jobs

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Our Boom in Hyperbole

With the year end break behind us we can return our thoughts to more mundane matters, such as the apparent boom about to sweep through the US economy. At least that’s the sentiment that seems to have sprung up while I my attention was diverted elsewhere. Everywhere I look I read headlines announcing the imminence of a surge in growth. Clearly the stock market is anticipating something grand, retail stock prices have gained about 25% in value over the last year and show no signs of slowing down. Even the Financial Times carried a headline suggesting that it, too, was now expecting the news to be unrelentingly perky throughout 2011. At least the FT told us that the data supported the breathless excitement oozing from the headlines. Other folks seem to be making it all up based upon whimsy and very little fact.

So are these boom times we are about to enter?

Maybe. Maybe not. Actually, more not than maybe.

The news is certainly more upbeat. US retail sales were strong over the selling season just ended. New claims for unemployment assistance dipped below the magic 400,00o mark for the first time in years. Manufacturing continues to plod along above the 50% mark in the Institute of Supply Management surveys. There is no sign, yet, of sustained inflation, except for the pressure on prices that might emerge from commodity cost increases – and those increases themselves reflect worldwide growth and not a monetary policy flub. So there is something real going on. Something good.

But is it a boom?

I don’t think so.

Take manufacturing. The ISM survey does indeed point to continued expansion in factory production. Today’s report has 57.0% of manufacturers saying they are adding rather than subtracting to activity. Any reading over 50% means that more factories are busier than are less so. Thus a reading of 57% is quite good. It is not a boom. Certainly we have had seventeen straight months of 50%+ readings. There was a worrying dip over the summer, but last month brought us back to last May’s level, so the dip appears to have been temporary. In historical context this is a good report, we have not seen a sustained reading for the overall ISM index of over 60% since the mid 1980’s, so this is a heartening figure.

But.

There is a downside. If we look inside the composite index at the employment sub-category we see something a little less rosy. There the reading is slightly lower, at 55.7%. More to the point it actually fell last month, and is well down from the 60.4% reached last August. So the trend in production is positive, while the trend in factory hiring is negative. Productivity is growing, at the expense of hiring.

Meanwhile the news on new claims for unemployment assistance is more positive. Last week’s report showed claims dipping sharply to 388,000. Whether there is some seasonal adjustment glitch in the data we will have to wait and see, but this is the first time since the onset of the crisis that claims have been this low. After a few weeks of hovering in the 425,000 to 440,000 range the dip seems very sudden and suggests that it could be an anomaly. Let’s hope not. The decline was sharp enough to bring the four week moving average, always the better figure to work with, down to 414,000. This is much better than the levels claims had been stuck at throughout the late summer and early fall, but nowhere near low enough to break the back of unemployment. Looking at the year over year figures the pace of improvement is slowing down, and we have yet to reach the kind of claims activity associated with a strong economy. Just to put this in context: during the long employment boom of the 1990’s weekly claims were routinely in the mid to low 300,000’s, and ended the decade in the high 200,000’s. So we are a long way from those halcyon kinds of levels, and have yet to see activity low enough and long enough to get excited by. Yes, we are moving in the right direction. No this does not portend a boom.

Besides, employment is a lagging indicator. We should see other signs of a boom before those claims numbers dip into the strong growth range. One of those signs could be retail sales which, by all accounts, showed some strength over the crucial end of year selling season. Looking back at the data we have – the last report is for November and so excludes the year end sales – the trend is very positive. The year on year rate of growth in retail sales is faster than anything we experienced in the last two decades. This is not surprising given the awful collapse we saw throughout 2009, but it is certainly suggestive that consumer demand is reviving. There was a mid-2010 slide, but that now appears to be behind us, and the annualized rates of growth are at the dizzying heights of the mid and late 1990’s.

But. Again.

This does not imply a boom. It implies a strong GDP level for 2011. Or at least stronger GDP growth than I had been predicting. In my book a boom would be several years of 4.0%+ GDP growth, and not just a single such year. And I doubt that 2011 will quite get to that level, even with the additional kick stemming from the recent tax cut deal.

So here’s why we need to keep perspective and avoid the silly hyperbole of the headline writers: even if we see 4.0%+ in 2011 unemployment will not drop very much. Maybe by a percent or so.

Why?

Because we need 2.5% GDP growth just to stay in place. Only growth above that point has the effect of reducing unemployment. That initial 2.5% simply allows us to absorb population growth and offset the impact of continued productivity improvement. This effect is why so many people still think the economy is in bad shape – it is just barely treading water in terms of job creation. Since this is a major determinant of attitudes and consumer psychology, only when we break through and get to a sustained growth of 3.5% and more will we start to see consumer sentiment improve markedly.

We are not there yet. Despite the blaring headlines we do not have a boom. Unfortunately we are much more dull: we have a steady chug. Good, or at least better than before, but not good enough to justify the excitement. And absolutely not enough to justify a relaxation of policy. All it will take is one good austerity move, and the building positive energy could dissipate quickly. Since the incoming Republican majority in the House of Representatives has signaled its intention to attack government spending, that risk is now high. We could be in the absurd position of having slogged through the hard part of restoring the economy only to have all that effort nullified by a bout of ideological insanity.

So, no, we are not there yet. Far from it. But we do have a goodly supply of hyperbole. Please ignore it.

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Economic Growth Disappoints

The latest revision to the third quarter GDP numbers produced a disappointing report. While most analysts had been looking for growth to be about 3.0%, which would have meant another slight upward adjustment, the final tally was only 2.6% and thus quite a bit short of expectations. The hope had been that growth would be picking up as we head into 2011, and that the new stimulus hidden within the recent tax deal would then catapult us higher into the mid 3.% to 4% range. Now such a spurt looks much more difficult unless the fourth quarter comes in unexpectedly strong.

The second revision to the third quarter figures released last month had shown growth at 2.5%, and with some sectors of the economy performing better than expected – sales of autos especially – many people had stared to believe the economy was in much better shape. Indeed there were rumblings that too much more stimulus would only show up as inflation rather than as real growth. Such thoughts are now to be banished. The economy is growing, but it is nowhere near growing fast enough either to tackle unemployment quickly, or to raise inflationary concerns. Instead we appear to be still stuck in a sideways crawl, like a crab on the beach not going anywhere in particular.

Indeed the pessimists might get support from the numbers. Much of the jump in growth from the second quarter, which saw GDP rise only 1.7%, was due to factors such as a drop in imports and a rise in inventories, both of which can have very ambiguous causes. Imports typically rise when the US is growing quickly as demand for finished goods and raw materials takes off. That imports fell could be an early sign of renewed stagnation. Likewise the fact the inventories continued to rise can also be interpreted as a weak sign: perhaps businesses overestimated sales and will have to cut production in order to get sales to inventory ratios back in line.

Of course there are more optimistic interpretations too. Especially for inventories. During the recession firms cut back drastically on inventories as they reduced their sales forecasts and generally hunkered down to weather the storm. As the recovery gained steam the need to rebuild inventories re-asserted itself and we saw a long and steady climb back towards more normal levels. Sales forecasts were raised, albeit only slightly, and production rose accordingly.

Obviously the key will be the holiday selling season. Early indications are that it is fine but not great. Steady as she goes seems to be the way to characterize the state of the economy.

And therein lies our problem.

We need much more rapid growth to work off the huge slack that still hampers the employment market. The longer we go without such a burst of activity the worse the situation becomes for those workers who have been unemployed for a long time. Their skills and enthusiasm will ebb, and with a hostile Congress their chances of getting more help is receding. Unusually for the US we are now, apparently, facing a very European like sclerosis in our vaunted job market. Flexibility used to be the watchword during our business cycles, with rapid increases and decreases in unemployment. The last two recessions should have warned us that our job market was getting very “sticky”, by which I mean the decrease in jobs took longer to reach bottom, and the recovery took much longer to re-absorb the unemployed. This cycle has been even worse. It truth it has been awful, not just in its severity, but in its stubborn lack of improvement. This more Euro style cycle is unnerving for America where the Euro style safety net does not exist, and old fashioned puritanical attitudes toward the unemployed resurface very easily. This comparative weakness in our safety net programs was all well and good when we had a youthful and dominant economy. Clearly the economy has moved on. Unfortunately our political thinking has not. It may take a few years of suffering for us to realize that this was not just another cycle, but was the end of a long term decline that we now need to arrest and address.

Which leads me to this:

I have said it many times, but it bears repeating, healthy economies and healthy societies do not privilege one part over another for long. They seek and try to maintain balance. During the 1950’s and 1960’s the US managed to locate a mother lode of wealth by staying in such a balance. Profits, wages, productivity, and wealth moved in a harmonic trend together. Neither wages nor profits soared at the expense of the other. Higher wages fed sales which created higher profits and so it rolled on. After the Reagan illusion set in and the economy shifted towards debt based growth and short term profit gain at all costs, the balance was lost. Or rather it was deliberately thrown overboard. The new generation of managers and politicians, steeped in Friedman and Hayek, tossed away any notion of social cohesion whilst in the misguided thrall of free market dogma. The result has been the steady rise in inequality, profits reaching record levels while wages stagnate, and the substitution of debt for equity at both the household and business level as the cost of keeping decent growth in living standards became ever more difficult. Our post 1980’s leaders formed an educated elite who drove home the advantage their education wrought. The bulk of the rest were left way behind.

This asymmetry eventually eroded the economy’s ability to self generate wealth in a steady even stream. Instead it became susceptible to Minsky like financial cycles and thus inevitably to implode. Bank caused bubbles are the new norm. The rentiers cling to their privilege by offloading the cost of recovery to the taxpayers who are now underrepresented within the halls of power. To belabor the blame due Friedman and Hayek: we were indeed “free to choose”, but we were led along the “road to serfdom”. A populist reaction was inevitable, and the Tea Party seems to be its first manifestation. People will lash out even if they lash out in the wrong direction, as they have done this time.

Free markets just don’t work in complicated societies reliant upon complex production to meet its needs. The market needs to be augmented by strong government intervention to prevent rent seeking imbalances from creating an uncontrollable yaw. When we fell for the free market illusion we condemned ourselves to exactly the kind of cycle we are now suffering through. And it looks as if the denouement is years of unsatisfactory GDP growth and prolonged unemployment. We hurtled back in time to the pre-Keynesian world of classical economics and a highly bifurcated society. We embraced red blooded capitalism in an age when global reach and rapid technological advances exposed us as easy prey to those with capital or lower costs, and those in control of the vast bureaucracies able to move resources around at will to seek profit from that capital or those lower costs.

How many times during this cycle have we been told that we need to swallow unpleasant medicine in order that the “system” be saved? Did we ever ask in sufficient depth who this system benefitted? If the market is so magical how come the system broke? Should those who benefitted not pay for its repair? If there is one lesson that history should have taught the average citizen: there is nor “fair” in laissez faire. When we start to be told about rising tides lifting all boats we should question who is on the biggest boat. When we are told that something trickles down, we should question whether a trickle is enough. Yet we fell for the illusion, and soldiered on getting ever more into debt in order to stay afloat.

We shut our eyes to history. That’s never a good thing.

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House Prices Drop Slightly

Getting hold of hard economic data right now is difficult. Worse: when we find some it is ambivalent. Today’s Case-Shiller Index report bucks that trend somewhat, home prices dropped 0.7% in October. That’s not ambivalent, it’s just bad.

The problem with housing is not just that it seems difficult to identify the bottom in prices, but that so many unknowns impinge on that calculation. The Case-Shiller Index measures resales of houses in 20 of the country’s top housing markets, so it gives us an excellent reading on the movement of values through time. After picking up a little earlier in the year we are now facing the likelihood that prices will continue to ebb for a few months more. My guess is well into the early summer of next year.

Why?

Because of all the reasons that undid the bubble to begin with plus the pressure of a “shadow” inventory hanging heavily in the background. This latter effect is the great unknown: no one really has a proper notion of its impact, yet we all know that there is such an impact. The shadow inventory consists of all the homes with mortgages in arrears, in foreclosure, or simply in the hands of owners who would dearly love to sell but cannot for a variety of reasons, negative equity being primary among them.

So the openly discussed inventory of unsold homes, which is still large by historic standards, but is down from the peak reached in the immediate aftermath of the crisis, is just the tip of a very large and depressing iceberg. Even if it never transmutes into actual activity to the extent that its shadow suggests, that inventory is choking off any solid recovery in housing. Couple this continued loss of wealth implied by lower home values with the poor income outlook into 2011 and 2012, and it is very hard to see a dramatic upturn in aggregate demand.

Without that we won’t get back to our historic growth pattern any time soon. And the longer we remain below that long termtrend, the more prone we are to reversals and dissatisfaction all round.

Don’t forget that real estate played a disproportionate role in generating jobs over the last decade. Construction is just not going to be a big factor in the near to medium term. Which leaves the great question unanswered: where will the jobs come from?

Who knows?

And that is why we all are stumbling with our forecasts. If we subtract construction from the equation, the US economy has a weak record for job creation for a very long time. So we keep coming back to the same solutions. Devalue the dollar to get jobs from export trade; and boost domestic demand as best we can through reflationary policy actions. Looking beyond that old bag of tricks requires an imagination singularly lacking in our policy and business leadership at the moment.

Meanwhile today’s home price report suggests we are still stuck in a low gear. Unfortunately.

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Unemployment: Improvement?

Is there light at the end of the tunnel?

Possibly. Today’s release of last week’s data on new claims for unemployment assistance shows a glimmer of hope, with claims dropping quite sharply to 435,000. That’s a decline of 24,000. The good news is that this drop brings the four week moving average down to 446,500, its lowest point in two years.

Before we get carried away we should all recall that the economy needs to generate a far greater number of jobs than last month’s 150,000 to break the back of unemployment. Plus the prospect of long term unemployment benefits running out for approximately 5 million people casts a considerable pall over consumer’s moods as we head into our prime retail selling season.

With the recent election producing a hung Congress there is extra pressure on the lame duck session to tackle issues like the extension of those benefits and those Bush tax increases scheduled for the new year. That adds up to some fraught and crucial decision making between now and year end. Without clarity on those issues we will enter the new year in an even more muddle condition than our current mess.

But at least unemployment seems to have reached its high water mark. How quickly it recedes depends as ever on whether the economy can get beyond its current 2.0% to 2.5% growth range. As of now the most likely GDP growth for the fourth quarter is stuck within that range. Which is, frankly, not enough to create much movement on jobs.

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Modest? Mediocre? Employment Numbers Disappoint

I suppose the good news in today’s employment report from the government is that the economy added 151,000 new jobs in October. That’s obviously better than losing jobs. But it was insufficient for the unemployment rate to decline, and so it remains stuck at an ugly 9.6%.

The improvement in job creation we saw at the beginning of then year vaporized as soon as the government started firing all those census workers. The underlying private economy is simply moving sideways and there is no sign of acceleration. Indeed the October increase in jobs failed to keep pace with our population growth, so the backlog of unemployed and discouraged workers is building. At that rate of job creation the unemployment rate might even increase over the winter.

I cannot think of a more striking indictment of the Administration and Congress. The policies thus far used to combat the malaise have been both weak and small scale. They reflect a limited ambition and defeatist attitude.

So be it. I am tired of making critical comments. Failure is annoying when there were so many of us warning of the consequences of those policies.

What worries me most is that the new Congress has absolutely no new ideas. So the poor and unemployed are likely to suffer much longer than they ought. For that I hold Obama accountable.

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