Tim Mazanec's  Instablog

From the FOMC statement on 12/12/12:

"In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent"

Well kudos to the Fed for being transparent. As one of their largest critics I have been hard on them (and anyone) who states one thing and turns around and does another. This tends to go for anyone near Washington DC.

Remember that back when Bernanke took office he gave speech and after speech on the merits of transparency. It wasn't long after that the tool of transparency got thrown under the bridge and exceptional accommodation and QE took hold. In other words, believe that we are 'doing the right thing'.

Ah, never believe that anyone in DC is just 'doing the right thing'.

But the FOMC has spoken, exceptional accommodation to all (just in time for the holidays) and to all a good night until 6.5% unemployment arrives. (meaning that future Fed speeches should have little relevance unless Bernanke does a U-turn)

Three thoughts on the 6.5% level:

1) Unemployment is not an accurate gauge of the labor force. Most would say that the real unemployment level is between 12% - 18%. 7.7% is a BLS fantasy-land figure.

The participation rate is a better proxy for the labor force. The Fed would do better to watch the percent of people actually taking part in the labor force than the guesstimate work that the BLS does which is heavily skewed by poor seasonal adjustments and their guesstimate on how many people have given up as a job seeker.

2) Per the BLS the unemployment rate oscillated between 4% and 6'ish% from 1994 to 2008 in the US. Those were good economic times. Those are also revised figures. When they were actually announced in real time the figures were higher.

I'm sure that 10 years down the road the BLS will look back and say that 2010 - 2014 were good economic times too and the real rate was actually... well you guess it.

3) What is the level of full-employment?

I remember days when 4% was considered full employment, then it was 5% and some have even called 6% a healthy rate of unemployment.

Is the Fed now stuck in a 4% to 6.5% unemployment range where every tick will force them to adjust policy? Perhaps and why not? In fact we live in a HFT world anyways right? Just change the policy rate monthly, right?

Just wait for those days that the BLS announces revisions or better yet, when they an event, such as a hurricane, impacts our economy and the numbers are double the guesstimate that they usually are and the FOMC acts on false information.

Or are we already back to believe that the FOMC is 'doing the right thing'.

The Fed is guessing. I wish they would focus on the trend from 10% to 7.7% or acknowledge the participation rate that has been declining since 2008 but at least they are moving in the right direction.

Transparency is back, for now.

This report is for your information only and does not constitute investment advice or an offer to buy or sell securities.

Hope springs eternal.

The BLS released the November jobs report yesterday and the markets reacted in typical theatrical fashion. Initially risk surged as more jobs were created last month than dead-beat economists had forecasted. Then risk dipped as the details of the report were actually read and traders scuttled away from their Long positions. By the end of the day the final outcome was the typical trader conclusion of "this report is ok, but it could be better".

Thank you Wall Street for showing up. Without you we would be left with the endless theatre that takes place in Washington DC everyday!

Anyways to the BLS reports. First as I have said before the BLS does a very poor job. Not only with their resources but with their communication as well. If you don't believe then ask the Fed. Why would the Fed bother creating their own economic statistics if the BLS does it for them? Because they are not impressed with the work that the BLS does. Neither should you be.

When examining the NFP report skip the headline numbers. Skip the NFP count and the reported unemployment rate (7.7% yeah right, ask Chicago Fed. President Evans what he thinks of 7.7%, this is a person who is asking for non-stop QE because the job situation is so bad in his district). Skip the debate on how Sandy impacted the report or the typical query such as do August auto shutdowns hit the seasonal adjustments? Skip 'em.

Go straight to the participation rate information. For more see the charts below:

The first chart is titled "Participation Rate" but maybe we should change the title to "Lack of Participation in the US labor force". As you can see we are levels not seen since the late '70s and early '80s.

(click to enlarge)

Next:

We are a bit of a junction here. By the Fed's measure the US economy rebounded over the last few years. Jobs did not, which is why we have 0% rates (proof that they just skim BLS reports before tossing them into the recycle bin).

Thus where do we go from here? Will 2013 bring forward some actual hiring or is the economy about to reverse and reverse hard? Somewhat of a chicken-and-egg scenario, luckily we have leaders in Washington DC who understand this and are working vigorously to stay out of the economy's way. Not.

If you look back to Regan's first term the economy rebounded and jobs followed. Let's hope that this will be the case again.

(click to enlarge)

Finally, Hope:

The chart below shows the Participation rate since the economic top in 2007. It has basically been a straight line downward since. In 2010 there was some hiring, likely related to Obamacare and a few stockbroker jobs, but it has been a bleak time in the labor force.

That said there are certainly signs of a bottom in the chart at current. We've been staggering around a participation rate of 63.7% all year. In November it was 63.6% but it won't take much for it to bounce above the 3 month average and shed some hope. There could be a snowball scenario where once company A hires and engages into something then their competitor company B needs people in order to not to be left behind...

(click to enlarge)

To sum up, skip the headline numbers reported by the BLS. The amount of people participating in the US labor force is currently at multi-decade lows. That said there may be some signs that the labor force might start to improve. We certainly hope so.

This report if for your information only and does not act as investment advice or constitute an offer to buy or sell securities.

The Fed's Capacity Utilization figures were released on Friday, lets have a look:

At first glance the fall in Cap U last month looks as if it is no cause for concern:

(click to enlarge)

On the chart above you can barely notice the deceleration in the economy. But of course we are comparing apples to oranges as 2008/2009 was the crisis. You should be trying to compare the October reading of 77.79 to the figures during the Bush years which mostly hovered around 80.

A level of economic activity at this point looks unreachable.

What does that mean?

Well if you care about the stock market it suggests that some froth needs to be taken out.

(click to enlarge)

Two things stick out from the chart above: 1) There appears to be some premium priced into the stock market that needs to be taken out if the economy continues to weaken. The 77.79 Oct Cap U. reading was the lowest figure since late 2011. The economy is weakening.

2) The spike downward in stocks in mid to late 2011 was primarily cause by the inability of our leaders in DC to balance budgets. Now, not a day goes by where the Fiscal Cliff is not front page material. Failure to make progress in DC can certainly spoil any momentum in the stock market as we have seen.

Of course I'm not going to write a blog without referring to the 1970s. The more and more you look, the more you see the 1970s being repeated.

The chart below is Capacity Utilization, then and now. When we had a larger proportion of manufacturing in the US we were able to bounce back even greater (notice the peak of the axis on the right).

Today we are relying on more public debt creation, Japanese style zero interest rates and countless other alternative measures by the government to help us get back to a level of economic activity where we were just a short while ago.

(click to enlarge)

And at this point it doesn't appear that we are going to get back to the level of economic activity that we enjoyed just a few years ago as the economy turns for the worse.

This report is for your information only and does not constitute investment advice or an offer to buy or sell securities.