The worst things get, the more they stay the same.
As the stock market continues to set records, the latest Philadelphia Fed Business Outlook Survey shows that the business outlook for manufacturing is weakening. Of course, that could help continue to boost the market, since it gives The Fed an excuse to continue its quantitative easing.
All I want for Christmas is a new economy. Ours is broken.
While there are a few positive signs that optimists can latch onto, it appears that either the country will go over the fiscal cliff or virtually no cuts will be made in the $3.8 trillion federal budget. If nothing else, current spending should prove that Keynesian economics doesn’t work. With a fourth consecutive deficit exceeding $1 trillion, optimists take as good news a drop in the unemployment rate from 7.9% to 7.7%. Considering the federal spending that has taken place in recent years, wouldn’t the economy be booming now if Keynesian economics really worked?
In November, 146,000 new jobs were added, exceeding expectations of 85,000, according to the Bureau of Labor Statistics (BLS). In spite of Sandy, according to the BLS, the unemployment rate declined to 7.7% from 7.9%. However, these preliminary figures could be more BS from BLS. Final BLS job figures for September and October were revised downward by 49,000 jobs. You may recall that the BLS stats brought the jobless rate below 8% just in time for the election. We’re betting that when final stats are released, the number of new jobs will not have to be revised upward.
Those cheered by the latest job figures can always find a black cloud in the silver lining by visiting Zerohedge.com, which correctly points out: “What is certain is that the broader mainstream media will continue to focus purely on the quantitative aspect of the report, while the real story over the past 3 years has been a qualitative one: a shift to lower paying jobs, a painfully slow (if any) rise in average hourly earnings, a transformation of the US labor pool to ‘Just In Time’ inventory as virtually all new hiring needs are met by temps, and finally a secular shift to an older labor force, as job creation in the 25-54 category since January 2009 is still negative!”
The biggest driver of the U.S. economy is consumer spending. Over the past four years, income for the average consumer has dropped by about $4,000. While the inflation rate has been relatively tame, prices for basics such as food and oil have increased significantly. On top of this, going over the fiscal cliff would cost the average household nearly $3,500 in new taxes, according to BloombergBusinessWeek.
So consumers need to lift the economy while taking a $7,500 hit to their incomes and paying more for essentials. The only way that will happen is if consumers use the federal government as a role model and spend more money than they earn. Lots more.
Merry Christmas, indeed!
“Been down so long, it looks like up to me.”
Furry Lewis
This is what passes as positive economic news these days: The Institute for Supply Management’s (ISM) reported Thursday that its index of purchasing managers edged up to 51.7% from 51.5% in September.
Wow! A whole 0.2% gain!
Yet it was positive enough to send the Dow Jones Industrial Average up 1% (136.16 points) yesterday, in the last Thursday before the Presidential election.
It was the biggest gain since the latest round of quantitative easing (QE3) was announced on Sept. 13, 2012 – but it doesn’t erase the market drop that has taken place since then.
The gain in the ISM index is up from a three-year-low of 49.6% in August and it’s better than the 50.5% index projected by economists in a MarketWatch survey.
But put the figure in perspective. Any number above 50% signals expansion, while a number below 50% means contraction. Whether the number is 51.7%, 50.5% or 49.6%, it signals that the economy is standing still. Statistics have a margin of error, which renders a gain or a loss of 0.2% meaningless.
Let’s assume, though, that the trend is upward. After all, ISM’s new order index, which is based on future sales, moved up from 52.3% to 54.2%. If the growth rate for September continues, after five months, the index could reach 51%!
That’s about as exciting as the 2.1% growth in gross domestic product (GDP) that we reported last week.
Economic Data Doesn’t Create Jobs
Speaking of meaningless statistical changes, the bigger news, reported today, is that the unemployment rate ticked back up to 7.9% from 7.8%.
Just last month, the U.S. Bureau of Labor Statistics, amid a great deal of skepticism, announced that the unemployment rate had fallen below 8% for the first time in nearly four years. So much for positive trends.
Many even viewed the latest data as positive news, as 171,000 new jobs were added in October, which is higher than the expected 125,000 new jobs. Regardless, there are not enough new jobs being created to make a dent in the unemployment rate.
As with the ISM index, it doesn’t matter much whether the jobless rate is 7.9%, 8.1% or 7.8% — especially given that it counts part-time workers as being fully employed and doesn’t include people who have given up looking for work.
The take away from this is that too many people have been out of work for a long, long time, and that stimulus programs, monetary policy and other government efforts have done little to change that.
With the election season in full swing, dominating the airwaves, Internet and print media, you may have missed some of the other news from the past week. Here are a few lowlights:
What Recession? We recently reported that the unemployment rate miraculously improved to under 8% just before the election. Now, according to a preliminary report, annual growth in gross domestic product (GDP) is miraculously above 2%.
An unemployment rate under 8% is none too impressive and neither is a growth rate of just above 2%, but we live in times of low expectations – and these benchmarks, if achieved honestly, would indicate that the economy is moving in the right direction.
But have they been achieved honestly? And are they accurate?
According to zerohedge.com, over one third, or 0.71% of the growth was contributed by an increase in “Government Consumption:’
“This was the biggest rise in government spending in 3 years, and only the first contribution by Uncle Sam to its own GDP print since Q2 2010. So in much the same way as the September jobs print soared courtesy of government employee hiring, this same government is now juicing its own numbers to make itself look better.”
Recall that Q2 GDP was revised down from 1.7% to 1.25%. Revisions to Q3 GDP will be released after the election.
As for the unemployment rate, none other than former GE CEO Jack Welch questioned the employment numbers in a Wall Street Journal op-ed. Even if you accept the numbers from the U.S. Bureau of Labor Statistics, gains were in “involuntary part-time” help – meaning people who were looking for full-time work are now flipping burgers to make ends meet.
Because the unemployment rate excludes those who have stopped looking for work and includes those who are underemployed in part-time jobs, others put the real unemployment rate at 14.7%. An analysis by The Wall Street Journal, which factors in historical shifts in the labor market, puts the rate at 9.3%.
Whatever analysis you accept, many Americans are still out of work and economic growth is well below what it should be.
Muni Massacre. Moody’s Investors Service cut its credit ratings on more than $200 billion worth of municipal bonds through the first nine months of 2012, exceeding the total for 2011 – and “there’s no end in sight.”
Moody’s cites increased risk because of the “difficult economic and industry environments.” And we thought the economy was improving!
Stimulus spending. If government spending does, indeed, stimulate the economy, we should now be growing at a record pace. U.S. debt has reached $16.6 trillion, while total GDP is $15.76 trillion. In other words, debt exceeds GDP by 2.4%.
Lower Profits, Home Building. The stock market’s performance continues to be erratic at best, reflecting economic data that one day sounds hopeful and the next day sounds hopeless.
Profits have been generally disappointing, as previously reported, but at least the housing market has been rebounding, as we announced last week. However, anyone who jumped into homebuilders’ stocks to take advantage of the improving market would have to be disappointed by this week’s performance, as the SPDR S&P Homebuilders ETF dropped 1.2% this week.
The ETF dropped because the National Association of Realtors (NAR) reported that the speed of growth in housing sales decreased last month.
NAR Chief Economist Lawrence Yun said, “Home contract activity remains at an elevated level in contrast with recent years, but currently appears to be bouncing around in a narrow range. This means only minor movement is likely in near-term existing-home sales, but with positive underlying market fundamentals they should continue on an uptrend in 2013.”
Sorry for being such an optimist last week!
The unemployment rate has finally dropped below 8% to 7.8%! Or has it? Really?
The latest numbers are a head scratcher. The Bureau of Labor Statistics (that’s BLS, not BS) reported that only 114,000 non-farm payroll jobs were added in September. That’s well below the 206,000 increase in the working age population.
As we’ve previously reported, the overall unemployment rate has been dropping not because new jobs are being created, but because many people have stopped looking for work or are underemployed in part-time jobs.
Yet the BLS reported that 418,000 people were added to the labor force in September. So how can the unemployment rate fall when the number of people added to the labor force is nearly four times the number of new jobs created?
Have hundreds of thousands of people suddenly become farmers, in which case they wouldn’t be included in the stat? That’s not it.
The BLS explains that, “The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.0 million in August to 8.6 million in September. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.”
In BLS-speak, people who are underemployed – i.e., all of those new involuntary part-timers — are counted as being fully employed and those who have given up looking are not counted as being unemployed.
Still, a sudden jump of 600,000 part-time jobs in a month is hard to believe, as it is inconsistent with previous months.
Is progress finally being made on the employment front? Or is it just convenient to the Presidential election that the unemployment rate has finally fallen below 8%?
As one analysis put it, “how do you have a 600k jump in part-time employment in just one month before the beginning of retail season with nobody realizing it until the BLS published today’s report?”
Even if the unemployment rate has indeed dropped to 7.8%, as the BLS reports, keep in mind that the drop is to the commonly reported U3 rate. The broader U6 rate, which includes those who had stopped looking for work is at 14.7%.
So The Fed is “all in.” QE3, the third round of quantitative easting, will continue until the unemployment rate drops to an acceptable level.
The implication is that buying bonds will improve the unemployment rate, which has been over 8% for a record 43 months. Yet if unemployment remained high after QE1, QE2 and Operation Twist, why should QE3 be any different?
The unemployment rate, of course, is bound to drop sooner or later. When it does, will The Fed take credit and claim that QE3 is the reason?
Granted, this round of QE is different from the others, as The Fed will be buying $40 billion worth of mortgage-backed securities a month.
Added to existing bond buying, that will come to $85 billion a month through the end of the year. If unemployment doesn’t drop, the Fed said it will buy even more bonds!
So we’ve come full circle since 2008, when the financial system nearly went bust by … investing in mortgage-backed securities.
Want to reduce the unemployment rate? Stop looking for a job.
More than 300,000 workers dropped out of the labor force in August, while employers added just 96,000 positions.
In the bizzaro world of Washington, D.C., that cut the unemployment rate from 8.3 percent to 8.1 percent.
Now if we can only get a few million people to stop looking for work, we can achieve full employment!
An unemployment rate above 8% is no longer news – it’s been above 8% for 41 months, which is the longest streak since the Great Depression.
However, during the Clinton Administration the federal government narrowed the definition of unemployment. Add back in those who have given up looking for work or who are underemployed in temporary or part-time jobs and the unemployment rate becomes 14.9%.
That’s not as bad as Spain, Greece or Italy. But it’s certainly not good news.
Yet President Obama called it “a step in the right direction.”
It’s true that the economy added about 90,000 jobs in June, up from just 77,000 new jobs in May, but the U.S. labor force grew by 189,000 people, or twice the number of jobs created. Overall, the official unemployment rate remained unchanged at 8.2%.
Job creation at this rate is a “step in the right direction,” only if your intent is to step off of a cliff.
