unemployment

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Unsound Bites

It’s been a long day. So at first I thought I must have misunderstood the meaning of today’s Republican prevention of action on unemployment. I didn’t. And that’s sad because it was stupid. Here’s the unsound bite:

The GOP is trapped. The payroll tax cut introduced a while back is up for renewal. In general the Republican caucus objects to its renewal. The Democrats want to re-up the cut in order to avoid what would, in effect, be a tax increase on the very people most likely to benefit from some extra cash in hand. In the spirit of austerity – yes I know it’s a dumb spirit, but Washington is awash with dumbness right now – the Democrats have sneakily suggested that the continuation of the payroll tax cut should be offset for budget purposes by a tax hike for very high income earners.

This is the kind of thing the voters continually say they support.

It is also the kind of thing that the Republicans continually object to. They, as we are all painfully aware, want no tax hike of any sort. Not even on the very top income earners who have recently been dubbed job creators to distinguish them from the rest of us who, apparently, don’t generate jobs. Even with all that cash we spend at the local store.

It can get confusing for those keeping score, because many of these job creators work in finance and are engaged in firing workers in order to create shareholder value in the companies that they have recently taken over. But that’s not today’s story.

Faced with with both a loss of face in the eyes of the voters, who would appreciate action in Washington, and insurrection in their own ranks by hard liners who want to protect these so-called job creators from socialist inspired tax hikes – the right has taken to calling taxes a forced expropriation of wealth, which is odd since this is a democracy and no guns are involved, but, hey, what do I know? – the rRepublican leadership has come up with a daring scheme to boost jobs.

It will go along with the continuation of the payroll tax cut, and thus support stimulus, but wants the budget offset to come, not from a tax hike on its job creator buddies, but from a reduction in the Federal government workforce.

That’s right.

We are going to boost jobs. By cutting jobs.

This is what I thought I must have misunderstood, but didn’t. I wish I had.

So far have we strayed from actual real life policy making, and so far into the realm of election theatrics, that the GOP is seriously espousing a job creation package that is paid for by job reductions.

To call that bizarre is to dignify it far too much. It is otherworldly. As in outer space.

The only way I can reconcile all this without making my brain explode is to assume that the Republicans really do mean it when they argue that government jobs are a sham. Only then does it all come together. Stimulating real jobs in the private sector by sacrificing non-jobs in the evil public sector is something all good Republicans can get behind. Dumb though it be.

Think of it as increasing the number of burger flippers by reducing the number of teachers. Or reducing the number of police and fire personnel in your local department so we can have more call center phone reps. Oh wait. Those call center jobs are in India or the Philippines. Do they count? At least they’re real jobs.

Anyway, as you can see the whole thing’s a mess, and simply part of the election run up. Nothing will get done easily. It’s going to be a long, tedious, and at times confusing year.

Full of unsound bites. I will report them when I find them.

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Unemployment: Better? Or Worse?

Here we go.

The immediate reaction to this morning’s announcement that the US unemployment rate dropped to 8.6%, its lowest level since 2009, is one of excitement and relief. On the surface, which is where the mainstream media seems to dwell permanently, things look as if a corner has been turned. Those who are politically inclined will interpret this as a good sign for Obama, and Republican supporters will be glumly hankering for the good old days when they could hang a rotten jobs market around his neck.

This is, of course, nonsense.

I didn’t comment yesterday about the weekly report on new claims for unemployment assistance because I wanted to do so in the context of today’s jobs report. The combined picture is not that good. Certainly nowhere near as good as the headline fall in the unemployment rate.

Let’s step back to yesterday.

The new claims data was disappointing. By itself it spoke to stagnation not progress. At 402,000 it was up 6,000 on the prior week, and was well above the widely expected forecast of around 390,000. I have said repeatedly that any number around 400,000 is just not good. The economy has a monthly inflow of new workers so it needs to absorb somewhere around 125,000 people every month just to stay even. It is only new jobs in excess of 125,000 that go towards reducing overall unemployment. Similarly, under ‘normal’ conditions the turnover within the economy causes about 300,000 new claims each week, so yesterday’s news that claims edged up back above 400,000 cannot be interpreted positively at all. The move was in the wrong direction, and the level is still way too high.

Which is why I waited to see today’s data.

Beneath the headline we find a much less optimistic picture. The economy added only 120,000 new jobs, with the private sector adding 140,000 and the government shedding 20,000. The private sector gain was broadly in line with the ADP data we saw earlier in the week, so there was no shock there. It was not overly strong, but not that weak either. However there is still weakness in the public sector. The loss of jobs in the government sector has now reached a total of 600,000 over the last two years as state and local governments struggle to cut their deficits. That loss of local jobs – which is concentrated in education, fire, and police departments – has taken a great deal of steam from state economies and contributed to the stagnation we see at the national level. We should remember that the effect of the federal stimulus back in 2009 was heavily muted by enormous austerity measures introduced at the local level, so these job reports provide tangible evidence of the contradictory nature of government policies over recent years: the federal level has tried to aid expansion; the local level has induced contraction.

Also lost in the details is the remarkable exit from the workforce of 315,000 workers last month. They gave up looking for jobs so they are no longer counted in the calculation of the unemployment rate. That loss alone accounts for most of the improvement in the headline rate, and is, naturally, not an improvement at all. That we have such a large number of people simply giving up on their job search at this stage in the economic cycle is a sign of a deep underlying ailment. It does not augur well for the future if more and more workers opt for early retirement, or a life of enforced leisure. We need them producing stuff, earning wages, and spending or saving. We don’t need them living off savings or sitting around doing nothing. Plus, we should be seeing the exact opposite trend: in a vibrant economy people are induced to re-enter the workforce to make some extra cash. Obviously that opportunity isn’t there. Far from it, the outlook seems to be adding discouragement rather than encouragement.

Still, all is not lost.

The numbers were at least positive in the general sense. Plus they add to the growing trend of mildly positive numbers we have seen over the last three or four months. The economy has managed to get past the slight lull we saw in the early summer – recall all those fears of a double-dip recession – and is back on a steady but unspectacular crawl to safety.

The politicians will spin today’s report in a variety of ways. Don’t fall for it. To put things in context: we need to add more than 250,000 jobs a month to cut the unemployment rate to the pre-crisis level within the next few years. At the current pace we won’t get there for a decade. And, parenthetically, that pre-crisis level was around 6.0% and was not so good by historic standards. So, despite the glitzy headline decline in the unemployment rate, the news this week was definitely weak.

Better? or Worse?

Better, but only by the thinnest of margins.

Not good enough by a very wide margin.

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Weak Jobs Gain

There is not much to say about today’s unemployment and jobs reports. In way the data contains slightly contradictory stories. This is because there are two sources for the information we lump together in the report: the survey of business and the survey of households. The two sometimes diverge in their narrative. Perhaps now is one of those moments.

First the business survey.

This is the one that gets the headlines because it tells us how many jobs have been added. We learned today that the economy added 80,000 new jobs in October. That’s not very good, since it lags the inflow of people into the potential workforce and so should, I emphasize should, therefore cause the unemployment rate to rise. Before we get to that, let me report that the slightly better news embedded in the data is that we added more jobs in both August and September than originally thought – to the tune of 102,000 more.

This is nothing to get too excited over, and stays well within the bounds of an outlook of mediocre growth in the range of 2.0% to 2.5%. These kinds of monthly additions simply tell us we are not contracting nor are we growing at a sufficient rate to chip away at unemployment. The malaise continues.

But.

The household survey tells us a different story.

Contrary to what I just suggested, the unemployment rate, which is calculated from the household survey not the business survey, fell from 9.1% to 9.0%. This apparently perverse result is a direct result of using different sources in the calculation. The number of people reporting that they are employed has risen much more steeply in the household survey – for instance it rose by 277,000 in October, which is radically different from the 80,000 of the business survey. Not only this but the number of discouraged workers, part time workers, and other measures of weakness in outlook for jobs, all fell significantly. This is a trend that developed over the summer, and so we now have a strong divergence in the message being sent by the two surveys.

What do we make of this?

I think it is too early to tell. The business survey is much more inclusive and has been much more reliable through time. So the sluggish story has more credibility, and should affect our thinking more decisively. But the more upbeat message coming through the household survey is hard to ignore, especially now that it has been consistent for a few months.

Eventually the two surveys should converge again. This current divergence is not unusual at inflection points in the economy’s trajectory, so it may be that we have arrived a critical moment. If so we ought to detect a shift in spending and confidence over the next few months. That we have not seen such a shift suggests to me that the household survey is simply filled with noise that masks a more downbeat story. After all the sample size, while very large for such a survey, is still narrow enough that the results need to be handled with care.

Over all, as you can imagine, I err towards reliance on the business survey as the better guide as we try to predict the employment outlook. Job generation is still a sputter rather than a roar. But we would be wise to keep an eye on the household data, lest we miss a key moment in our change of fortune.

My forecast stays the same: sideways motion is the most likely outlook. Let’s hope I am wrong.

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News not Greek

It is hard at the moment not to be mesmerized by the melt down of the Euro. One moment we are told a major position has been established. The next, what was impregnable crumbles to dust in the face of inexorable economic and financial logic. As I see it default is both inevitable and desirable. Inevitable because the burden of debt on top of horribly ill-conceived austerity measures is creating a social backlash that cannot be resisted. Desirable because it would give space to the Greek economy within which much needed reforms can take place without undermining civil society. Desirable also because creditors need to be disciplined just as much as debtors: they need to be reminded that lending is a risky game, and that losses are a natural part of the process of banking. Both buyer and seller need to beware. Stuff happens, and money may not get paid back.

Meanwhile in news not Greek:

The US economy meanders along in it well established stagnant rut.

This week you may not have noticed the news amidst all that Greek drama – on a personal note, my late father-in-law was Greek and grew up in the town of Drama, so he would have enjoyed the current dramatics on a decidedly personal level. Here’s a brief summary of this week’s action:

The Chicago index of industrial activity slipped from 60.4% to 58.4% this month. This supports the general notion that things are not accelerating, but that they are still not collapsing either.

On a slightly more worrying note, the Institute of Supply Management’s measure of manufacturing edged down also, to 50.8% in October from 51.6% in September. Neither of these readings is particularly strong – a reading of over 50% indicates more companies are expanding than contracting. Obviously if we slip any further we should all be concerned that we are seeing the beginnings of a more broad contraction. That October result is perilously close to the borderline. So this index bears watching over the next few months.

Worrying too was the drop in construction spending, which has hardly been robust of late anyway. The latest figures are for September when construction eked out only a 0.2% gain. August had seen a 1.6% gain, so things have slowed down a bit, from rotten to really rotten. This decline didn’t make the headlines, however, because most forecasts had been for an even worse result, and weather may have distorted things too. Still, there is no sign of an incipient boom anywhere to be found. The meander continues.

Lastly, and to support the prognosis of stagnation, today’s ADP report on private payrolls is nothing to write home about. The private sector added 110,000 jobs in October. This is neither good, nor atrocious. It is down slightly from September’s 116,000, but not significantly enough to worry about.

All of this sideways motion contributed into the Fed’s decision to stand pat on monetary policy. The two day Federal Open Markets Committee meeting concluded this morning with a rather tepid press release. At this point I usually launch into a tirade about the Fed’s hawks because they perpetually interpret all this mediocre news as a sign of an imminent burst of growth, sufficient to cause rapid a inflationary spiral. They are thus normally on the side of caution and want to see the Fed start to undo its easing and to tighten things up. How they arrive at this position I have no idea, they seem to be content to ignore the actual evidence and to rely, instead, on fantasy visions and doom laden scenarios in their minds.

But, not today. The only dissenter from the Fed’s current position sees things as more gloomy than me. He wants more easing. This is so unusual I have to bring it to your attention. When even the hawks are quiet, and when the only dissent is on the side of easing, the economy cannot be in the rosiest of shape.

That our hawks are quiet is of little help in global terms. The crazies running the European Central Bank seems intent on being horribly destructive. Those hawks make ours look positively sparrow like. The economists at the ECB qualify for the title of ‘weapons of mass destruction’. Perhaps the US should invade the ECB on that pretext?

Oh. Wait. We used that excuse already.

How did that work out?

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The Economy Grows! So What?

The enormous sigh of relief we heard this morning when the GDP figures for the third quarter were released is absurd. I realize I am being a tad curmudgeonly here, but: so what?

For the record this is the first, or “advance”, estimate and will go through two revisions before becoming final. Even after that it could get revised as the government geeks sift through their piles of data. According to this release GDP grew at a 2.5% annual rate in the third quarter, up from the miserable 1.3% of the second and the appalling 0.4% of the first.

Hurray.

Unfortunately this figure is less than the numbers being tossed about last week by the experts who had all been taken in by the more upbeat nature of recent piecemeal reports. The consensus had settled at growth of around 3.0%, with individual forecasts ranging as high as 3.5%. I saw no reason to budge from my less optimistic predictions of between 2.0% and 2.5%. Thus my ongoing view of malaise seems vindicated.

That’s not good.

Here’s the breakdown of the numbers, as usual I express it as contributions to the overall 2.5%:

  • Personal Consumption contributed positively at +1.72%
  • Private Investment added +0.52%
  • Net trade [exports less imports] added +0.22%
  • Government spending was flat, adding 0.00%

Add those up and you get growth of 2.46% which the government press releases all round up to that 2.5% number.

As you can see, the big story is that consumption ran at a decent pace, although it is still considerably down from the pace we saw a year ago. It has bounced up from the second quarter’s terrible showing and is at least in the black, but it is not a strong figure by any stretch of the imagination. Digging beneath the surface we find two major contributors: health care spending, which produced 0.61% of the overall 1.72% I mentioned above; and spending on autos, which added 0.31%. So over half of the uptick came from just to parts of the economy. The rest was spread thinly across the rest of consumption, with no one area showing either notable strengths or weaknesses.

This is a decent but not great quarter. There is no need to get particularly excited about it. Except: at least we are not headed downwards into another recession, but I never thought we were. Indeed, in my opinion, all the talk of double dips over the past two or three months represented a complete misreading of the data. The economy is sluggish, not imploding. Demand is weak – as today’s figures confirm – but it is not trending down.

The private sector investment numbers would have been much stronger were it not for the ongoing unwinding of inventories. Fixed investment added 1.6%, but inventories chipped -1.08% off this figure. As you all know, inventory swings can distort the overall investment figures, and this quarter is no exception. A key question we need to ask, as always, is what motivated the inventory swing? Was business de-stocking shelves because it anticipates less sales this winter? Or was the reduction involuntary because businesses misjudged the slight surge in consumption? Or was it weather related? This conundrum always plagues the proper interpretation of the data. If the de-stocking is accompanied by a strong uptick in sales then we could spin it in a positive light. If not, then the more likely interpretation, and my current preference, is that business is still cautious and is thus keeping inventories at a minimium. It will be interesting to watch this aspect of the report as it goes through revision over the next two months.

There isn’t much of a story behind the trade figures. Both exports and imports grew, with exports comfortably outpacing imports. One slight oddity to report is that imports of services grew at exactly the same rate as exports of services. This is unusual. Under normal circumstances the US is a net exporter of services which thus make a steady contribution to GDP and the growth of exports is usually higher than that of imports. So the third quarter was something of a quirk. That is, of course, in terms of rate of change. In absolute numbers exports of services still dwarfs imports by about a 5:3 ratio.

Lastly, government spending was neither positive nor negative. I have mentioned many times that the impact of the 2009 stimulus has worn off, and the third quarter is a good example of this. Federal spending has grown about $10 billion in inflation adjusted terms over the past six months, but non-defense spending has contracted by $10.3 billion over that same period. Yes, government spending, other than defense is shrinking – contrary to what you might hear in our political dialog. That $10.3 billion contraction was offset, obviously, by a surge in defense spending of $20.3 billion. Furthermore, and to add to my constant drumbeat, spending at the state and local level continues to decline as states trim their budgets. This is a hidden aspect of the total story of government spending, and is why I have advocated federal aid to the states. In the past six months the contraction of local spending cut about $15.2 billion out of the economy, following a contraction of $27.2 billion in 2010. So austerity at the state level has eroded, very significantly, the effectiveness of federal stimulus. Which is yet one more reason why I thought the original stimulus was way too small and ill-conceived. But that’s an old story.

So, what does this all mean?

Bear in mind that these numbers will be heavily revised, so we should be careful in our interpretation. Still, I think we can conclude that the economy is growing, not contracting; it is not robust by any means; growth is well dispersed throughout all sectors, but nowhere is it a source of strength. Thus the picture is one of malaise. I cannot see a reason to move towards predicting stronger growth any time soon. All the basic building blocks are in place for more of the same. yes, we may see a quarter of higher growth, but I don’t think it will signify a break out to a sustainably higher level. We need household debt reduction to work its way through, wages to increase, and unemployment to fall before we can argue for a return to “normal” growth of 3.0%+.

We are firmly stuck in no man’s land. None of these important factors will be resolved quickly as long as we potter along with mediocre growth. And yet unless they are resolved we can only expect mediocre growth. The case for stimulus is clear. But it isn’t being heard. Hence my view of more, and possibly intractable, stagnation.

So, don’t get carried away by the third quarter. It was nice. Nicer than a decline for sure. But not that nice. It doesn’t solve anything.

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