keep it Up?

With these numbers as the backdrop, it likely comes as no surprise why markets continue to shift their attention to emerging markets in search of growth.  Three out of the four leading so-called emerging markets are in the top four (China, Brazil, and Russia).  The fourth member of the famous BRICs group is India, which lacks timely data to be included in the analysis.

Given the increasing importance of the BRICs, the question economists keep asking themselves is – can they maintain this growth?

The simple answer is, at least in the case in three out of the four, yes.  There’s an enormous appetite in the People’s Republic and India to become more like the U.S.  consumer.  Unless something happens with property values in China, there’s no sign of the Chinese consumer stepping away from large scale consumption. Of course, one of the four – Russia – likely will give up some of its growth given the ongoing fighting in what governments currently call Eastern Ukraine.

Overall, the global retail world continues to shift its attention towards consumers in China, Brazil, and other emerging market economies.  Although some economists have their doubts about the sustainability of the emerging market consumer, every indication is that these emerging economies will continue to become more like American consumers rather than revert to a slower growth path.  Investment bankers who ignore this fact will certainly become dinosaurs in a field generally on the cutting edge of market and consumer research.

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Money Supply and Equity Market Performance Since 2007

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Are Investment Bankers Underpricing the Risk of Central Bankers Raising Rates Quickly?

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Central bankers have the option of increasing rates quickly.  They also have the option of taking a plodding approach. Although central bankers could, in theory, increase interest rates just as easily by 200 basis points as they could 25 basis points, investment bankers appear convinced that the latter will be the case for the foreseeable future. […]

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