Free Markets, Free People

Economy

Scary Employment Chart of the Day

When it comes to employment, we have dug ourselves a tremendous hole. I will be surprised if unemployment is back to where it was four years from now. This chart gives us all an idea why:

Of particular interest is the path of the last two recessions which had anemic job growth despite relatively shallow initial dips. The recovery period for each far exceeded previous recessions. If we see a repeat this time the V shaped recovery in employment we keep hearing about is not going to happen. So why the difference?

The earlier recessions exhibited a similar pattern of sharp drops in employment followed by sharp recoveries as the economy snapped back. The change that we began to see in the 1990 recession is partly structural. The layoffs associated with the much larger manufacturing sector in recessions of the past were associated with a rundown in inventories which then snapped back once the inventories were depleted.

Something else is going on here as well in my own opinion. As the eighties gave way to the nineties the US was in the early stages of an experiment in monetary and economic policy. Monetary policy was explicitly geared to reduce economic volatility. This led to attempts to reduce the severity of recessions, and also led to a reduction in upside volatility as well. This was (at least for a while) somewhat successful, resulting in what became known as “The Great Moderation.” The recession of 1990 was the first crack in that system. Attempts to limit volatility not only reduced the violence of the recession, but the explosive growth typical after recessions previously. It also was a recession which was a result of a financial crisis (the S&L’s) and the real estate boom of the late eighties. The deleveraging of the finance and debt recession (what we are going through now, only in miniature) was sluggish. It took a good while for the adjustment to occur.

We followed a familiar script of lowering interest rates and encouraging credit expansion. Constant expansions of credit whenever things slowed kept the engine running until a bigger crisis hit with the bursting of the tech and telecom bubble. Once again we applied even more credit easing to soften the blow, and the attempt to avoid wringing the excesses of credit from the system led to another sluggish recovery with anemic job growth. Profits however were large and the return for the steadily growing financial sector was immense. If the economy was going to be stabilized by constant applications of credit expansion, then the financial sector was the main beneficiary. Finally we have the latest crisis, one where the financial system itself was the most important bubble.

What we can now see is that the types of recessions we have been experiencing are successive deleveraging cycles, each “solved” by releveraging the economy and leading to a bigger crisis down the road. Sadly deleveraging processes, especially if drawn out by keeping them from running their course, result in tepid job growth. We are now in a massive deleveraging cycle which we are once again trying to solve by adding massive debt to the system. Once again job growth and recovery is slower. Unless we break this cycle (which would be very painful) we should expect nothing different in the outcome, except that the problem is bigger and will last longer.

Cross Posted at: The View from the Bluff

CBO: Obama budget deficit 9.8 Trillion over next 10 years

How can you tell when claims of budget hawkishness and fiscal responsibility are all talk and no walk?  When you put deficit commissions together with no power and propose trillion dollar a year deficits for the next 10 years as the Obama administration has:

A new congressional report released Friday says the United States’ long-term fiscal woes are even worse than predicted by President Barack Obama’s grim budget submission last month.

The nonpartisan Congressional Budget Office predicts that Obama’s budget plans would generate deficits over the upcoming decade that would total $9.8 trillion. That’s $1.2 trillion more than predicted by the administration.

Any idea of where we’d get the money? We certainly don’t have it. And if you guessed China, et. al., yes, you’re right – for all intents and purposes we’d become a wholly owned subsidiary of the PRC.

The new report predicts that debt held by investors, including China, would spike from $7.5 trillion at the end of last year to $20.3 trillion in 2020. That means interest payments would more than quadruple — from $209 billion this year, to $916 billion by the end of the decade.

So, we’d be paying almost a trillion a year in interest (with even more money we don’t have). You can imagine what a debt like that would do to us, not only the economy but in terms of national security.

The deficit picture has turned alarmingly worse since the recession that started at the end of 2007, never dipping below 4 percent of the size of the economy over the next decade. Economists say that deficits of that size are unsustainable and could put upward pressure on interest rates, crowd out private investment in the economy and ultimately erode the nation’s standard of living.

And is the White House concerned? Well, other than lip service, it has moved decisively to address the problem /sarc.

“While the president is intent on ramming through Congress a new trillion-dollar health-care entitlement, he appears far less concerned with addressing the looming crisis of entitlement spending already on the books,” said Rep. Paul Ryan of Wisconsin, the top Republican on the Budget Committee. “Instead, he delegates this task to a ‘Fiscal Commission’ — which would not even report until after the next election.”

Other than make recommendations, the “Fiscal Commission” has absolutely no power. And the White House has shown no real interest, other than the usual lip service, in addressing the huge deficits projected for the next 10 years. I’ll be interested to see if the White House continues to treat the CBO’s reports as the gold standard after this one saying the administration has proposed an even higher debt than it claimed.

And, of course, one of the rather large points is the effect of having countries like China holding 20 trillion in US debt instruments and the amount of control that grants such countries over what we can or can’t really do – economically, in foreign policy, militarily, etc. That much debt becomes a weapon, whether the administration or others want to admit it or not. It’s an economic bomb and detonating it would have a profound negative effect on us and our economy and our enemies know it. It reminds me of the saying about how a capitalist will sell you the rope by which you hang him. That’s precisely what we’re doing with this debt problem and our desire to spend what we don’t have.

The time for a sane fiscal policy which cuts spending and the size and scope of government is long past due. And even if the politicians don’t recognize it yet, it is the public’s understanding that the time has come that is driving this discontent manifested in the Tea Parties and the overwhelming “wrong track” majorities to be found in polls which track whether or not people believe the country is on the right track or the wrong track. Democrats thought the public believed the country was on the wrong track during the last administration because of Bush. But after a year of Obama, those same numbers are even higher.

The people may not really like the fact that such measures must be taken, but they are prepared for them. They understand that this spending addiction, if continued, has no acceptable outcome and that the longer it continues the worse the outcome will be.

Step one is getting sanity back into the federal budget. And adding 9.8 trillion to an already huge debt while pretending to be concerned about deficit spending isn’t how that is done.

~McQ

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Unemployment: Let’s get real

Poor Harry Reid.  You can understand why Rush Limbaugh calls him “Dingy Harry”.  For a public servant of many decades who is supposedly practiced in the art of public speaking, he sure can mess it up.  Today I assume he was trying to tell us that the 9.7% unemployment rate that the government claims and the number of unemployed reported this week didn’t go up as high as expected.  This is how it came out:

“Today is a big day in America. Only 36,000 people lost their jobs today, which is really good,” Reid said Friday on the Senate floor.

I’m sure those 36,000 are just happy as can be about that, Mr. Reid.

But as most informed folks know, that 9.7% figure doesn’t really reflect the full extent of unemployment.  The government’s “U-6″ number is much closer, but isn’t used because – well, take a look and you’ll figure it out for yourself:

The U.S. jobless rate was unchanged at 9.7% in February, following a decline the previous month, but the government’s broader measure of unemployment ticked up 0.3 percentage point to 16.8%.

Despite the Obama administration claim today that those measures they’ve put into place appear to be working, the U-6 says otherwise:

The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.6 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

Here’s the key and a reason you should take all this happy talk with a grain of salt:

A U-6 figure that converges toward the official rate could indicate improving confidence in the labor market and the overall economy. This month pushes convergence even further away.

And it “pushes convergence … away” by a significant amount.

One of the things to be wary of is the administration will start believing its own press and at the first sign the U-3 begins to dip, figure it can begin to further its tax and spend agenda. Until you see the U-6 headed in the same direction as the U-3 and showing significant drops, nothing is getting better on the employment front. And until that happens, the recovery is not going to “take off”.

~McQ

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“Unexpectedly” Bad Employment Statistics

The Employment Situation statistics are due out later this week.  They will be bad.  I know this, because Larry Summers is already spinning them.

White House economic adviser Larry Summers said on Monday winter blizzards were likely to distort U.S. February jobless figures, which are due to be released on Friday.

“The blizzards that affected much of the country during the last month are likely to distort the statistics. So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends,” Summers said in an interview with CNBC, according to a transcript.

So, please, when you see the numbers of Friday, be sure you don’t assume that they have any policy implications.  It’s all about the weather, you see.

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The Economy: Most likely lower GDP growth, higher unemployment, flat spending in 1st quarter

Take all of the forecasts with a grain of salt given the “unexpectedness” of most economic numbers, but this gives a hint as to what to expect and it also explains why the last quarter’s GDP numbers were an illusion of growth, not the beginning of a growth trend:

The US economy continues on a bumpy road to recovery. Weaker data this week on consumer confidence, jobless claims, housing, and durable goods orders have introduced downside risks to our near-term economic outlook. We have made some minor adjustments to our GDP forecast. Fourth quarter GDP was revised up to 5.9%, with the inventory swing now accounting for 3.9 pp of growth, up from 3.4 pp. We think this “steals” some growth from 1Q. In addition, core capital goods orders and shipments were weaker than expected in January, so we are lowering our forecast for 1Q GDP to 1.5% from 2.0% previously.

1.5% growth isn’t a particularly auspicious number for those claiming we’ve “turned the corner” and are out of the recession and on a positive growth trend. It should be remembered that the last positive growth quarter before December was driven mostly by “cash for clunkers” or government spending. The 4th quarter of last year was driven by restocking inventories. Without it, the GDP is at 2%.  Unless there are consumption increases which will work to decrease those inventories, the growth for that quarter is an anomoly much like the GDP increase driven by cash for clunkers.

With consumer confidence down, housing and durable goods orders down and jobless numbers up, it doesn’t speak for an auspicious start to the year.

This next week will see some other numbers come in. If the forecasters are right (big if), then its going to be more bad news on the employment front:

The consensus is for a net loss of 50 to 80 thousand payroll jobs, and the unemployment rate to increase slightly to 9.8% (from 9.7%).

Today’s Personal Income and Outlays report (PCE) is mixed:

Personal income rose $11.4 billion, or 0.1%, less than the 0.4% expected, while personal consumption expenditures rose 0.5%, ahead of the 0.4% increase expected: So income’s rising slowly, but Americans are still spending more than expected.

The PCE index for the month posted a 0.2% increase, most of that because of energy and food; absent those items, the PCE index rose less than 0.1%, the report showed.

So the PCE index saw a slight increase above expectation but that was driven by necessities (food, energy) not the consumption of goods.

The ISM Manufacturing index released today also disappoints:

Activity in the manufacturing sector expanded for the seventh consecutive month in February, according to a report released by the Institute for Supply Management on Monday, although the pace of growth slowed by more than economists had been anticipating.

The ISM said its index of activity in the manufacturing sector fell to 56.5 in February from 58.4 in January, with a reading above 50 still indicating growth in the sector. Economists had been expecting the index to show a more modest decrease to a reading of 58.0.
Activity in the manufacturing sector expanded for the seventh consecutive month in February, according to a report released by the Institute for Supply Management on Monday, although the pace of growth slowed by more than economists had been anticipating.

The ISM said its index of activity in the manufacturing sector fell to 56.5 in February from 58.4 in January, with a reading above 50 still indicating growth in the sector. Economists had been expecting the index to show a more modest decrease to a reading of 58.0.

While snow is being blamed for some of the decline, but only in its depth, not the fact that there was a decline.

And the final Monday report is the Construction Spending Report for January was released:

Spending on U.S. construction projects fell at a seasonally adjusted rate of 0.6% in January, the third consecutive month of declines, the Commerce Department estimated Monday.

The decline in January was wider than the 0.5% drop that economists surveyed by MarketWatch had been expecting. December’s outlays fell an unrevised 1.2%.

In January, private residential outlays rose 1.3%, while private nonresidential outlays fell 2.1%. Public outlays also fell, off 0.7%.

During the rest of the week, you’ll see the following:

On Tuesday, the various manufacturers will release light vehicle sales for February. The consensus is for a decline to about 10.4 million on a Seasonally Adjusted Annual Rate (SAAR) basis from 10.8 million in January. Sales for Toyota will be closely watched. Also on Tuesday, the Personal Bankruptcy Filings estimate for February will be released.

On Wednesday, the ADP Employment report and ISM Non-Manufacturing index (consensus is for a slight increase to 51% from 50.5%), and the Fed’s beige book will all be released.

On Thursday, the closely watched initial weekly unemployment claims, productivity report, factory orders, and pending home sales will all be released.

And on Friday, the BLS employment report, Consumer Credit (more contraction), and another round of bank failures (I’m thinking Puerto Rico will make an appearance).

The good news, if there is any, is that inflation expectations haven’t really reared their ugly head to this point, meaning right now inflation is under a modicum of control and not rising appreciably. Of course that could literally change in a heartbeat, so other than to note it and be glad for the fact, I have no idea how long those expectations will remain dormant.

Bottom line – we’re bumping along the bottom and hopefully we’ll see a meaningful turnaround sometime this fall. But right now, anyone saying things are going well and we’re fully into recovery doesn’t realize how fragile the economy is right now and certainly doesn’t know what they’re talking about.

~McQ

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At what point does the media drop “unexpectedly” from its unemployment stories?

I mean, for heaven sake, it seems that weekly the “experts” are surprised by an “unexpected rise” in unemployment statistics.  This week was no different than the “unexpected rise” last week:

Unemployment claims filed last week rose unexpectedly, coming in at 496,000, up 22,000 from the previous week.

Taken with other discouraging news released this week — record-low January new home sales and a slide in consumer confidence — the new jobless claims number describes a slow and uncertain recovery.

Forecasters had expected 460,000 new jobless claims to be filed last week

The four-week moving average of new jobless claims — which smooths out volatility in the week-to-week numbers — rose 6,000 to 473,750.

Key phrase – “slow and uncertain recovery”. So a continued “rise” in unemployment, even to this weeks actual numbers, shouldn’t be “unexpected” in such a recovery. Why it is so important to predict what the next week’s unemployment stats will be anyway? As often as they’ve been wrong and seen “unexpected” numbers you have to wonder why they even bother. More significantly, given the track record, you have to wonder why the media even bothers with their numbers. The numbers are what they are. From those numbers we should be able to understand the condition of the economy. But I’m tired of seeing “unexpected” numbers every week treated as some sort of surprise by a group whose credibility was shot a long time ago.

~McQ

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It’s Bush’s Fault. And Paulson’s. And Bernanke’s. And ….

John McCain, under attack for his part in approving TARP, is now claiming he was “misled”:

In response to criticism from opponents seeking to defeat him in the Aug. 24 Republican primary, the four-term senator says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis
, the housing meltdown.

“Obviously, that didn’t happen,” McCain said in a meeting Thursday with The Republic’s Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. “They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street – I guess it was trickle-down economics – that therefore Main Street would be fine.

Well one reason it wasn’t used only for the “housing meltdown” is because the law apparently didn’t specify it must be. Consequently one has to conclude it was McCain and those who wrote the law and voted for it who are responsible for what happened.  They a wrote bad law.  They fell for the drama.  They threw almost a trillion dollars out there and are now complaining that it wasn’t used as they “thought” it would be used.  Really?

If they were going to pass this travesty anyway, why wasn’t it limited to what the people who brought the problem to them (Paulson and Bernanke) said constituted the problem?  How did it end up bailing out auto companies and AIG?

Bad law.  And the ones responsible for writing th law include this guy trying to pass of the blame to others.

Secondly, there’s this:

McCain said Bush called him in off the campaign trail, saying a worldwide economic catastrophe was imminent and that he needed his help. “I don’t know of any American, when the president of the United States calls you and tells you something like that, who wouldn’t respond,” McCain said. “And I came back and tried to sit down and work with Republicans and say, ‘What can we do?’

Responding is one thing. But when your constituents are dead set against it, to whom should he really be responding? Well, who does he supposedly represent?  What McCain is really saying is “when the president tells you he wants you to pass a bad law, you salute and do what he says”.  Really?  “Response” apparently means saying ok to unconstitutional spending.  Not that Mr. McCain/Feingold has much use for the Constitution.

So, bad law, ignoring his constituents and now blaming others.

Sounds like a pretty typical politician who has spent way too much time inside the beltway to me – a politician well past his “incumbent expiration” date.

~McQ

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Greece? Just Like The US

You have to wonder how far we’ve slipped when the financial wreck that is Greece is assured that its situation isn’t so unique – look at the US.  And the example is made by none other than America’s best friend – Vladimir Putin:

Russian Prime Minister Vladimir Putin played down Greece’s economic woes on Tuesday, telling his visiting Greek counterpart that the United States were no better than Greece in handling its debt and fiscal deficit.

“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe,” Mr. Putin told a news conference after talks with George Papandreou. “It came to us from across the ocean,” he said in a clear reference to the United States.

“There (in the U.S.) we can see similar problems – massive external debt, budget deficit,” Mr. Putin added, suggesting Russia and Greece should concentrate on the “real economy” to weather the economic crisis.

It’s not clear what the “real economy” means. However it is clear that for Greece and the US, what they are doing isn’t sustainable and at some point the “real economy” or at least the laws of economics are not going to be denied – for both countries.

~McQ

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House “Jobs” Bills – Addiction To Pork Wins Over Fiscal Responsibility

You remember the headlines Senate Majority Leader Reid got last week when he threw out a bipartisan jobs bill effort crafted by Sen’s Baucus and Grassley with a price tag of about $100 billion for a very scaled down version costing$15 billion?

Not to worry – the House’s version of the job bill is much more like the Baucus/Grassley version than the Reid bill – and even more. In fact it comes in at 10x times the Reid bill and has the usual cornucopia of porky spending and subsidies for perpetual money losing programs we’ve all come to expect from our out-of-touch legislators. This list is classic – subsidies for programs of marginal worth with many completely unconnected with jobs or job creation as well as the usual unemployment benefit extensions. And don’t forget the Medicare “doc fix” – critical to creating jobs [/sarc] – which also finds its way into the bill. Here’s the list:

* $27.5 billion for roads and bridges
* $8.4 billion for public transit
* $800 million for Amtrak
* $500 million for airport improvement projects
* $100 million for maritime interests
* $2.1 billion in Clean Water funding
* $715 million for Army Corps of Engineers projects
* $2 billion in Energy Innovation Loans
* $4.1 billion in School Renovation Grants
* $1 billion for the National Housing Trust Fund
* $1 billion for the Public Housing Capital Fund
* $23 billion for an Education Jobs Fund for states
* $1.18 billion for law enforcement jobs
* $500 million for firefighters
* $200 million for AmeriCorps
* $500 million for Summer Youth Employment programs
* $300 million for the College Work Study program
* $270 million for Parks and Forestry Workers
* $750 million for competitive grants in “High Growth Fields”
* $41 billion to extend expanded jobless benefits for six months
* $12.3 billion to extend COBRA health insurance aid for jobless workers
* $354 million in Small Business Loans
* $2.3 billion in expanded Child Tax Credits
* $305 million to keep certain people eligible for federal aid programs
* $23.5 billion to extend a higher federal match for some Medicaid payments to doctors

If you carefully peruse the list you realize this is “Stimulus II” and will have just about the same effect “Stimulus I” – drive us into a deeper debt hole and create nothing in terms of jobs.  Small business creates about 80% of the jobs in America.  The $150 billion bill sets aside $354 million for Small Business Loans.  $354 million.  Even Summer Youth Employment programs got more.  Yup – a real “serious” jobs bill.

A poll today said that only 6% of Americans believe the $787 billion stimulus bill (which was promised to keep unemployment down to 8%) has had any positive effect whatsoever in creating jobs.  It should be clear that such messages from the unwashed masses has still yet to penetrate the “clueless bubble” many members of the House continue to live under inside the beltway.

~McQ

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Musings, Rants and Links over the 18th Fairway: February Housing Edition

On the heels of last weeks delightfully mixed bag of employment data (job creation looks like it may be out of reverse and into neutral) we get some new housing data. There the signals are more disquieting, if expected (at least by me.) The housing market may now be heading back down.

The interesting aspect of this is that so many people see this as unlikely. So let us list some reasons why this is a real risk, if probably not as rapid a fall as we saw previously.

  • Prices are still above a long term stable level. This could be taken care of by stagnating prices and inflation, but there is little inflation right now.
  • The price to rent ratio is out of whack, and rents are still falling, in fact, accelerating. Little wonder, since there is an 11% vacancy rate.

Source: Gary Shilling

  • There are 231,000 newly built housing units sitting vacant.
  • There are 3.29 million vacant homes for sale.
  • Then there is the shadow inventory of homes that are off the market for various reasons (such as foreclosed homes banks are unwilling to sell yet to avoid realizing losses.)
  • Defaults are accelerating, with the largest source of pain now prime loans. As I have maintained for a long time this is not, and never has been, a subprime problem. Subprime was just what collapsed first being the weakest link in the housing market.

Source: Gary Shilling

  • That acceleration is unlikely to slow any time soon as not only are workers still losing jobs and few new potential owners getting jobs, but the length of unemployment is unprecedented in the post war era. The longer a worker is unemployed, the more likely they are to default.

Source: Gary Shilling

  • Lending is still tight for many mortgage seekers.
  • We are forming households at a reduced rate, thus lessening demand for new homes.

Source: Gary Shilling

  • More than 20% of homeowners are currently underwater. Nothing correlates more closely with default rates than negative equity.
  • Worst of all, we need to revisit an old topic of mine that is no longer a longer term risk, but right around the corner. The likely huge wave of defaults represented by Alt-A and Option Arm Loans about to reset. Defaults have followed with a lag each wave of resets, and the largest wave, from the era with the worst underwriting is about to hit. Notice, subprime is receding. With the system as fragile as it is now, what will this wave bring on?

I always am nervous about calling anything a prediction, but further housing deterioration is a very grave possibility.

Needless to say, this has led to further problems at Fannie, Freddie with more to come. Not that you should be concerned about that, the mission has changed. On their way to probably 400 billion in losses (I remember when I was an alarmist claiming that the losses would be far more than the 20-30 million the government was claiming, probably 200 billion. It turns out I was a cockeyed optimist) the government has officially eliminated any limit on their exposure. Why? It seems to be so that they can take losses!

Freddie’s federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn’t likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.

On a recent afternoon, employees at Freddie’s headquarters here peppered Mr. Haldeman with concerns about the company’s future. He responded that they were “fortunate” to have such a clear mission—the government’s foreclosure-prevention drive. “We’re doing what’s best for the country,” he told them.

Then there is the poor FHA:

FT Alphaville is certainly in the skeptical camp referred to by Ms Burns, and we were not reassured when the housing agency released its December monthly report on Tuesday.

According to the report, the default rate in the FHA’s single-family portfolio hit 9.12 per cent in the fourth quarter of 2009, compared with 6.82 per cent in the same period a year prior.

In absolute terms, that means the number single-family mortgages insured by the FHA and in default reached 531,671 in the fourth quarter of 2009. That’s a 66 per cent increase versus the same period in 2008.

The agency is being hit hardest by the 2007 and 2008 mortgage vintages; the performance of these loans is so dismal the FHA expects to have to pay claims on at least one out of every four loans made in those years.

Cross Posted at: The View from the Bluff