jobs

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Hiring On The Rise?

Just days after I issued my forecast for a rather dull 2012 we read that the US private sector hired 325,000 people in December. This is according to ADP the payroll processing company that keeps an eye on such things. This is a noteworthy jump in activity by any standard and deserves to be commented on. If this number holds up tomorrow when we hear from the government in its total payroll data, then we all should breath better: the economy is showing signs of life.

But.

ADP has a track record of being a rotten forecaster at year end. Its seasonal adjusting is a little whacky. So the past couple of years its December figures have not been borne out either by the government numbers, or by subsequent evidence. So be warned: this may be a false dawn.

In order to root out support for the optimistic interpretation of ADP’s report we should look for possible corroborating trends.

New claims for unemployment assistance have also been trending down. Today’s report has them at 372,000 last week, compared with 387,000 the week before. Bear in mind that two week’s ago we saw a mild upward blip in claims, otherwise the recent trend has been steady, if unspectacular, progress. The tone in the job market is clearly improving, the data all are pointing in the right direction, the problem is that progress is still insufficient to break the back of our high unemployment levels any time soon. The gains are real but incremental. We need claims in the 325,000 a week range before we can think in terms of a healthy job market.

Beyond jobs we have evidence of improvement in manufacturing. Yesterday’s look at factory orders showed more strengthening. Orders were up 1.8%, right in line with expectations and much improved over November’s -0.4% dip. Couple this with Tuesday’s brighter Institute of Supply Management’s report on business conditions – their index of activity ticked up nicely to 53.9% in December from 52.7% in November – and the outlook seems better as we enter the new year. With both orders and general activity rising we can infer that the recent improvement in hiring will continue.

So, notwithstanding ADP’s seasonal issues, I think we can accept that things are on the rise. Probably at a less rapid pace than suggested by the ADP report, but nonetheless at a higher rate than the second half of last year.

Does this alter my forecast?

No.

I will stick to the view that the recent improvement has all the makings of a phase that will ebb when we butt up against the slow down being forced onto Europe by its 1930’s style policies. Add in the glaring fact that wages are stuck which means that even if people have a job they don’t have oodles of spare cash to go out and spend. Especially if they are still trying to pay down debt.

It is this debt liquidation that still dominates all other trends. There will come a moment when households reach a level of debt they feel comfortable with. I doubt they are there yet. Although US debt levels are down considerably they are not yet at sustainable levels in an economy that seems unable to generate many well paying jobs, and where asset prices – both stocks and houses – are still highly uncertain.

While this process continues we cannot expect consumption to pick up rapidly. So businesses will still be faced by stagnant sales and will only be able to boost activity in stores by repeating profit eroding discount programs. Thus, while overall activity may look better, the underlying issues remain sufficiently negative to drag growth back into the 2.0% range I have been predicting, rather than accelerating it above 3.0% where we need it to be to bring us back to full employment and a feeling of full recovery.

This is why I suggest we should be a little leery of the ADP figures. Let’s se what tomorrow brings.

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The Not So New Year

Year end is always an odd time. We pretend that we can wipe the slate clean and that the new year will be unencumbered by the weight of the old. We party – so I hear – and ring in the fledgling as a kind of tabula rasa open to anything.

Not so much. Not this year anyway.

Economies don’t jump from point to point, with each totally free of the consequences of its immediate predecessor. Path dependence, the inertia of past events and decisions, limits just how much novelty can emerge. Or, rather, how quickly novelty can emerge. So we should not expect much in the way of new. The trends are well set. The first few months of 2012 depend heavily on the path traveled in the last few of 2011.

With this caution in mind what can we look forward to this year?

Here in the US the media has made much of the recent spate of relatively good news. The job market looks to have shifted slightly for the better. Consumer confidence has risen steadily. Manufacturing just registered its best month in about half a year. Exports appear to be headed up. Consumers crowded into the shops over the holiday season. And even real estate seems to have hit bottom and is showing signs of a very modest recovery. Add this all together and we could arrive at the conclusion that the US economy is finally rising out of its recent rut and is about to return to a more healthy pace of growth.

We could. But we ought not to.

This string of good news has to be set in its proper context. It represents a return to very modest growth after a nasty lull earlier in 2011. A lull that had many people suggesting that we may even be headed back into recession. On reflection – and for me at the time – a recession was highly unlikely, but the middle months of 2011 left a very sour taste and may be more representative of what is in store that the more upbeat story told by the last quarter’s statistics.

That last quarter has yet to be properly measured, we will get our first glimpse of fourth quarter GDP later this month, but many of the sources of acceleration lifting growth during that period appear too fragile to be sustained much beyond the first quarter this year. This is especially true of consumer spending, which at about 70% of GDP, is crucial to the continued recovery. For all the hoopla about the uptick in consumer confidence we should be wary: it is still stuck at low levels, way below those we see during good times. It seems that consumers are shedding some of the siege mentality that has cast such a long shadow in recent years, but they are still not brimming with confidence. With wages stuck, unemployment lingering, stock prices volatile, and home prices still weak, there are no signs of the kind of support needed to keep consumer attitudes improving. Confidence may no longer be lousy, but it isn’t exactly rosy either.

This is reinforced by the ongoing effort to shed debt. If there is one defining characterization of our current economic cycle it is the effort within the private sector to downscale its indebtedness. Making this more difficult are the twin problems represented by low inflation and a horrible wage outlook. Higher inflation lifts the debt burden because debts are repaid in devalued dollars. And, obviously, people find it easier to pay down debt when their incomes are rising rather than stagnant. Given that inflation is unlikely to balloon upward any time soon, and that wages will remain a poor stepchild to profits, freeing up extra cash to pay down debt has to come at the expense of current consumption. The year end buying spree appears to have been fueled by heavy discounting by retailers coupled with the development of new frugal habits on the part of consumers. The moment those discounts end so too will the spending spree. Indeed within the past two weeks there is ample evidence that a slow down has already started and that consumption has slipped back to a lower pace.

So the outlook for demand is one of modest, unspectacular growth. This will feed into corporate budgeting and spending plans for the new year. The year end increase in manufacturing was somewhat misleading: half of all industries declined, and the bigger increases were in those where exports play a key role. Domestic activity is so-so, and export driven growth will depend, naturally, on the outlook for foreign markets. To say the least this makes for a problematic forecast. The Euro zone seems set for recession, and both the Chinese and Indian economies are showing signs of slowing. So trade may not be the positive factor that it has been recently. Further, corporate plans will now have to be set in the context not just of modest demand, but also within a very unstable political framework. It is a massive understatement to say that the farce of our political process heightens uncertainty. The political division splitting the voting public is now so large that it will not be healed in one election cycle. So we can expect repeats of the lunacy of the debt limit “debate” and the near total breakdown of consensus over what ought to be simple policy actions such as extending unemployment relief. Consumers and businesses trying to decide on what to do, and whether to spend, can only be made more cautious by the constant lurching about that now passes for leadership in Washington. So uncertainty is not diminished, nor will it be once this never ending election finally takes place.

Given this, I don’t see how the economy can accelerate. This is especially true since the fourth quarter is likely to have seen growth around 3%. Europe’s determined march into recession will harm US growth, which looks set to be slower of its own accord anyway. My view that GDP will chug along at about 2% still stands.

So 2012 is not as new as we might like. Indeed it will be more a repeat of 2011. Given where we were at the onset of the crisis, that may appear as improvement, but our inventory of unused resources is still too large for us to take much satisfaction. Our lack of nerve, our lack of leadership, and our loss of memory of sound policy are costing us dearly. 2011 was not good. 2012 will not be much better.

That’s simply not good enough.

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Winding Down The Year

We have had a flurry of news this week causing the stock market to bounce around in near frenetic glee. If you to believe that the markets are even vaguely rational, which hopefully you are highly skeptical of, then have cause for optimism. If you’re like me and regard markets as deeply flawed and easily misled, then you end the year with more of a yawn.

The news, you see, adds up to more of the same.

Earlier in the week we heard that housing starts had risen from an annual rate of 628,000 in October to 685,000 in November. This set off a market rally presumably because the perennial optimists there wanted something to offset the gloom and despondency settling in from Europe. But a cursory look at those starts numbers tells a story of continued drift: they are weak, albeit not quite so weak as before. Yes, its true that recoveries sometimes start with small steps. And it’s also true that we have to pass through 685,000 on the road to the kind of numbers we associate with a healthy economy. So this week’s very modest uptick is, indeed, a good move. But it isn’t the end of the crisis. Far from it. Housing has a very long and painful road to haul before it reaches the safety of normal growth.

So why did the markets react so strongly?

Because there are other small signs that real estate has touched bottom and has started its climb out of the hole.

On Monday we read the monthly index of home builder confidence. It too was up from the prior month. In this case the most recent reading is for the beginning of December: the index now stands at 21, up from 19 in November. This is, of course, an almost derisory reading. This is one of those indices where a reading of over 50 is considered strong because at that pint over half of all respondents state they are experiencing better business conditions. So 21 is still pretty pathetic. But, yes, it’s better than 19. This is hardly the stuff of legendary growth though, so we are all entitled to look on the market’s reaction as one of clinging to even the slenderest of slender straws of hope, rather than as a sign of a great turn about in our fortunes. Still, we should note that the index has registered three straight improvements so there are signs of stirring.

Adding to the signs of life was the sales of existing homes release on Wednesday. It too rose, from an annual rate of 4.25 million homes in October to 4.42 million in November. Once again the cautionary note holds: this is still a lousy performance. Just not as lousy as before. The problem with this news report was hidden in the details. The National Association of Realtors, not exactly an objective source in the best of times, is the group compiling this report, and they used this month to alter their numbers going back to 2007. The adjustment knocked about 14% of the accumulated number of sales between 2007 and 2010. So the decline was more severe than we first were led to believe. This downward adjustment is in line with similar moves in other indices – recall that GDP itself was significantly reduced a few months back, meaning that the recession was much worse than we thought it was as we went through it. Since housing, and the ridiculous overvaluation of our property, was at the heart of the crisis, it was inevitable that housing sales were also over-reported during that same period.

The week’s real estate news ended this morning with the data on new home sales. Again there was a very slight uptick, from an annual rate of 310,000 in October to 315,000 in November. I won’t bore you by adding my well worn caveat. Just be aware that this, too, is pretty lousy.

Amidst all this real estate news we also heard that third quarter GDP was revised downward, from 2.0% to 1.8%. This seems not to have set off a negative move in the markets. Although it ought to have done. The main reason for the revision down was that consumer spending was 0.4% less than first estimated. Given that our hopes for a solid recovery hang, by and large, on consumer spending, this is not good news. Couple it with today’s report that personal spending and incomes were essentially unchanged – both grew 0.1%, weaker results than the prior month – and it is very difficult to articulate a credible argument that we about to spring to life and see GDP growing at the oft forecast rate of 3.0% next year. There just isn’t any momentum carrying us to those kinds of heights.

But the optimists keep on forecasting that way. Sooner or later I suppose they will be correct. Not yet.

Two other reports give the optimists support: weekly claims for unemployment assistance, and consumer confidence.

The claims data has shown a steady improvement in recent weeks. They are now down at 364,000, well below the rotten readings of 400,000+ we saw all summer long. And nowhere near the awful numbers we saw at the height of the crisis. This is an indication that the labor market is firming up a little. Before we get too far ahead of ourselves, though, we need to remind ourselves that claims should be a further level down before we can think of the labor market being healed. Typically we see claims below 325,000, sometimes much lower, in better times. So there is work yet to be done. Although we have clearly made a start.

That things are improving a little is also reflected in the modest upturn in consumer sentiment, which according to the monthly University of Michigan survey, rose to 69.9 in December, from 64.1 in November. More interestingly is the fact that each successive revision of the December figure has edged the total upward, implying that a trend is developing that might carry over into next year. Once more I warn you to be careful getting carried away with this news: in a good year this index regular scores above 90, so we have a long way to go. But, as with all this week’s figures, an improvement is welcome however modest it is.

So.

What does all this mean?

Well, not a great deal.

The economy is clearly improving. After all this time it darned well ought to. The debate now centers on the rate of growth that this improvement will lead to next year, and to the political ramifications that such growth may have.

This is where I remain on the cautious side. My view is that the economy is set for a very modest year. That means, in my mind, GDP growth between 2.0% and 2.5% for most of 2012. This contrasts with the more optimistic forecasts being produced on Wall Street where 3.0%+ is frequently mentioned. The key will lie in how consumption fares. With unemployment down, but still way too high; with wages flat; with debts still to be reduced; and with no sign of a burst of business investment around the corner, I just cannot see a source of strong consumption growth. If we throw in the plight of Europe, where recession surely beckons, and the possibility of slower growth in China, the outlook for trade to provide an acceleration is also reduced. Indeed, the international outlook provides a strong chance of damage rather than help to our growth prospects. Throw in the contraction in Federal and State spending we are most likely going to see next year, and nothing appears to provide a justification for anything other than a forecast more sideways than upwards.

Anyone, like me, who thinks that recoveries from crises centered in finance – as this was – are much more difficult to recover from, has to look at next year as another year of relative stagnation. Our banking system still is unwieldy and dangerous – our banks remain way too big, too powerful, and too subsidized for our economy to grow strongly without igniting another collapse. Our debt levels are still way too high. And households are still too fearful of the future to impel us forward. We, most likely, have another two or three years of adjustment to go before we arrive back in calm waters. Between now and then the risks are all on the downside.

Then there is the endless political farce being played out in Washington. This week’s ridiculous Republican attempt to raise payroll taxes back to there pre-stimulus levels is an example of the immense damage we could sustain from the radicals in Congress. So hell bent are they in overthrowing the last seventy years of settled policy that they nearly drove our economy over the cliff once again. We live in a time of absurdist politics, where a small group of extreme radicals can sustain an attack on our economy and use the chaos of the crisis as cover for their enormously regressive agenda. In many ways the uncertainty added to our outlook from this attack hangs as the darkest risk on the horizon. Political risk is something we are used to ascribing to minor economies the world over as unbalanced regimes extract a toll on their nations. We are not used to describing the US in those terms. Yet we ought to. In my view the greatest weakness we have, and a potential source of the greatest damage to our prospects, is the radical wing of the Republican party and its attempt to double down on Reagan era mistakes. That the GOP presidential candidates all have to bend to the radical’s will – no one has the courage to stare them down and lead the Republicans back to the center – tells me that, were one of them to emerge as president, we should expect more extreme policies and a period of greater instability.

Romney’s preposterous statement that Obama is undermining free enterprise demonstrates this problem. Romney is allegedly a centrist. His claim is an overt pandering to the radicals who seem not to realize that corporate profits are at all time highs right now. We will not solve our problems by giving more away to big business, and, more particularly, to managers of big business – especially the banks. As I have said many times before: these are great times to be a corporate CEO or shareholder. The economic game is rigged already in their favor. Change will almost inevitably have to be away from business towards the people if we are to improve our economy. So the radicals want to go in exactly the wrong direction. That Romney cannot resist them does not augur well for the country.

Which is a shame, because Obama surely needs a firm kick in the pants to get him to act decisively. An opposition based upon obstruction is neither loyal nor productive. We need sensible alternative policies for the nation to debate. We do not need the radical libertarian anti-social and deeply divisive policies that currently pass for the GOP platform.

So, as the year winds down the economic news is modestly on the upside. But the political risks are mounting. Hence our need for continued caution when we try to predict the economy’s performance over the next few years.

More of the same, in other words.

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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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