The Great Year-End U.S. Jobs Blowout

1.1 Million Gone in Only 60 Days…

In December, no less than 693,000 jobs disappeared from the private non-farm payrolls, a dramatic and disturbing increase from the 476,000 jobs lost in November. More than one million unemployed persons in two months would cripple most countries and throw them into a major depression, but even in a nation of 300 million persons this is a disturbingly large increase.

The decline was the worst in the history of the monthly ADP Employer Services survey, which began reporting in 2001. And if its results are matched by the official government labor report on Friday, it would be the biggest employment drop since 1975's unwelcome and unhappy recession. Yes, that's more than 30 years ago. This ongoing crisis is now approaching once-in-a-generation status and it's still mushrooming like a bad case of fungus in spoiled food.

America's large services sector took the biggest hit (473,000 jobs) with the goods-producing sector (220,000 jobs) and manufacturing (120,000) following in second and third place. Even the seasonal hiring for the holiday season wasn't enough to make any kind of impression.

But of course, the employment report with real weight is the government report due on Friday. If ADP's survey is matched by the BLS, that's when the brown stuff will really hit the fan. And it's not particularly reassuring that last month's government report showed a loss of 533,000 jobs against a forecast of 320,000.

And since the new forecast is already -500,000, just how bad will it really be? Is ADP right?

America is not alone in rising joblessness, however. German unemployment rose by 18,000 last month, significantly higher than the 10,000 losses that had been expected and lifting the jobless rate to 7.6%. Germany is Europe's largest economy and is now showing its first increase in joblessness since February 2006.

Alcoa’s Angst and Anguish

Alcoa Inc. (AA) operates in 42 countries as a major producer of primary aluminum, fabricated aluminum, and alumina, with aluminum and alumina representing approximately three-quarters of Alcoa's revenues. The company's products are used worldwide in aircraft, automobiles, commercial transportation, packaging, consumer products, building and construction, and industrial applications.

In short form: this is a company closely integrated with one of the most basic commodities of the economy across multiple key industries. And just yesterday it announced that it will be cutting 13,500 jobs (13% of its global workforce).

It's also cutting its smelting output by 18%, freezing salaries and hiring, and selling four non-core downstream businesses, all in a bid to reduce its 2009 capital expenditures by a whopping 50%.

Yes, 50%. This is not the sign of a mild dip in the economy. This is a disaster, as evidenced by the 10%+ drop in the stock price after this news was released:

Technically, the stock price hit a ceiling at $12 again and looks to test support at the $10 level. If it holds above its 50 day moving average (and the lower boundary of the ascending triangle drawn in blue) then a bounce is possible. Ascending triangles are normally bullish, after all, and AA has already been brutally pounded by last year’s ferocious bear market.

However, it’s more likely is that the stock will stagnate at this level before drifting even lower. A company that needs to trim 50% of its capital expenditures is not a company which is primed for growth at any foreseeable point in the future. This is a survival action with management looking several years into the future.

"Buddy, Can You Spare $1 Trillion?"

The 2009 federal budget deficit will indeed exceed $1 trillion and reach $1.186 trillion according to the non-partisan Congressional Budget Office (CBO).

This is the largest deficit on record at 8.3% of GDP, and it doesn't even include the extra $800bn spending being planned by US President-elect Barack Obama. (By comparison, last year's deficit was a "mere" $455bn and the previous percentage of GDP was 6% in 1983.)

This added financial burden will only lead to increased debt costs for government, increased inflation (which has barely begun to register on the average American's finances), a weaker dollar (unless everyone else devalues their paper even faster) and will almost certainly lead to higher taxes and spending cuts in the future.

And so the prognosis for the long term value of the US dollar is bleak, to put it mildly. You can't even hold dollars and feel safe (never mind invest them) since the Federal has already cut interest rates to nearly zero in a bid to stimulate the economy.

Right now the US dollar index is in a bearish flag formation which will likely top out at the 85 level. Once the lower boundary is breached (see the blue trendlines on the chart) then expect the lows from September to be tested and perhaps even breached.

Is the Euro the World’s Currency Savior?

With the dollar looking so grim, will the euro take over as the new reserve currency? Possibly, but unlikely unless the ECB takes some serious measures to strengthen the currency rather than undermine it with interest rate cuts. It also needs a bit more of a track record: the relative baby of the paper currency world is currently only 10 years old as of New Year's Day this year.

However, it's potentially a very hard currency (as in backed by hard assets), as the Eurozone owns more than 36% of the world's official gold reserves and one-third as much as the amount of gold held by the Fed. And to its credit, the ECB has been less inflationary with its policies than the Fed. Over the last decade, the euro has been inflated by 9.8% annually as compared to 11.8% annually for the U.S. dollar.

But until the ECB acts to establish a formal link between paper and gold, inflation will continue to gnaw away the purchasing power of the people using it.

While we don't expect hyperinflation in the Eurozone or the USA, we do expect inflation to get a great deal worse -- perhaps even bad enough to force one of the major central banks to serious consider formal gold backing to restore faith in their offerings.

When that happens, we will know a new era has been truly ushered in. There isn’t enough pain yet for this dramatic event to occur, but we strongly suspect that this will in fact happen before this global crisis is truly over.

Disclosure: No positions.

Comments

[bosun.j:]

"And so the prognosis for the long term value of the US dollar is bleak, to put it mildly."

Mildly yet succinctly!

"You can't even hold dollars and feel safe (never mind invest them)"

Indeed!

Jan 09 08:58 AM

[Michael66:]

People just do not comprehend how much harm they do to the American economy when they buy an imported car.

Take, for example, the effect of buying a $50,000 Mercedes here in the US.

Approximately 60% of the list price of the Mercedes or $30,000 is transferred to Germany. That is $30,000 of American capital. The US loses $30,000 of capital and Germany gains $30,000 of capital.

This $30,000 of capital is permanently lost to us. We can no longer use it to invest in America.

In addition to a transfer of capital, that $30,000 transferred to Germany also represents $150,000 of jobs transferred to Germany.

Economists figure that when one dollar is introduced or transferred out of a country it actually represents $5.00 of jobs gained or lost. This is called the “Job Multiplier effect” of capital lost or gained.

Multiply $30,000 by the standard job multiplier of 5 and you have the sum of $150,000 which is the dollar value of jobs that the $50,000 Mercedes sent to Germany and that we here in the US have lost.

In other words, the purchase of the Mercedes lost America the equivalent of three jobs each paying $50,000. Germany gained the equivalent of three jobs each paying $50,000.

Currently we are transferring $6,000,000,000 (six billion dollars) of capital per day out of the US to purchase depreciating and wasting assets. In essence, we are squandering our capital.

This is a disaster in the making.

Jan 09 09:45 AM

[dw57:]

for all the noise about the loss of value for the dollar, there really isn't any thing better. the Euro won't do it,as it is not tied to gold any more than any other countries currency is. and gold won't have much value if the currencies were to collapse. as nobody (but gold bugs) really values it as much any more.

Jan 09 10:04 AM

[Dave Wrixon:]

It is this steep because it took those at the top soooo very long to figure it out. Everyone is playing catch up. Just go and get drunk and try to figure it out when you sober up. None of the data is worth crunching at the moment!

Jan 09 01:56 PM

[Dave Wrixon:]

But the answer is to make stuff that people want to buy at a price they can afford. Half the stuff coming out of the States is 50% advertising by value. You advertise over-rate crap until the cows come home. It doesn't make it value for money. And only value will sell in the current climate.


On Jan 09 09:45 AM Michael66 wrote:

> People just do not comprehend how much harm they do to the American
> economy when they buy an imported car.
>
> Take, for example, the effect of buying a $50,000 Mercedes here in
> the US.
>
> Approximately 60% of the list price of the Mercedes or $30,000 is
> transferred to Germany. That is $30,000 of American capital. The
> US loses $30,000 of capital and Germany gains $30,000 of capital.
>
>
> This $30,000 of capital is permanently lost to us. We can no longer
> use it to invest in America.
>
> In addition to a transfer of capital, that $30,000 transferred to
> Germany also represents $150,000 of jobs transferred to Germany.
>
>
> Economists figure that when one dollar is introduced or transferred
> out of a country it actually represents $5.00 of jobs gained or lost.
> This is called the “Job Multiplier effect” of capital lost or gained.
>
>
> Multiply $30,000 by the standard job multiplier of 5 and you have
> the sum of $150,000 which is the dollar value of jobs that the $50,000
> Mercedes sent to Germany and that we here in the US have lost.
>
>
> In other words, the purchase of the Mercedes lost America the equivalent
> of three jobs each paying $50,000. Germany gained the equivalent
> of three jobs each paying $50,000.
>
> Currently we are transferring $6,000,000,000 (six billion dollars)
> of capital per day out of the US to purchase depreciating and wasting
> assets. In essence, we are squandering our capital.
>
> This is a disaster in the making.

Jan 09 01:59 PM