Poisoning the Green Shoots

Poison: Any substance that can cause severe distress or death if ingested.

Our recovery is being poisoned. The drugs being given to “help” reduce the effects of recession have side effects. Pile this on top of the deteriorating economic conditions since 2000 which have never been addressed.

The soaring debt is the greatest poison. It is one thing to have a large debt in a rapidly growing and young country, it is another to have a large and growing debt in a maturing country facing an aging population which will place huge strains on the social networks. Fed Chairman Ben Bernanke sounded off on this subject this week in Congress.

Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Where are all those economists who claimed the growing deficit was not a problem? When the average Joe (or an average Chinese university student) knows debt will kill off and prevent economic growth, it is nice to know that Chairman Ben knew that too.

Back to Econ 101. What happens to companies who do not invest in themselves? They slowly wither on the vine. Our poison is greed. We are choosing to maximize profits today at the expense of having new profitable profits in the future. The corporate CEOs will do whatever is possible to bolster earnings (to drive stock prices up). When you shift into survival mode, you are at a disadvantage to companies (or countries) which continue to invest in new products. Do you think investment as a percentage of GDP is declining in Asia? Goodbye jobs.

Discussion of poisons would not be complete without adding that lack of jobs is a powerful poison. I have written on this subject many times in the past. It is one of a government's prime responsibilities to provide an environment for expansion of jobs – it is the right of every citizen who is willing to work hard to have a job. Lack of jobs not only create a drag on the social support network, but prevent the economy from reaching its potential. The employment graph clearly shows the deterioration of employment trends.

There are many other poisons which may be less toxic, or arise from the combination of drugs given to the economy – higher taxation, rising interest rates, quantitative easing which causes increases in commodity prices, meddling with capitalism. But in today's poor economic conditions, even relatively less toxic poisons will work with the more deadly ones destroying green shoots.

With the current rise in energy and other commodity prices, this will create a drag on GDP (the value of imports will increase – imports are subtracted from GDP).

This is a game changer, and jeopardizes 3Q 2009 GDP being positive.

If there were real green shoots, Vice President Joe Biden would not have made the following statement:

As much progress is already made, we still have a long, long way to go in the road to recovery. And that's why on Monday the President and I will be announcing our plans to ramp up the Recovery Act implementation over the summer.

The green shoots we have seen over the last few months are dying for now. The bullshit spin on this week's economic events will not act as fertilizer.

Additional Economic Events from this Past Week

No green shoots are in the April 2009 consumer credit numbers. Consumer credit decreased at an annual rate of 7.5%. Revolving credit decreased at an annual rate of 11%, and non-revolving credit decreased at an annual rate of 5.25%. Consumers are not spending yet.

Economic evaluation of consumer spending using chain store sales has just been kicked in the stomach.

Wal-Mart (WMT), the 400 pound gorilla who is 40% of the chain store market is no longer reporting its sales monthly – but will do so quarterly.

Even if Wal-Mart would have reported, it is probable chain store sales would have fallen this month as the remaining players were pretty negative.

Last week I discussed the advanced report on MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS (M3) saying the data did not add up. This week we get the preliminary April 2009 data.

• Manufacturing new orders up 0.7%
• Shipments down 0.2%
• Unfilled orders down 1.2%
• Inventories down 1%

There were only slight downward revisions in most numbers. Still it does not make sense how new orders are up - and unfilled orders, shipments and inventories are down.

Fed Chairman Bernanke appeared before the House Budget committee this past week. There was little new in his speech, and his economic summary follows:

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall........

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

ABC news publishes a consumer confidence survey which at least meets the test of statistical polling accuracy, is almost in real time, and publishes enough data that an analysis can be performed of the bottom line.

While the market has been rising in May, consumer confidence has been moving in the opposite direction. To put this in perspective, ABC does not include future expectations into their poll (which incidentally is rising). Consumers believe that the economy and their personal finances are getting worse. What the hell, there actually is a consumer confidence poll which correlates to the economic data.

New car sales in May 2009 improved slightly over April, but are down over 38% YoY. Clearly demand has stabilized and is slightly drifting upward since the beginning of 2009. The Chrysler and GM (GMGMQ.PK) bankruptcies have not had a dramatic effect on the market shares, and Ford (F) seems to be gaining market share in these adverse conditions.

For the first time, more cars are produced by the transplanted car manufacturers in the USA than the Big 3 Detroit manufacturers. I don't know if this qualifies as green shoots, but not getting worse is very good in these times.

Construction spending upticked in April 2009 – and one month does not make a trend as you can see the single month upticks in the chart below. Government construction spending decreased a small amount and residential construction spending increased an equally small amount. But the uptick in construction spending was due to two accounts in non-residential private spending – power construction and manufacturing facility construction. Both of these accounts have continued growing month-over-month during this recession.

For those waiting for signs that the consumer is coming back would be disappointed by the April 2009 personal income and outlays from the BEA. Highlights from this report:

• disposable personal income was up +1.1% after several months of decline.
• wages/salaries were unchanged after several months of decline.
• Personal consumption decreased -0.1% in April on top of -0.3% in March. Spending on durable and nondurable goods dropped by -0.6% each, while spending on services increased +0.3%.
• Inflation increased a slightly higher than expected +0.3% in April for a year-over-year rise of +1.9% – well above the Fed’s stated objective of 1%.
• the personal savings rate jumped up to 5.7%, the highest level since February 1995.

This kind of data is not indicative of an impending recovery.

The Institute of Supply Management (ISM) released their May 2009 report on business showing a 'less bad' - manufacturing is still contracting at a slower rate. Even though the ISM report methodology is similar to confidence surveys (as respondents only say conditions are the same, better or worse), it has usefulness in that it is published months before objective government is available.

Cutting through the crap they include in the report, it is fairly obvious by focusing on the production and new orders components – that we are in a bottoming process.

Note the steady increase in manufacturers reporting same conditions, and conversely the steady decline in manufacturers reporting conditions are getting worse. I cannot draw any conclusion from this report things are getting better.

I have given considerable thought to how May 2009 employment data should be spun to accurately present the current situation. What does it mean that the drop in employment is half of the recent months, but the increase in unemployment is one of the highest since the recession began? As an analyst, it always bothers me when there is no correlation in the shape of related curves. At least the May unemployment data is close to the weekly unemployment numbers, the employment numbers are inaccurate.

So what we can believe about May 2009 jobs situation: 1) The headline unemployment rate continued to rise, increasing from 8.9 to 9.4%. The U-6 (broad based employment measure) increased from 15.8 to 16.4%; 2) unemployment is growing most rapidly with teenagers and Hispanics.

Listening to the media, you will notice some talk about weekly unemployment getting slightly better. I use 4 week moving averages because of the weekly spikes and revised data – and this week unemployment numbers are slightly worse at 631,250 claims. No green shoots here yet.

Filing for Bankruptcy: General Motors, Butler (Services) International, Eagle Geophysical. Bank failures this week: Bank of Lincolnwood (Lincolnwood, IL).

Economic Forecasts Published this Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said

With WLI growth climbing to its best reading since July 2008, U.S. growth prospects are rapidly reviving.

International and Canadian Inflation indexes which forecast future inflation pressures have fallen. USA future inflation index has risen (published at the same time as this article)..

Watching what is happening this week economically leaves me weak. Are we in a bottoming or a pause before another leg down? The interest rates are in an uptrend. Rising interest rates cool an economy. Whatever green shoots we have seen to date have died. The good news is that the economy is not getting much worse.

Disclosures: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, DBC, EWA, EWC, EWT, PIN, GLD, Physical Gold

Comments

[Dave Wrixon:]

Paradoxically, the very optimistic employment figures have put Obama in more of a jam as Treasury Yields surge even higher. The question is, can Uncle Sam even afford a recovery?

If the figures have been fudge to try to improve sentiment, then it looks like someone might have shot themselves in the foot.

Jun 07 06:20 AM

[Dave Wrixon:]

The bottom line is that when the Barbeque burns out, it needs more Charcoal, not lighter fuel.

Jun 07 06:29 AM

[Carlos Lam:]

Steven, I thought that Chmn. Bernanke's remarks to Congress were a joke. It was Chmn. Bernanke and his predecessor's inappropriate monetary policies who helped fuel the debt-financed real estate bubble. Now it is Chmn. Bernanke who is lecturing Congress about profligate fiscal policy. How ironic.

You are spot-on regarding debt. There is simply no way absent significant tax increases or debasement that we will be able to get a handle on the debt. Tax increases are out, so that means that the gov't will attempt to inflate away its debt.

Speaking of which, I think your article gives a little short shrift to the plunging dollar theme. You do mention increases in energy & commodity prices, but let's examine the damage that double-digit price jumps caused by irresponsible fiscal and monetary policy will do to the average consumer. Sure, the CPI will factor in hedonic adjustments because iPods and netbooks cost less, but the middle class gets REALLY hurt when milk goes to $4/gallon, gas to $4/gallon, and heating bills shoot up to $400/month in the wintertime.

Jun 07 07:55 AM

[The Geoffster:]

Fiscal prudence has been defenestrated by both political parties and their supporters cheer them on as long as their programs are being funded. Obama will not stop the madness. He will attempt to use the crises to expropriate private health care before bowing to the bond market.

Jun 07 08:17 AM

[Gerhard Hahn:]

Hi Steven.
you right on , when you saidin this article :
Back to Econ 101. What happens to companies who do not invest in themselves? They slowly wither on the vine. Our poison is greed. We are choosing to maximize profits today at the expense of having new profitable profits in the future. The corporate CEOs will do whatever is possible to bolster earnings (to drive stock prices up). When you shift into survival mode, your are at a disadvantage to companies (or countries) which continue to invest in new products. Do you think investment as a percentage of GDP is declining in Asia? Goodbye jobs.
A great article

G.H.

Jun 07 08:42 AM

[Chezfrederick:]

Excellent article... I agree with your perspective 100%. Manipulating market sentiment may keep the momentum going a little longer, but at some point reality dawns and the major correction shall come to pass.

Jun 07 08:45 AM

[enigmaman:]

Very sobering article that helps dispel what the main stream press is trying to make us beleive "That things are getting better" There was a Duetche Bank analysis of the jobs report and it provide information that nobody else spoke about. While on the surface the jobs report seemed to improve, the underlying factoirs say otherwise, specifically the affect of working less hours, if extrapolated the reduction in hours worked would equate to the loss of 375,000 jobs, no small matter. Also taking it further when you work less, you have less to spend, hence the increased savings rate of 5.7% without cosnumer spending the economy can in no way improve. There are other datas that confrim this but yoiu get the idea. The admin is spinning this recovery, I understadn why they are but that doesnt change what is, We are in deep shit!

Jun 07 09:03 AM

[fran:]

greed and excessive population growth do influence this earth greatly. huxley covered such a situation in his book-"brave new world". a model does exist to ameliorate the poison, but brings with it other ailments as tradeoffs[ SOMA, FEELIES, HATCHERIES, etc].
come to think, we've almost socio-engineered our way there with little forethought. or is there more forethought/plan than we realize?

could THE CLUB OF ROME still exist?

Jun 07 09:35 AM

[User 353732:]

The culture of Exchange where real value is created and exchanged is being replaced by a culture of Taking where individuals, institutions , banks and governments at every level want to take far more than they can ever repay, consume far more than they produce in return, and promise far more than they can ever redeem.
The gratifications and appropriations are immediate and the consequencies, to many, seem either distant or trivial.
The elites take more and more power and resource allocation decisions away from businesses, families and individuals without providing any increase in accountability or transparency or responsiblity: Public service becomes self aggrandizement and public pillaging.
Banks take gigantic rewards in return for little genuine value added but force risks on the duped and unsuspecting and now, mostly helpless, middle class.
Many individuals and familes have little hesitation, when the opportunity arises, to take on debt that cannot possibly be repaid to enjoy lifestyles that have not been earned and cannot possibly be sustained by the value they create for fellow Americans. When the debt is no longer availabe they demand income transfers and unmerited forgiveneess of obligations because to them taking has become an entitlement that is not matched by a commensurate.
giving.
In the culture of taking, private and public, domestic and foreign ,debt of all kinds and maturities is simply the mechanism by which the taking occurs.
Debt is a manifestation of the culture, not its cause.

When global investors mark down the dollar either via currency depreciation or rising commodity prices or rising interest rates, they are, in effect, marking down the culture of Taking. The marking down will continue until either the culture corrects itself and returns to the culture of Exchange or until the US loses its unique(and until recently well deserve status as a planetary hyperpower.
When a cultural phenomenon is not sustainable, it must either change or collapse. Balance is always restored and in one form or another the price is always paid.

Jun 07 09:44 AM

[Biggonmv:]

And thus the Culture of Debt Dependency has morphed into the Culture of Handout Dependency in roughly a year's time. Unreal!


On Jun 07 09:44 AM User 353732 wrote:

> The culture of Exchange where real value is created and exchanged
> is being replaced by a culture of Taking where individuals, institutions
> , banks and governments at every level want to take far more than
> they can ever repay, consume far more than they produce in return,
> and promise far more than they can ever redeem.
> The gratifications and appropriations are immediate and the consequencies,
> to many, seem either distant or trivial.
> The elites take more and more power and resource allocation decisions
> away from businesses, families and individuals without providing
> any increase in accountability or transparency or responsiblity:
> Public service becomes self aggrandizement and public pillaging.
>
> Banks take gigantic rewards in return for little genuine value added
> but force risks on the duped and unsuspecting and now, mostly helpless,
> middle class.
> Many individuals and familes have little hesitation, when the opportunity
> arises, to take on debt that cannot possibly be repaid to enjoy lifestyles
> that have not been earned and cannot possibly be sustained by the
> value they create for fellow Americans. When the debt is no longer
> availabe they demand income transfers and unmerited forgiveneess
> of obligations because to them taking has become an entitlement that
> is not matched by a commensurate.
> giving.
> In the culture of taking, private and public, domestic and foreign
> ,debt of all kinds and maturities is simply the mechanism by which
> the taking occurs.
> Debt is a manifestation of the culture, not its cause.
>
> When global investors mark down the dollar either via currency depreciation
> or rising commodity prices or rising interest rates, they are, in
> effect, marking down the culture of Taking. The marking down will
> continue until either the culture corrects itself and returns to
> the culture of Exchange or until the US loses its unique(and until
> recently well deserve status as a planetary hyperpower.
> When a cultural phenomenon is not sustainable, it must either change
> or collapse. Balance is always restored and in one form or another
> the price is always paid.

Jun 07 10:04 AM

[Jeff Nielson:]

Steve, a very good analysis - although it still bothers me when people who ARE realistic (like you) still quote official "statistics" in their analysis.

What is needed more (in cutting through the B.S.) is to hack through the "veil of propaganda" - and give people a look at the "real world".

For example, when you strip away the $2 TRILLION per year in statistical "padding" from U.S. GDP, you're left with an $11 trillion economy - not a $13 trillion one.

This instantly makes all the debt-to-GDP and related calculations 25% worse.

Even engaging in a realistic analysis (such as you have done) loses much of its educational value as long as we continue to plug fictional parameters into such analyses.

Jun 07 10:16 AM

[moron:]

I think the point of the article is that even using this very suspect numbers, the overall view cannot possibly be viewed as positive. Just imagine what the real view looks like (as you have commented on several times Jeff).

Jun 07 10:21 AM

[American in...:]

The housing bubble took place all over the world regardless of whether monetary policy was tight or not. Euro region has a common monetary policy, but the real estate bubble was largely concerned in Ireland, Spain, and to a lesser extent, France.


On Jun 07 07:55 AM Carlos Lam wrote:

> Steven, I thought that Chmn. Bernanke's remarks to Congress were
> a joke. It was Chmn. Bernanke and his predecessor's inappropriate
> monetary policies who helped fuel the debt-financed real estate bubble.
> Now it is Chmn. Bernanke who is lecturing Congress about profligate
> fiscal policy. How ironic.
>
> You are spot-on regarding debt. There is simply no way absent significant
> tax increases or debasement that we will be able to get a handle
> on the debt. Tax increases are out, so that means that the gov't
> will attempt to inflate away its debt.
>
> Speaking of which, I think your article gives a little short shrift
> to the plunging dollar theme. You do mention increases in energy
> & commodity prices, but let's examine the damage that double-digit
> price jumps caused by irresponsible fiscal and monetary policy will
> do to the average consumer. Sure, the CPI will factor in hedonic
> adjustments because iPods and netbooks cost less, but the middle
> class gets REALLY hurt when milk goes to $4/gallon, gas to $4/gallon,
> and heating bills shoot up to $400/month in the wintertime.

Jun 07 10:44 AM

[American in...:]

Steven,

Your moralizing about debt is neither grounded in economic history or any credible theory of economic growth. Follow the consequences of your own logic. Less government debt means less government spending and less aggregate spending. So it implies a far more severe recession. Now a more severe recession means less tax revenues...

It is naive for you to think that the federal deficit would be smaller under a do nothing scenario.

Keynes wrote that practical men, who think themselves immune from theory, are usually the slaves of some defunct philosopher. Could that apply to you?

Jun 07 10:48 AM

[Steven Hansen:]

Jeff....

there are problems with all statistics - government or private. you have to be smart enough to know when the results are bogus. even if you are trying to be honest in producing statistics, the results do not have to be correct.

this weeks jobs report for May was one of those. many suggest the government is lying. i suspect BLS has been under pressure from every administration to present data is the best light - but not misrepresenting or fabricating results. the jobs numbers are highly manipulated based on adjustments that have been developed through the years. we are in our last year before a census. the adjustment data at this point is suspect.

just as investors should not invest only in one stock, when you analyze the economy you need to diversify you analysis. you look at everything. you make connections. you analyze exceptions.

the market makers love to react to singular pieces of economic data - whether it agrees with other data or not. they love to spin the data to support upward market movement. the problem is not the data itself but the spin.

Jun 07 10:50 AM

[rubberband man:]

User 353732 has just given a brief synopsis of the concepts put forth by Ayn Rand in Atlas Shrugged. He describes, as Rand did, how we are quickly moving to a society of producers and looters in which the looters greatly outnumber the producers


On Jun 07 09:44 AM User 353732 wrote:

> The culture of Exchange where real value is created and exchanged
> is being replaced by a culture of Taking where individuals, institutions
> , banks and governments at every level want to take far more than
> they can ever repay, consume far more than they produce in return,
> and promise far more than they can ever redeem.
> The gratifications and appropriations are immediate and the consequencies,
> to many, seem either distant or trivial.
> The elites take more and more power and resource allocation decisions
> away from businesses, families and individuals without providing
> any increase in accountability or transparency or responsiblity:
> Public service becomes self aggrandizement and public pillaging.
>
> Banks take gigantic rewards in return for little genuine value added
> but force risks on the duped and unsuspecting and now, mostly helpless,
> middle class.
> Many individuals and familes have little hesitation, when the opportunity
> arises, to take on debt that cannot possibly be repaid to enjoy lifestyles
> that have not been earned and cannot possibly be sustained by the
> value they create for fellow Americans. When the debt is no longer
> availabe they demand income transfers and unmerited forgiveneess
> of obligations because to them taking has become an entitlement that
> is not matched by a commensurate.
> giving.
> In the culture of taking, private and public, domestic and foreign
> ,debt of all kinds and maturities is simply the mechanism by which
> the taking occurs.
> Debt is a manifestation of the culture, not its cause.
>
> When global investors mark down the dollar either via currency depreciation
> or rising commodity prices or rising interest rates, they are, in
> effect, marking down the culture of Taking. The marking down will
> continue until either the culture corrects itself and returns to
> the culture of Exchange or until the US loses its unique(and until
> recently well deserve status as a planetary hyperpower.
> When a cultural phenomenon is not sustainable, it must either change
> or collapse. Balance is always restored and in one form or another
> the price is always paid.

Jun 07 10:52 AM

[Steven Hansen:]

american in paris
i moralize about nothing.

debt has to be financed. financing debt drags gdp down. the higher the interest rates the higher the drag.

debt is something that is beneficial today and paid for tomorrow. if you induce debt to build a dam, the reoccurring benefit of the use of the dam is beneficial to your economy while you are paying it off. if you induce debt to pay for medicare, you are paying it off in the future with no benefit at that time.

think of our debt. when we have to pay it off we are not getting any benefit from the debt.

you have decided that our debt has been created because our government is doing something about a recession. please show me the portion of our current debt which applies to actions of the government to mitigate the recession.

Jun 07 11:09 AM

[Crocodilian:]

Author writes:
"The soaring debt is the greatest poison. It is one thing to have a large debt in a rapidly growing and young country, it is another to have a large and growing debt in a maturing country facing an aging population "
----------------------...

yes, that's correct. Demographics are important, but few people talk about them. At an individual household level, it makes perfect sense to take out a mortgage and buy a house when you're thirty . . . it makes very little sense to do so when you're 65.

Nations face similar choices-- and the US is aging very rapidly. Not only does an older population have little ability to produce more, they necessarily consume more expensive healthcare services.

The US median age is about 37 years, and is on its way to the 40s.

Jun 07 11:47 AM

[baird:]

This incredible experiment on planet earth obviously has no precedent, we've had the pedal all the way down and now it's through the firewall. It ain't complicated folks there's way too many of us and that's growing quickly to what "final" number who knows. And everyone wants to live the "good life" not just the clueless in the developed countries. It's not complicated but of course we still don't get it, without question we're way beyond sustainability and far into defcon omega or whatever is the ultimate alert status. Very sad prognosis and worst is it didn't have to be.


On Jun 07 09:35 AM fran wrote:

> greed and excessive population growth do influence this earth greatly.
> huxley covered such a situation in his book-"brave new world". a
> model does exist to ameliorate the poison, but brings with it other
> ailments as tradeoffs[ SOMA, FEELIES, HATCHERIES, etc].
> come to think, we've almost socio-engineered our way there with little
> forethought. or is there more forethought/plan than we realize?
>
>
> could THE CLUB OF ROME still exist?

Jun 07 01:02 PM

[Living4Divi...:]

Steve, a very good article. I am impressed.. rather.. I am BLOWN AWAY by the amount of work you put into the article, the data, the charts. How do you do it?

I am most taken back by the investments as a pct of nominal GDP. Actually it looks like an inverse image of "Govt Transfers as a Pct of GDP."

Jun 07 01:25 PM

[H. T. Love:]

A very informative piece. Thank you.

I have two questions. In Bernanke's statements,

"Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further."

Bothered me. Is it the first tacit admission that the recession will end later than they have been espousing? That last line "implying that the current slack in resource utilization will increase further" seems to mean that the recession will not have ended as I can't reconcile "ended" with capacity utilization continuing to decline.

Any thoughts? Just normal double-speak trying to obfuscate the truth?

The other thing is it seems to me that if we know the number of unemployed in the previous report and the percentage it represented, and we know the new percentage, we should be able to calculate the real losses for the latest report.

Do they add up?

Thanks again,
HardToLove

Jun 07 01:54 PM

[H. T. Love:]

On Jun 07 01:54 PM HardToLove wrote:
Never mind! I just made a rough estimate using those numbers and they've correlated.

Sorry for th noise.

HTL

><snip>
> The other thing is it seems to me that if we know the number of unemployed
> in the previous report and the percentage it represented, and we
> know the new percentage, we should be able to calculate the real
> losses for the latest report.
>
> Do they add up?
>
> Thanks again,
> HardToLove

Jun 07 02:02 PM

[ed233:]

The thing that bothers me are the numbers of investors that are lulled into the government propoganda that is leaked out from various sources to suck so many people into invest their hard earned money when that investment could fall off a cliff. I'm not saying it is going to happen. But just the gamble of the possibility under these circumstances has got to make you think. Who has really paid for this rare so-called recession when the Obama government attempts to prop up all major failures so noone is a loser. There's going to be major losers sooner or later as all crisis turn out the same way. Of course many will say,"Look how much I'm already up which couldn't have been possible if I've listened to your advise." If you get out with that increase in tact then that's okay. But everybody can't get through the same door at the same time using stop limits. LOL Looking after your money.

Jun 07 02:23 PM

[donzelion:]

Steven - good article, and some decent comments. I particularly like this observation: " i suspect BLS has been under pressure from every administration to present data is the best light - but not misrepresenting or fabricating results."

The exception would have been the early days of the Great Depression - while BLS wouldn't have been lying, local reporting mechanisms would have exaggerated certain harms due to the budgeting mechanisms then deployed (the worse the problem, the more spending channeled to your district). Of course back then, the system missed working women and other "irregular" employees. In a manner of speaking, it still does, even as the number of irregular employees has grown (by some counts to be larger than permanent employees, if one counts long-term temps).

Disclosure: I'm waiting for the next leg down, and looking for foreign assets to diversify into as the dollar wobbles.

Jun 07 03:44 PM

[Alphameister:]

Are you a pessimist by nature? You seem obsessed by current economic indicators that are bearish combined with long-term economic problems that could not be much more daunting, leading you to ignore "green shoots" wherever they may be found. The WLI has an excellent long-term record. To your credit, you present it in your comprehensive report but then virtually ignore its significance for the future.

Also, the concept that every American willing to work is entitled to a job may be a more noble "entitlement" than those that are bringing this country to its knees, but it isn't one of the freedoms granted to us by the Declaration of Independence or by the Constitution. Each of us has the freedom to pursue happiness by seeking a job, but nobody has an obligation to offer us one.

We've kicked the can down the road, and there may well be a more devastating bear market in our future, but for now there is a growing array of indicators pointing to an economic recovery likely to be neither strong nor durable.

Jun 07 06:07 PM

[Fighting Yoda:]

Great summarization and analysis. Here are my takes:
BLS/Unemployment data- this had birth/death adjustments of +220K. This is how the unemployment numbers came at 345 and not as forecasted 550. In the current environment there is no anecdotal evidence of more firms taking birth rather than dying. 0 would be OK, a negative number would be closer to the truth.
U-6 - total unemployment was 16.4% in any case - this the number that ultimately matters

Bernanke- he says one thing does another, changes his tone and rhetoric all the time. He never saw nothing coming - no problem, small problem, sub-prime only problem, no recession, shallow recession. And suddenly the biggest crisis since Depression. His forecasts etc are a complete waste. His recent fiscal responsibility talk to the Congress was simply a part of China appeasement PR. Bernanke/Fed/Geithner have no credibility in my eyes, they are the cause of this crisis and they continue to lead us down the wrong path - more debt.

Guys things have changed, mainstream media either is in complete denial or just playing the good old game of optimism and PR.
- When giant iconic institutions die - the whole environment changes -fixing it takes a long time. No V or U or even a W - if you can get to flat and solid ground you would by very lucky.
- When the largest capitalist economy needs help from a much smaller Communist economy - there is major problem.
- When the biggest car companies in US are nationalized - owned by the labor unions and Govt. - only Karl Marx is smiling in his grave.

We have to get out of the 'borrow and consume' mode. Back to Econ 101: Save -> Invest -> Produce -> Consume. But alas our leadership does not get it - they want some easy way out - 'borrow even more'.

There no green shoots only deadly weeds, being watered by Wall Street.

Jun 07 06:55 PM

[E Nuff Sed:]

Where do you get your data? debt/GDP is currently 80%. It was 120% during the war. Britain in her peak had a debt/GDP ratio of 240% and still was a super-power for another 100 years. Countries are not people. They live for ever. When growth resumes debt will take care of itself.

On Jun 07 07:09 PM abl3 wrote:

> Total credit market debt as a percentage of GDP has risen from 130%
> of GDP in 1952 to 350% of GDP today. The various bailout and stimulus
> schemes enacted in the last year will drive this percentage above
> 400% in the near future. When a country allows this much debt to
> accumulate versus its GDP, they have done something seriously wrong.
> The country’s politicians, business leaders, and citizens have all
> contributed to this disaster.
>
> good articles>> is.gd/HGYt recommended reading

Jun 07 10:30 PM

[Steven Hansen:]

Alphameister,
i was waiting for someone to call me on the WLI. Yes, it is true it is headed up. i am a big fan of this index, and it is indicating the economy will be improving before summer ends.

you will also note i publish the CEI curve also. this is ECRI's coincident index. you will note it is struggling. most of the data analyzed this week is coincident. there is no data this week which indicates a recovery. the small green shoots from the last months have not developed.

this is not a normal recession, and it has factors which we have not faced before compounded by mitigating factors which may have unintended consequences.

i am waiting for signs on coincident indicators are improving.

Jun 07 11:24 PM

[Poor Dude:]

>>> Steven,

Your moralizing about debt is neither grounded in economic history or any credible theory of economic growth. Follow the consequences of your own logic. Less government debt means less government spending and less aggregate spending. So it implies a far more severe recession. Now a more severe recession means less tax revenues...

It is naive for you to think that the federal deficit would be smaller under a do nothing scenario.

Keynes wrote that practical men, who think themselves immune from theory, are usually the slaves of some defunct philosopher. Could that apply to you? <<<


That's an argument that the only way to ensure prosperity is to create it by hocking everyone's future productivity in order to enjoy the benefits of that future productivity today. If that's what Keynes espoused, then he is a fool.

Prosperity is created by productive output and economic expansion. Nothing more, and nothing less.

While borrowing may lend the appearance of prosperity at the current moment, it carries with it an iron-clad and unquestionable consequence. It requires you to drain from your future prosperity the means to repay the amount of your debt, plus the interest on those borrowings (since time is money, and no one is willing to lend to you today without an acceptable return on their investment).

To enjoy the benefits of a borrowed dollar today, you must pay back more than a dollar in the future. I don't know if "economic history" or any "credible theory of economic growth" recognizes that fact, but it's still a fact. Hell, it's just plain old common sense. Finance 101, or even simpler.

Any system built upon the premise that it must borrow from the future in order to survive today is a system built upon sand. One built upon the "bubble theory" of economics. And its future is unquestionable. The bubble will eventually burst, and that system will fail.

This much, I agree with:

"practical men, who think themselves immune from theory (or I would say economic reality), are usually the slaves of some defunct philosopher. Could that apply to you? "

Jun 07 11:26 PM

[Peter Cooper:]

Actually the recent surge in oil prices more than compensates for all the bailout and stimulus spending, so it has all been wasted - the recession will intensify as a consequence, see:
arabianmoney.net/2009/.../

Jun 08 12:19 AM

[Graybeard44:]

While you all rant about Econ 101, the thing I remember is that if you borrow to build something ( a business, a house, a skill), you can pay the cost as you use the asset that you build. In Business 101, we learned that the more capital you CONTROL, whether it is from cash or a loan, the better able you are to fund and grow your business. Debt is an important tool in building our future. If we wait for people to be able to "pay cash" for their houses, cars, college educations, or for gov'ts too pay "up front" for roads and schools, it will be a looooong time before we see any economic expansion.

Jun 08 12:20 AM

[John Lounsbury:]

E Nuf Sed - - -

I think you are looking at government debt and 80% of GDP is about right. The total debt, government plus corporate plus financial plus household is about 350%, which is the number abl3 was referring to.

Poor Dude - - -

You can not have too much productive debt, unless you can not provide the cash flow to carry the debt. I define productive debt as debt that produces greater return than the cost of repayment and carrying charges (interest).

We have two problems: (1) the future cash flow to support the debt we face is not certain; and (2) the marginal return on debt has been declining for several decades. We are at a position where the return as growth in GDP for each dollar of added debt is at an alltime low, leading some to project that we are only a few years away from having the return become negative. These people extrapolate the 50 year trend to say that within 5-6 years adding debt will reduce GDP.

I don't subscribe to the negative return projection for added debt, but very low return (compared to historical levels) has been reached in the last 10 years and I believe could continue unless we figure out a new economic trajectory. A recent article discusses this seekingalpha.com/artic...

We need to be aware that there is good debt, tolerable debt and bad debt. I feel that good debt finances the means of production of things of economic utility, and as a result produces a marginal return in excess of a dollar of GDP per dollar of debt (a multplier effect grater than one). There is tolerable debt that may produce a a multplier effect that is near one, or even slightly less, but is used to obtain something that has many years of use, even if it is not a means of production. Bad debt is used to buy something that is consumed and provides no lasting value.

Examples of good debt: financing a college education, financing a new factory or retooling, financing a development project that leads to a new technology, medicine, etc.

Example of tolerable debt: a home mortgage (although not in a bubble).

Examples of bad debt: credit card balances or home equity lines of credit that were accumulated by spending on entertainment, vacations, furnishings or clothing beyond the basic essentials for living, etc. A car loan for a $30,000 car or truck when an $18,000 vehicle would have provided all (or even more than) the functionality needed is also a bad debt.

I think you may have been too critical of the author, for I think you made assumptions about what he was thinking. If you thought he had some of the factors in mind that I have mentioned above, then you might have reacted differently.

Jun 08 12:57 AM

[John Lounsbury:]

Graybeard - - -

I apologize for not recognizing you had made a comment about the quality of debt being an important consideration before I finished my comment.

Jun 08 12:58 AM

[Alphameister:]

"this is not a normal recession, and it has factors which we have not faced before compounded by mitigating factors which may have unintended consequences. "

Change "may" to "will" and I am in complete agreement! Mitigating today and terribly damaging down the road.

Jun 08 01:02 AM

[Dave Wrixon:]

Debt is detrimental today because it discourages the capital investment that is required to turn the economy around. When I talked about charcoal I meant investment in future productive capacity, as opposed to lighter fuel which is the stimulus money that ends up getting squandered in W-Mart on cheap imports. Indeed you might even go as far as to say that strong figures from Wall Mart are very bad for the American economy as a whole. With all these statistics you need to delve further to find out what is going on. Temporary hirings for census do not hold the same value as jobs created through the construction of a new steelworks or nuclear power station.


On Jun 07 11:09 AM Steven Hansen wrote:

> american in paris
> i moralize about nothing.
>
> debt has to be financed. financing debt drags gdp down. the higher
> the interest rates the higher the drag.
>
> debt is something that is beneficial today and paid for tomorrow.
> if you induce debt to build a dam, the reoccurring benefit of the
> use of the dam is beneficial to your economy while you are paying
> it off. if you induce debt to pay for medicare, you are paying it
> off in the future with no benefit at that time.
>
> think of our debt. when we have to pay it off we are not getting
> any benefit from the debt.
>
> you have decided that our debt has been created because our government
> is doing something about a recession. please show me the portion
> of our current debt which applies to actions of the government to
> mitigate the recession.

Jun 08 01:07 AM

[Bard:]

Religious empires are an expensive luxury paid for by obscene wealth for a few, torture for a few, and misery and hopelessness for everybody else. Get the preachers out of our bedrooms and cut the military to the bone and we have a tiny chance of getting out of this one with some semblance of sanity.

Bard

Jun 08 01:31 AM

[Poor Dude:]

>>> Debt is an important tool in building our future. If we wait for people to be able to "pay cash" for their houses, cars, college educations, or for gov'ts too pay "up front" for roads and schools, it will be a looooong time before we see any economic expansion. <<<

OK, I do not disagree with this. If you can borrow at 5 percent and produce a return of 10 percent, then it is smart to borrow. (To yours and Mr. Lounsberry's credit.)

But I think it's important to keep investments and returns in perspective. While the underlying principle may be sound in a growing economy (or for a young nation), it is critical to know when you've passed the point of productive borrowing and entered the realm of borrowing for the sake of survival or maintaining the status quo. Once you cross that threshold, there is only a limited opportunity to reverse course and place oneself on a sustainable footing for the future.

And looking at the literally exponential growth of our nation's total debt over the past 20 or 30 years or so, and then factoring in our nation's demographics and life stage (baby boomers just now entering retirement, the development of a truly global economy where our workers must effectively compete with children from third-world countries, etc.), I can't help but reach the conclusion that we have now passed the point of no return. The point where we are no longer growing or earning our way to prosperity, but are instead simply borrowing today's prosperity (or maintenance of our current status quo) from our future. With a net NEGATIVE return to our children, instead of a positive one. And I'm sorry, but that's not productive borrowing.

Now being unable to sustain ourselves in a world where everyone else has the same advantages we once owned (because we chose to export our expertise in exchange for lower costs of labor and a short-term competitive advantage in the free markets), we are now doomed to failure. We have now borrowed more than we can ever POSSIBLY pay back while realizing a positive return on that investment. We are now borrowing simply to maintain our current lifestyle --- not to improve our future. And we are doing so at the expense of our children.

That's what I fear. That we have now entered the long slide to oblivion, and our leaders have neither the understanding nor the will to stop our demise and save us. At this point, it would require hard choices and sacrifices by many. But none are willing to pay the price. And because of that, we will all die together. All holding each other's hands and singing "kumbaya" as we're flushed down the toilet of human history, along with all those who preceeded us with great ideas but lacking the fortitude to make the sacrifices necessary to realize their fruition over the many centuries it requires ....

:(

Jun 08 01:48 AM

[Poor Dude:]

We live in a world where corporations hire lobbyists to convince Congressmen/Congresswomen to pass laws that benefit them over (and at the expense of) their competitors. And where our leaders do so, in exchange for campaign contributions.

Where our tax laws are so convoluted that not even the people who wrote them nor the people who enforce them have even a clue what the law requires (but where our government will come down on you hard in a heartbeat, should you piss off the wrong federal official or serve as a good example of what "not to do" for the rest of our public).

Where nearly every single elected representative feels it is their solemn duty as an elected official to "bring home the bacon" to their district. (Forget what may be in the "nation"'s best interest.)

Where the vast majority of our population feels they are entitled to a good-paying job, or at least a nice roof over their heads, one (or two?" cars), three radios, two cell phones, a surround-sound home theatre system in HD, free food, and the best of medical care at no cost --- even if they choose not to work. And they get it, in the name of "compassion" or "humanity" or "equality" or "progress". Or whatever.

Where corporate executives and high-flying New York bankers get multi-million-dollar salaries each year, year after year after year, regardless of whether the value of their company's stock has gone up by 10 percent or down by 95 percent. And if they do REALLY badly, they'll get fired and drive off in the company car with a mega-millions settlement and a healthy pension for the rest of their life, while the little old ladies and widows and orphans and average working people who lost their life's savings after investing in them don't get even an apology.

Yep, that's the America we live in today.

And just trust me when I tell you that it's not sustainable, because it isn't. At some point, the producers are going to stop producing. And the hurt and the angry and the homeless and the penniless are going to want blood. And they'll get it.

Jun 08 02:30 AM

[kmarkt2:]

Steve,

Overall, I have been following the state of the US economy over the last 5 years when debt was blownup in the face and Wall Street was cheering on the longest and most robust bull run. I tend to agree with your overall analysis that there is a lot of BS and cover ups here with the recent cheering on Wall Street numbers.

Never would I imagine, with the swipe of the pen, Georgie Bushie and his pal, Hank Paulson forced through more $Bs into the debt machine than one can say: I need to have a toilet break !

An important premise you made about the time value of debt and repayment needs verification - the notion of repayment is an assumption that no longer can be presumed as valid. The bankruptcy filing of Chrysler and GM is a case in point - bondholders are flushed into the toilet. Now, there was a veiled comment by China's President Hu, regarding the need to have fiscal housekeeping in the US to protect the US T-bills value. Question is- will the Treasury do a GM and tell the T bill holders - oops, we are bankrupt now and so, bugger off as we aren't paying the money back ! Consequences ?


On Jun 07 11:09 AM Steven Hansen wrote:

> american in paris
> i moralize about nothing.
>
> debt has to be financed. financing debt drags gdp down. the higher
> the interest rates the higher the drag.
>
> debt is something that is beneficial today and paid for tomorrow.
> if you induce debt to build a dam, the reoccurring benefit of the
> use of the dam is beneficial to your economy while you are paying
> it off. if you induce debt to pay for medicare, you are paying it
> off in the future with no benefit at that time.
>
> think of our debt. when we have to pay it off we are not getting
> any benefit from the debt.
>
> you have decided that our debt has been created because our government
> is doing something about a recession. please show me the portion
> of our current debt which applies to actions of the government to
> mitigate the recession.

Jun 08 03:20 AM

[Blair Dehuff:]

Let's remember just how recently (in the forth quarter of last year) it looked like the entire US financial system was on the brink of total collapse! The banking system looked to be headed for a complete meltdown. The stock market had no bottom. Everything was going down. There was no "safe" place to hide money, except under the bed or by buying treasuries. EVERYTHING looked pretty grim.

Now, fast forward to today (only a few months later). The financial world has not collapsed (or at least it LOOKs like this has been avoided) and retrospectlively there are many Monday Morning Quarterbacks taking pot shots at Government officials. Truth is, massive government intervention was in fact needed to restore public confidence. Although some of this "intervention" can be rightly viewed as "chemo" to save a dying patient, I realize the "poison" which you are talking about is not the short term stimulus which governments have been injecting into the system.

You are absolutely correct that what is poisening the US economy is much, much broader than this and has become ingrained over a long period of time. Only now it is generally being recognized by the public at large (i.e. that there is in fact NO free lunch.) The public is now being FORCED to cut back on spending, and amazingly US citizens are starting to save a little. While this is good, it is a bit too little, and way too late. The system has been poisened for too long, and as you pointed out is still being poisened. Higher taxes are inevitable, one way or another (both legislated and through higher inflation). We, our children, and our grandchildren will have to "pay" (for the free lunch everyone has been enjoying for many years) through a reduced standard of living. There is no way around this, even though we may take steps to reduce or eliminate the poisen in our system.

Jun 08 09:43 AM

[mikesa69:]

Very fine article w/ good insight. The crux of your argument could have been summed up in just two of your words: "bullshit spin", with which I wholeheartedly agree. The rest is just supporting info that, unfortunately, the koolaid drinkers will continue to ignore. This house of cards is getting less stable by the day.

Jun 08 01:09 PM

[Blair Dehuff:]

Steve,

As you noted, one major poison in the system is CEO's who ignore the long term health of the company, and instead focus mostly on current quarterly results and pumping up the stock price. How do we incentivize CEO's to take a long term focus?

Of course, there are many nowdays who would argue that we need poison to fight the poison. Rat poison for CEO's who are paid way too much to care about the company (as in CEO's who get paid 400 times the average worker's salary). When you give CEO's millions in company stock as part of their compenstation, that only reinforces their short term focus and increases their motivation to pump up the stock price, even if it means fudging the numbers.

Maybe this poison can be eliminated only if the entire CEO compenstation structure gets changed (and Boards of Directors start taking some responsibility). Any other ideas?





On Jun 08 09:43 AM Blair Dehuff wrote:

> Let's remember just how recently (in the forth quarter of last year)
> it looked like the entire US financial system was on the brink of
> total collapse! The banking system looked to be headed for a complete
> meltdown. The stock market had no bottom. Everything was going down.
> There was no "safe" place to hide money, except under the bed or
> by buying treasuries. EVERYTHING looked pretty grim.
>
> Now, fast forward to today (only a few months later). The financial
> world has not collapsed (or at least it LOOKs like this has been
> avoided) and retrospectlively there are many Monday Morning Quarterbacks
> taking pot shots at Government officials. Truth is, massive government
> intervention was in fact needed to restore public confidence. Although
> some of this "intervention" can be rightly viewed as "chemo" to save
> a dying patient, I realize the "poison" which you are talking about
> is not the short term stimulus which governments have been injecting
> into the system.
>
> You are absolutely correct that what is poisening the US economy
> is much, much broader than this and has become ingrained over a long
> period of time. Only now it is generally being recognized by the
> public at large (i.e. that there is in fact NO free lunch.) The public
> is now being FORCED to cut back on spending, and amazingly US citizens
> are starting to save a little. While this is good, it is a bit too
> little, and way too late. The system has been poisened for too long,
> and as you pointed out is still being poisened. Higher taxes are
> inevitable, one way or another (both legislated and through higher
> inflation). We, our children, and our grandchildren will have to
> "pay" (for the free lunch everyone has been enjoying for many years)
> through a reduced standard of living. There is no way around this,
> even though we may take steps to reduce or eliminate the poisen in
> our system.

Jun 08 01:43 PM

[aja8888:]

Great article, thanks for the diligent work. I passed it along to my fellow associates at the office. Our engineering firm (privately held LP) is slow from lack of business after 24 years! We had to let an engineer go this last month which is the first time we can remember for lack of work.

Two people I ran into socially this weekend have been put on 32 hour week schedules at their companies (major tech firm and small manufacturing one). Two people in our immediate family have been permanently terminated from their companies in the last 6 months.

In my 40 years of working in industry, I do not recall the employment picture being this poor and getting worse.

Jun 08 03:56 PM

[Carlos Lam:]

On Jun 07 10:44 AM American in Paris wrote:

> The housing bubble took place all over the world regardless of whether
> monetary policy was tight or not. Euro region has a common monetary
> policy, but the real estate bubble was largely concerned in Ireland,
> Spain, and to a lesser extent, France.

I do not know as much about the Euro region's housing bubble, but the explosive mix of loose monetary policy plus a longstanding public policy (and government subsidy) favoring home ownership in the U.S. were the major additives for the housing bubble. If we in America had free banking (i.e. no central bank) then interest rates would truly reflect the cost of borrowing. This would make borrowing more expensive and, as a result, only people who are truly able to purchase (i.e. savers) & maintain homes would be able to buy them. We in American have become used to the artificial booms caused by lax monetary policy, and now we are paying the cost for such reliance.

Jun 11 10:44 AM

[Carlos Lam:]

On Jun 07 10:30 PM E Nuff Sed wrote:

> Where do you get your data? debt/GDP is currently 80%. It was 120%
> during the war. Britain in her peak had a debt/GDP ratio of 240%
> and still was a super-power for another 100 years. Countries are
> not people. They live for ever. When growth resumes debt will take
> care of itself.

1. Where do YOU get the 80% figure? Medicare's unfunded liability is $74 trillion according to its own trustees. The SS unfunded liability is $17.5 trillion per its own trustees. The national debt is about $11.4 trillion per the U.S. Treasury Dep't. The GDP is about $14 trillion per the BEA. When the national debt is added to the unfunded liabilities of SS & Medicare and then that sum is divided by the GDP, the ratio is 735%. The fact is that SS & Medicare MUST be counted as part of the debt. Do you or anybody else really think it's politically possible to force SS recipients and Medicare beneficiaries to take a haircut?

2. You state the countries live forever. That is untrue. The USSR collapsed into many nation-states. The Austro-Hungarian empire is no more. When a particular nation-state is no longer "working," often either secession or internal collapse results.

3. You state that "When growth resumes debt will take care of itself." This is a loaded statement. Even when growth resumes, there is no guarantee that the added revenues will offset the new borrowing that has occurred plus the funds to fund the unfunded SS and Medicare liabilities. Indeed, based on prior behavior, I'd wager that Congress will continue to borrow & spend.

Jun 11 11:08 AM