Economic Recovery Continues to Stall 21 comments
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Data are what they are. I do not cherry-pick economic releases – I try to analyze all released reports that were issued during the week.
I work at not biasing data – although this is an impossible goal as we all have some degree of bias that escapes into our analysis. My bias is that I want to be the person who makes money – not some hedge fund manager, congressman or Federal Reserve official.
I believe you work with the truth, and cheerleading is left to the segment of our economic community that prefers to get its data distilled through the agenda-distorted main-stream media (Faux and CNBC).
I am an investor, and I want the good, the bad, and the ugly (not just the excellent, the great, and the wonderful).
The Federal Reserve Believes Recovery is Weak
The Federal Reserve's Federal Open Market Committee (FOMC) – the board of directors for America's central bank – also believes there is no “real” recovery occurring presently. Their statement reads, in part:
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
….....In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period
The Fed confirmed it intends to keep purchasing securitized mortgages through 1Q 2010 – and did not announce changes to any of their existing strategies including their deadly zero-Fed-funds-rate policy.
Auto Sales Great For Imported Cars
For the economic and market pumpers, I will put my own positive spin on auto sales:
Car sales were great for imported autos, as domestically-produced auto sales declined last month YoY. October has negative implications for GDP as imports are subtracted from GDP.
Auto sales must be compared YoY because of monthly sales variations. However, this increase in foreign auto sales is a clear buying shift which does not bode well for the jobs market.
It is also not clear whether the volume of car sales is trending up or down because of the cash-for-clunkers distortion which impacted the buying curve. I actually am surprised that the sales were this strong – and this could be good news for the foreign car manufacturers.
Even if American's are unable to create jobs at home, they are able to create jobs for foreign manufacturers with the selection of cars they purchase.
Manufacturing Data Reveals Mixed Picture
September 2009 Preliminary Manufacturers' shipments, inventories and orders shows a mixed picture for manufacturing.
While the sales teams break open champagne to celebrate new orders, manufacturing delivers the profits with their shipments. Shipments come directly off of the plant floor or inventory.
Manufacturing cycles (design, procurement, fabrication, testing, and shipment) span many months. Future profitability is a function of backlog or unfilled orders.
So, when you see unfilled orders contracting, this cannot be considered good news. It is good news when new orders are increasing, but orders are down approximately 20% YoY versus backlog which is down 11% YoY. This 9% gap will either be closed with new orders (where new orders will increase from -20% YoY to -11% YoY) or further decline in unfilled orders and inventory (where unfilled orders and inventory decline from -11% YoY to -20% YoY) – or both (which is what is happening now).
The take here is that manufacturing's unfilled orders have been contracting steadily for the last 12 months. I would have to be on Kool-Aid to spin this as a good thing.
This will continue to reduce revenue – which will continue to cause widening manufacturing contraction and loss of jobs.
This week the Institute of Supply Management released their October 2009 reports on manufacturing and non-manufacturing business. These reports are unweighted subjective opinion whose value is its release over a month before hard data.
I concentrate on two areas in ISM data – new orders and backlog of orders. For non-manufacturing ISM data, backlog of orders is meaningless (what is backlog in a retail store?).
ISM data for manufacturing is suggesting this sector is slightly expanding – but when you compare this to the hard data their opinion is not supported by the facts.
In case you care at this point, an ISM number greater than 50 represents economic expansion.
Non-Manufacturing and Retail Data Shows Signs of Life
The ISM non-manufacturing above is indicating a slight expansion. This is easier for me to believe, and non-manufacturing represents 80% of the economy. However, it is easy for me to discredit the ISM non-manufacturing data also – it is subjective cocktail conversation.
However, October 2009 same store retail sales increased 1.8% YoY. There are not only signs of market stabilization, but of a slight improvement. Data do show a chaotic picture with a broad spectrum of results showing a bias towards value retailers.
Bad News - Jobs (less bad is still bad)
This was a triple jobs week – ADP National Employment Report, the weekly Unemployment Initial Claims Report, and the big BLS jobs report.
ADP said America's employment declined 203,000 in October 2009.
The government's own initial unemployment claims release shows only a marginal improvement in jobs destruction.
For the first time in a half a year, the BLS has properly stated the increase in unemployment – rising 0.4% to 10.2% for the headline U-3. Total U-6 unemployment which includes marginally employed and people which have given up exceeds 17.5%.
The gig was up for the BLS who appeared to compress the surveyed unemployment data to try to fly under the politically significant 10%. But the preponderance of contradictory data became overwhelming (see Chart 1 below) which demonstrated unemployment was significantly higher than admitted unemployment rates.
Chart 2, non-farm payroll above should match the ADP employment data where both BLS and ADP are essentially using the same data base. Variations are caused by the manipulation of the data by the BLS which uses flawed and illogical modeling techniques.
Real unemployment is somewhere between 13% and 20% depending on the methodology used.
While it can be correctly argued that the high unemployment will not prevent the recovery to expand, it is my position that our unemployment situation is a result of the continuing government policies which are creating our recovery headwinds.
It is those policies (excessive globalization, taxation, and regulation) which have created the headwinds - and lack of jobs is one of the symptoms.
Additional Economic Data Released this Week
Consumer credit decreased at an annual rate of 5-3/4% in August 2009. Revolving credit decreased at an annual rate of 13%, and nonrevolving credit decreased at an annual rate of 1-1/2%.
The weekly Mortgage Bankers Association mortgage application data continues to show a downward trend in new mortgage applications and remains at the lowest level since April 2009. And, just to demonstrate the effect of the government and the Fed's interference in the mortgage market, the 30 year fixed mortgage rate decreased to 4.97% while the long term treasuries continued to rise.
The Fed's purchases of the securitized debt cannot be wiped off of the Federal Reserves books without a haircut as the yields even today are lower than market conditions would demand. This haircut literally is evaporation of debt.
Bankruptcies this week: CIT Group, South Texas Oil, Otter Tail Ag Enterprises, Panolam Industries International, Lazy Days’ R.V. Center
Economic Forecasts Published this Past Week
The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index which remains slightly lower than its all-time high. Lakshman Achuthan, Managing Director at ECRI added:
While WLI growth has backed off from a record high, its continued strength promises a stronger U.S. economic recovery than most anticipate.
Hat tip to Steve at MEMETICS & MARKETING™ for editing support.
Hat tip to Princess Cruises for providing internet access for publishing this article.
Disclosures: long MMFs, GLD, short S&P, IOO, PIN, UUP, Physical Gold - as well as numerous puts and calls which comprise less than 3% of my portfolio.
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This article has 21 comments:
of the first ...that the economy is weak. I see many things in the numbers that portend better times. here is one:
We have lost 5.5 million jobs in the last
year of which the last three months we have lost 576,000.In other words
the last three months (25% of the time) has constituted only 10% of the payroll jobs lost.If you look
at Table B-1 of the Establishment Data the the job losses in the last
three months are concentrated in basically four industries Construction,Durable Goods,Retail Trade,Leisure and Hospitality.These
industries make up 31% of the workforce but now constitute 86% of the joblosses in the last three
months.In other words 69% of the workforce is now experiencing virtually no job loss in the last three months.
There are many...here is another one Did you know the inventory to sales ratio is distorted due to the drop in gas prices over the last year a non petroleum based inventory to sales ratio shows much
leaner inventories to sales.....
Another is the increase in temporary help services....a leading
indicator for future job growth...there are many more....
the lead and the headlines are written just before the article goes to bed based on data. i believed this week that the jobs data was going to come in bad - and the market did too based on their reaction.
the economy is weak. you have to spin fly manure to say otherwise. the issue i covered in the jobs report this week was the inconsistency over the last 6 months. I believe that the data contains as many trends not favoring a recovery (like work week numbers or expansion of part time employment) as trends favoring a recovery.
again, when you have to search for good or bad news with a microscope, it is possible that statistical anomalies have created this event. trends over several months are the only way to confirm an expansion is underway.
the inventory to sales ratios in manufacturing and non-manufacturing industries are well above historical trend values - period. i covered this in my article last week.
i am waiting for container counts (TEU's) for october. if the preliminary data is correct - the retail stores do not have historical volumes of goods to sell at christmas.
view of where you stand is incorrect).....
I recommend the author check out the stats for the Architecture field on the BLS site! Unbelievable!
Great work.
One addition to your bank report which came out after you had gone to press, and not a small one:
#120. United Commercial Bank, San Francisco, CA; Assets: $11.2 billion. Loss to FDIC $1.4 billion (est.) - they always save the best for last, must have thought everyone would have gone to bed when they put out this stinker.
It is good to get this all in one place -- with or without commentary -- so we can try to separate the news media fly specks from the rice. I appreciate your compilation for our benefit.
Add me to those who appreciate their data "unspun", so to speak...something you do admirably well. One note on autos, though; F came out of C4C pretty well (justifiably so, imho), and almost all of the major import makers have mfg. operations here, so there might well have been some positive jobs effect domestically. I believe Hyundai is the only major import brand without a US plant (although I vaguely recall reading/hearing they're looking at building one).
Outstanding as usual. I have a comment on your reference to:
"The gig was up for the BLS who appeared to compress the surveyed unemployment data to try to fly under the politically significant 10%. "
The "compression" was a result of the decline in the labor force. In the latest report the labor force declined only 31,000 after losing more than half a million in the three preceding months and almost one million in the past year. When the denominator is shrinking, the fraction stays smaller (lower % unemployment).
Normally, the labor force should expand roughly 1% each year to account for population growth. That would be about 1.5 million more in the labor force each year. But we have gone the other way, down about 1 million. If the labor force had remained unchanged over the last twelve months, the U-3 unemployment rate would now be 11% (not the 10.2% reported). If the labor force had grown by the normal 1% over the past year, the unemployment rate would now be 11.9%.
So, I don't think the BLS has manipulated anything, unless they are deliberately under counting the labor force. That is not something that I think they would want to do because it makes a negative projection of economic activity vis a vis employment. Of course, maybe someone wants to argue the BLS has it in for the current administration. I just don't think that is likely. The BLS may have some shortcomings with some of their models, as indicated by an upcoming correction for under counting jobs losses from March 2008 to March 2009 of 850,000, probably because of modeling corrections such as the infamous Birth/Death adjustment.
In my opinion, the problems with BLS data has nothing to do with lack of integrity. The problems have to do with application of models for data adjustment that work very well in most economic situations but fall apart at certain times. These errors are corrected later, but some of the corrections occur up to a year after the fact.
"Normally, the labor force ......If the labor force had remained unchanged over the last twelve months, the U-3 unemployment rate would now be 11% (not the 10.2% reported). If the labor force had grown by the normal 1% over the past year, the unemployment rate would now be 11.9%."
What are the primary components of the reduction of the labor force? Are undocumented worker repatriations adequately represented? What else?
which is why, among many good reasons, you are such a good dependable read -
thanks!
Is it plausible that two further factors are delaying the recovery, particularly as it relates to employment?
1. The credit crunch and threatened meltdown of the global financial system in the last quarter of 2008 was a unique experience within the adult lifetime of most persons managing companies and investors and created an unaccustomed type and degree of uncertainty in these groups that is slow to lift. The fact that the crunch was ended and meltdown avoided in fairly short order, while welcome, doesn’t alone allay their fears.
2. The nature and extent of fiscal and monetary stimulus that was judged necessary by governments and central banks to end that crunch and avoid that meltdown was itself viewed as unorthodox and risky by many persons managing companies and investors and this also prolongs their sense of deep caution.
Hopefully, if economic stability continues for another couple of quarters confidence will continue to build among managers and investors and this will speed the pace of recovery.
When referring to ‘investors’ above, reference was being made to those prepared to invest in company expansion on a middle or long term basis, not speculators prepared to buy and sell from day to day.
The overpowering hubris and selfish reasoning by those in power must be expunged for any reasonable and constructive action to take place. The spirit and principles set forth by the Constitution must be adhered to and enforced for any chance of a fair recovery to take place. Prosecution and punishment of wrong doing against these very principles must be pursued by the people, for the people. Without such changes the rot from within will continue to infest the system and spread.
I don't think the repatriated undocumented worker will be counted in the "not in the labor force" number. That is determined from the household survey. In order to be counted, someone has to answer a telephone (land line I believe). So, if someone has left the country they can not report that they are no longer looking for work. Someone who is "not in the labor force" is someone who:
1. Is in the 16-65 age group.
2. Is not employed.
3. Is not disabled.
4. Does not declare themselves to be temporarily laid off.
5. Has not looked for work in the past four weeks.
The decline in the labor force in this recession is unprecedented since the end of the Great Depression. It is related to the historic high percentage of jobs terminated that employers say will never be refilled. That is at 56% right now and has never been as high as 45% previously.
I have written about these unprecedented problems in several articles here at SA and at TheStreet.com. We are in a deeper hole than bbro is recognizing.
By the way, I am not blind to possible bright spots. I have an article scheduled to be published tomorrow morning at TheStreet.com, entitled "Glimmers of Hope for Employment" (unless the editors change the title).
On Nov 08 12:54 PM lower98th wrote:
> John, regarding:
>
> "Normally, the labor force ......If the labor force had remained
> unchanged over the last twelve months, the U-3 unemployment rate
> would now be 11% (not the 10.2% reported). If the labor force had
> grown by the normal 1% over the past year, the unemployment rate
> would now be 11.9%."
>
> What are the primary components of the reduction of the labor force?
> Are undocumented worker repatriations adequately represented? What
> else?
You correctly quote the sector payroll loss numbers but the rest of your comment about employment is misleading. The employment loss in the past three months is 1.766 million. The number of non-farm payroll jobs lost in the past three months is 591 thousand. Almost 1.2 million jobs have been lost among the self-employed, 1099 sub-contractors, and full and part-timers working at the margins of the economy. Here are the numbers from the DOL, with the data series IDs:
Total employment (LNS12000000):
Oct 2008 144,657,000
Jul 2009 140,041,000
Aug 2009 139,649,000
Sep 2009 138,864,000
Oct 2009 138,275,000
Employment loss Oct 2008 to Oct 2009 = 6,4000,000
Employment loss for last 3 months = 1,766,000
Non-farms payroll (CES0000000001)
Oct 2008 136,352,000
Jul 2009 131,439,000
Aug 2009 131,223,000
Sep 2009 131,038,000
Oct 2009 130,848,000
Non-farm payroll loss Oct 2008 to Oct 2009 = 5,504,000
Non-farm payroll loss last three months = 591,000
You are correct that only 10% of the payroll losses of the past year have occurred in the most recent three months. But non-payroll job loss has accelerated. There is more uncertainty in the total employment number than in the non-farm payroll number, which I have discussed in another comment (John Mauldin's article today seekingalpha.com/artic... ). However, the differences between the non-farm payroll numbers and the total employment numbers are much larger than the uncertainties involved.
If you look at all the data I suggest that you will be less optimistic.
BTW, I do see some reasons to look for better employment numbers in 2010, as will be published in an article scheduled to be published at TheStreet.com tomorrow. (See comment above replying to lower98th for title.)
On Nov 08 05:00 AM bbro wrote:
> A very impressive analysis but It seems you have a pre ordained view
>
> of the first ...that the economy is weak. I see many things in the
> numbers that portend better times. here is one:
> We have lost 5.5 million jobs in the last
> year of which the last three months we have lost 576,000.In other
> words
> the last three months (25% of the time) has constituted only 10%
> of the payroll jobs lost.If you look
> at Table B-1 of the Establishment Data the the job losses in the
> last
> three months are concentrated in basically four industries Construction,Durable
> Goods,Retail Trade,Leisure and Hospitality.These
> industries make up 31% of the workforce but now constitute 86% of
> the joblosses in the last three
> months.In other words 69% of the workforce is now experiencing virtually
> no job loss in the last three months.
> There are many...here is another one Did you know the inventory to
> sales ratio is distorted due to the drop in gas prices over the last
> year a non petroleum based inventory to sales ratio shows much<br/>leaner
> inventories to sales.....
>
> Another is the increase in temporary help services....a leading<br/>indi...
> for future job growth...there are many more....
thanks for the input in the comment stream. i am on Princess Cruises Tahitian Princess off of India right now and my internet access is not unlimited. Your additional detail you provided into this data demonstrates that there is little good news inside of the jobs report.
I was not clear enough in my comments on the BLS - i do not think anything is sinister in this organization. however, the more you manipulate data, the more focus is put on your rationale for adjusting the data.
i have been outspoken on my belief that data should be released with the unemployment rate based on change in employment / population ratio. it is absurd to monthly try to establish the size of the potential workforce as it is subject to interpretation who actually is a a potential worker.
the survey portion of the jobs report is a waste of our money.
and the establishment data is overly adjusted and should follow the simple methodology of ADP.
versus roughly 50,000 individuals...it is possible the household
survey is the one with the sampling error...
On Nov 08 08:05 PM John Lounsbury wrote:
> bbro - - -
>
> You correctly quote the sector payroll loss numbers but the rest
> of your comment about employment is misleading. The employment loss
> in the past three months is 1.766 million. The number of non-farm
> payroll jobs lost in the past three months is 591 thousand. Almost
> 1.2 million jobs have been lost among the self-employed, 1099 sub-contractors,
> and full and part-timers working at the margins of the economy. Here
> are the numbers from the DOL, with the data series IDs:
>
> Total employment (LNS12000000):
> Oct 2008 144,657,000
> Jul 2009 140,041,000
> Aug 2009 139,649,000
> Sep 2009 138,864,000
> Oct 2009 138,275,000
>
> Employment loss Oct 2008 to Oct 2009 = 6,4000,000
> Employment loss for last 3 months = 1,766,000
>
> Non-farms payroll (CES0000000001)
>
> Oct 2008 136,352,000
> Jul 2009 131,439,000
> Aug 2009 131,223,000
> Sep 2009 131,038,000
> Oct 2009 130,848,000
>
> Non-farm payroll loss Oct 2008 to Oct 2009 = 5,504,000
> Non-farm payroll loss last three months = 591,000
>
> You are correct that only 10% of the payroll losses of the past year
> have occurred in the most recent three months. But non-payroll job
> loss has accelerated. There is more uncertainty in the total employment
> number than in the non-farm payroll number, which I have discussed
> in another comment (John Mauldin's article today seekingalpha.com/artic...
> ). However, the differences between the non-farm payroll numbers
> and the total employment numbers are much larger than the uncertainties
> involved.
>
> If you look at all the data I suggest that you will be less optimistic.
>
>
> BTW, I do see some reasons to look for better employment numbers
> in 2010, as will be published in an article scheduled to be published
> at TheStreet.com tomorrow. (See comment above replying to lower98th
> for title.)
>
> On Nov 08 05:00 AM bbro wrote:
I continue to believe that we are now experiencing a slight economic uptick that will lead to further economic weakness. This type of activity is common during long economic downturns.
With regard to your comment "Real unemployment is somewhere between 13% and 20% depending on the methodology used." I would agree, although I think if one really could delve into the numbers the actual Unemployment Rate would be at least 20%.
Any way one looks at it, the Unemployment situation is severe. For those interested, I just posted a couple of very interesting Unemployment charts to my blog that can be found here:
www.economicgreenfield.../
The number doesn't include everyone that has given up. Only those defined as marginally attached. Table A13 on the BLS site -- the one that shows the increase in people not in the workforce -- lists "people who want a job". I emailed the BLS about this a week ago and was told that "Marginally attached to the labor force" are included in U6 but "Persons who currently want a job" are not. Presumably because, as you say, they have given up and are defined as not looking for work. This represents another 3.3%.