Saturday, July 16, 2011
Weekly Indicators: moving further towards contraction edition
Monthly data released this past week was consistent with very slow growth or a stall. There was monthly deflation in June via import prices, producer prices, and consumer prices, all due to Oil. Retail sales improved, up +.1% from May, so real retail sales were up +.3%. Capacity utilization was flat. Industrial production was up +.2, but May was downgraded to -.1. All of this at least was positive for the economy. Consumer confidence, including consumer expectations (one of the 10 LEI) plummeted, however, an important negative.
The high-frequency weekly indicators, however, moved towards outright contraction.
Areas in YoY contraction included transportation and mortgages:
Oil finished over $97 a barrel on Friday, back above the level of 4% of GDP which according to Oil analyst Steve Kopits is the point at which a recession has been triggered in the past. Gas at the pump rose $.06 to $3.64a gallon. Gasoline usage at 9016 M gallons was -0.7% lower than last year's 9080. This is the third week in a row that gasoline usage has been significantly less than last year. Further, with the exception of 3 weeks, this comparison has been negative YoY since the week of March 12.
The American Association of Railroads reported that total carloads actually declined YoY, down 8000 carloads to 438,000 YoY, or a -1.8% YoY decline for the week ending July 9. Intermodal traffic (a proxy for imports and exports) was down 300 carloads, or -0.2% YoY. The remaining baseline plus cyclical traffic was down a little less than 8000 carloads, or -3.2 YoY%. This series, which has been deteriorating for months, is now negative for the first time. (Note: Railfax has graciously given me their breakdown of baseline vs. cyclical groups. I will start to break those out in the next few weeks).
Also, the Mortgage Bankers' Association reported that seasonally adjusted mortgage applications decreased 2.6% last week. For the first time in 7 weeks, the YoY comparison in purchase mortgages was negative, down -0.2% YoY. Refinancing also decreased -6.2% w/w and also was down -42.1% YoY.
Two other series have deteriorated to the point where they are very close to contraction:
Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that for the first 9 days of July 2011, $65.8 B was collected vs. $63.2 B a year ago. For the last 20 days, $129.6 B was collected vs. $129.3 B a year ago, for an increase of merely $0.3 B, or 0.2%. Use this series with extra caution because the adjustment for the withholding tax compromise is only a best guess, and may be significantly incorrect. Nevertheless, this is one of the worst 20 day showings all year, and is very nearly negative.
The American Staffing Association Index declined 1 point back to 87. As this number typically declines for the reporting week of July 4 (which this number includes), it may simply reflect seasonality. This trend of this series for the year is still just barely rising. The trend is slightly better than the early recession of 2008, but worse than 2007.
Housing price information was equivocal:
YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the asking prices declined -4.5% YoY. The areas with double-digit YoY% declines increased to 10. The areas with YoY% increases in price remained at 7.
Other series, chiefly monetary, still show continued expansion or improvement:
The ICSC reported that same store sales for the week of July 9 increased 5.5% YoY, and increased 0.4% week over week. This is the best YoY comparison in months. Contrarily, Shoppertrak reported a 1.2% YoY increase for the week ending July 2 and a WoW decrease of -2.2%. YoY weekly retail sales numbers had been slowly weakening for a month or so, but this week is the third week of a rebound for the ICSC, contrary to Shoppertrak.
The BLS reported that Initial jobless claims last week were 405,000. The four week average decreased to 423,250. This weekly number was the best report in over 3 months, but was probably affected by seasonality (i.e., the seasonal adjustment was too great). Still, we appear to have stabilized in a range generally between 410,000 - 430,000.
Weekly BAA commercial bond rates declined -.04% to 5.84%. Yields on 10 year treasury bonds, contrarily, increased .01% to 3.12%. This was probably due to the ending of QE2. Needless to say, this does not show any increase in distress in the corporate market.
Finally, M1 was up 2.5% w/w, up 1.4% m/m, and up 14.1% YoY, so Real M1 was up 10.7%.
M2 was up 1.0% w/w, up 0.7% m/m, and up 7.1% YoY, so Real M2 was up 3.7%.
Both M1 and M2 have surged in the last 2 weeks. Real M1 remains very bullish, and Real M2 has now re-entered the green zone above 2.5%.
Despite the contraction in other indicators, it is worth reiterating that going back to 1920, there has never been a recession with both real M1 positive and real M2 positive by more than 2.5%, and also a positive yield curve. Even in the deflationary 1920s and 1930s, positive M1 and M2 have never existed during a recession in the absence of a previous actual yield curve inversion. At the same time, it is worrisome that Oil refuses to decline below $94 (except for about 1 week), and plummeting consumer confidence also shows that idiocy in Washington will affect consumers.
Friday, July 15, 2011
She is very friendly and has shown no dog aggression and really loves people.
Cost of Education Is Now Prohibitive -- At the Worst Possible Time
The cost of higher education in the US has soared in recent decades while median incomes have stagnated, pushing college increasingly further from the grasp of many Americans and limiting social mobility. Three-quarters of US repondents to a recent survey by the Pew Research Center said college was now too expensive for most Americans.
In the past decade, tuition rates at public universities have risen 5.6 per cent a year above inflation, while fees at private college have increased by 3 per cent a year, the College Board says.The faster acceleration in fees at public universities is highly significant for those on median incomes. For students from wealthy backgrounds, college may still be affordable. Moreover, thanks to handsome endowment funds, colleges such as Harvard and Yale can afford to give generous financial aid to able-but-needy students.
However, public universities – many of which have been forced to raise fees in recent years because of dwindling support from cash-strapped states – have much less ability to offer financial assistance, even though they are now starting to charge fees comparable with their private-sector peers.
The increase in fees has not stemmed demand for higher education. Applications rose during the downturn, as more Americans deferred the search for scarce jobs and took the opportunity to get training – with what traditionally has been good reason. College graduates generally receive bigger salaries, on average earning $20,000 more a year than workers without higher education, according to the Census Bureau. That translates into career earnings of $1.4m for a worker with a bachelor’s degree – almost twice the $770,000 a non-college graduate can expect, according to Pew.
I have no words for the level of abject stupidity regarding the lack of a response in the US.
I have been swamped by real life this week, and haven't been able to pitch in here.
I'll finish looking at potential leading indicators for pre-WW2 recessions next week, and hopefully some other stuff. Weekly Indicators will be posted Saturday morning.
In the meantime, there may be more doggie pictures from the proprietor of this blog later today.
Five Fundamental Problems With the Jobs Market
1.) During the worst parts of the recession, the economy was losing over 600,000 jobs a month. An analysis of the length of time of unemployment indicates most of these losses have not been recovered as the number of long term unemployed (26 weeks and above) is still near historically high levels. However, the decline in the intermediate length on unemployment (5-26 weeks unemployed) indicates the problem is not getting worse. Put another way, the damage caused by the initial bloodbath is still hurting us, but it's not getting much worse. But that original damage was very bad and is a prime reason for the currently high unemployment rate.
2.) The bursting of the housing bubble is causing tremendous problems. At its worst, total non-farm payrolls dropped by 8.7 million jobs during the Great Recession. Total losses in the construction sector were a little over 2 million or a little over 20%. The dismal state of housing means these jobs will not be coming back anytime soon, which means unemployed construction workers face dim job prospects.
3.) There is a tremendous global realignment occurring in the manufacturing sector right now, as evidenced by the massive drop in employment. Part of this is due to automation in the US and part of this is due to a shift in economic centers of power. As emerging markets develop, it makes more sense to move manufacturing facilities to these developing countries, lowering overall US manufacturing employment. While manufacturing is still important to the US (it has been a primary driver of growth during this expansion) it needs less and less labor -- a trend which will continue.
4.) There is a slow bleed of government workers over the last two years that continues to add to the unemployed and keep initial unemployment claims about 400,000. This slow bleed is not a death knell, but it certainly doesn't help.
5.) The US economy is not creating jobs for those with anything less than a college education in any meaningful way. This is a tremendous problem going forward and, I believe, represents one of the core problems we face going forward.
6.) We're also seeing a drop in the number of people in the labor force as the baby boomers start to retire. I outlined my thoughts on that argument here.
If you're not employed in construction, housing, manufacturing or government and you have a college degree or higher, you should be OK. But, that's a pretty narrow swath of the employed population and explains why the employment situation still sucks.
Thursday, July 14, 2011
Friday Dollar Analysis
However, as the chart below illustrates, prices are back into the triangle pattern, meaning the break-out earlier this week was a false breakout.
All the EMAs are in a tight bunch, indicating a lack of overall direction from the market. This means last weeks break-out was a false break-out, and we're left waiting to see that happens.
Singapore Contracts 7.8%
Gross domestic product fell an annualized 7.8 percent in the second quarter from the previous three months, when it climbed a revised 27.2 percent, the trade ministry said today, citing preliminary data. The median estimate of 13 economists surveyed by Bloomberg News was for no growth.
Europe’s debt crisis and rising U.S. joblessness have threatened demand for exports from Asia and wiped more than $2 trillion off stocks worldwide since the beginning of May. China’s economic expansion eased in the second quarter and India’s industrial production unexpectedly slowed in May, reducing the scope for monetary policy tightening as regional growth cools.
“The ongoing debt crisis in Europe and the very slow recovery in the U.S. are the risk factors for the Singapore economy,” said Chow Penn Nee, an economist at United Overseas Bank Ltd. in Singapore. “With the slowing growth and easing inflation, we are not expecting the Monetary Authority of Singapore to move at the upcoming policy meeting.”
The Singapore dollar, the best performing Asian currency after the South Korean won in the past year, traded at S$1.2176 against its U.S. counterpart at 10 a.m. today, paring gains after climbing to a record S$1.2156 before the report. The currency has reached unprecedented levels since the central bank, which uses the exchange rate to manage inflation, said in April it would allow further appreciation to tame price gains.
A Closer Look At Employment, Part IV: Length of Unemployment
Note that the number of individuals unemployed for less than five weeks was actually at a good level -- it reached the lower level of the range established in the 1990s and 2000s. However, this number has spiked up over the last few weeks to levels that raise concern.
The number of individuals unemployed for 5-14 weeks -- while still at high levels -- has been moving in the right direction. I would expect this number to spike up over the next few reports as a result of the less then five weeks' numbers increase.
The number of people unemployed for 15-26 weeks is also moving in the right direction
The long-term unemployed number is still far too high and most disturbingly has not made any meaningful decrease.
The above charts indicate that the initial damage of the recession -- the massive job losses that occurred in the 2008-2009 period -- has not been restored. However, the decreases in the intermediate ranges of unemployment are encouraging and indicate some further damage has occurred, but nowhere near the magnitude of the original job losses. However, the recent spike in the less than 5 week number is very concerning, as it indicates a new wave of people may be starting to hit the ranks of the unemployed.
Also to consider, is that the intermediate numbers have declined as people have left the labor force, largely to take early retirement. I outlined my thoughts on that argument in this post.
Wednesday, July 13, 2011
Thursday Oil Market Analysis
As I wrote last week, moving through this many layers of technical resistance takes time. I gave it about a month, which I still think seems like an adequate amount of time make this move. As such, I still see prices moving higher for the summer and for prices to be back over $100 within a month.
It is my belief that the number of new oil consumers (India and China) are forming an increased demand for oil which is replacing diminished US demand. As such, I think there is a floor underneath oil prices. Let's take a look at the charts.
On the five minute chart, prices broke through support four days ago and moved lower for two days largely as a result of the EU/Greece and Italy situation. But prices have rebounded over the last two days and are hitting resistance in the 99/99.5 price area.
Prices have moved through resistance, but are now mired with the EMAs. Prices have hit upside resistance at the 50 day EMA twice now. Note the 10 and 20 day EMAs are now moving higher and the 10 has just crossed over the 20. The MACD has given a buy signal as well.
Overall, prices are moving about how I thought they would after the sell-off. Remember -- there is a tremendous amount of resistance to move through right now which takes time. However, I still see prices moving higher for the next month or so.
Copper Has Broken Through Key Resistance Levels
The chart is short-term bullish. All the EMAs are moving higher, the shorter EMAs are above the longer EMAs and prices are above all the EMA. The MACD has also given a buy signal. After an initial burst, prices are now consolidating gains.
While we're hardly in rally mode, the advance is welcome.
Fed Minutes Show A Slowing Economy
The expansion of private nonfarm payroll employment in May was markedly below the average pace of job gains in the previous months of this year. Initial claims for unemployment insurance rose, on net, between the first half of April and the first half of June. The unemployment rate moved up in April and then rose further to 9.1 percent in May, while the labor force participation rate remained unchanged. Both long-duration unemployment and the share of workers employed part time for economic reasons continued to be elevated.
Total industrial production expanded only a bit during April and May after rising at a solid pace in the first quarter. Shortages of specialized components imported from Japan contributed to a decline in the output of motor vehicles and parts. Manufacturing production outside of the motor vehicles sector increased moderately, on balance, during the past two months. The manufacturing capacity utilization rate remained close to its first-quarter level, but it was still well below its longer-run average. Forward-looking indicators of industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, weakened noticeably during the intermeeting period to levels consistent with only tepid gains in factory output in coming months. However, motor vehicle assemblies were scheduled to rise notably in the third quarter from their levels in recent months, as bottlenecks in parts supplies were anticipated to ease.
Growth in consumer spending declined in recent months from the already modest pace in the first quarter. Total real personal consumption expenditures only edged up in April. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, increased somewhat in May, but sales of new light motor vehicles declined markedly. Labor income rose moderately, as aggregate hours worked trended up, but total real disposable income remained flat in March and April, as increases in consumer prices offset gains in nominal income. In addition, consumer sentiment stayed relatively low through early June.
Activity in the housing market remained depressed, as both weak demand and the sizable inventory of foreclosed or distressed properties continued to hold back new construction. Starts and permits of new single-family homes were essentially unchanged in April and May, and they stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained at subdued levels in recent months, while measures of home prices fell further.
The available indicators suggested that real business investment in equipment and software was rising a bit more slowly in the second quarter than the solid pace seen in the first quarter. Nominal orders and shipments of nondefense capital goods declined in April. Business purchases of light motor vehicles edged up in April but dropped in May, while spending for medium and heavy trucks continued to increase in recent months. Survey measures of business conditions and sentiment weakened during the intermeeting period. Business expenditures for office and commercial buildings remained depressed by elevated vacancy rates, low prices for commercial real estate, and tight credit conditions for construction loans. In contrast, outlays for drilling and mining structures continued to be lifted by high energy prices.
Real nonfarm inventory investment rose moderately in the first quarter, but data for April suggested that the pace of inventory accumulation had slowed. Book-value inventory-to-sales ratios in April were similar to their pre-recession norms, and survey data also suggested that inventory positions generally remained in a comfortable range.
The available data on government spending indicated that real federal purchases increased in recent months, led by a rebound in outlays for defense in April and May from unusually low levels in the first quarter. In contrast, real expenditures by state and local governments appeared to have declined further, as outlays for construction projects fell in March and April, and state and local employment continued to contract in April and May.
The U.S. international trade deficit widened slightly in March and then narrowed in April to a level below its average in the first quarter. Exports rose strongly in both months, with increases widespread across major categories in March, while the gains in April were concentrated in industrial supplies and capital goods. Imports grew robustly in March, but they fell slightly in April, as the drop in automotive imports from Japan together with the decline in imports of petroleum products more than offset increases in other imported products.
Headline consumer price inflation, which had risen in the first quarter, edged down a bit in April and May, as the prices of consumer food and energy decelerated from the pace seen in previous months. More recently, survey data through the middle of June pointed to declines in retail gasoline prices, and prices of food commodities appeared to have decreased somewhat. Excluding food and energy, core consumer price inflation picked up in April and May, pushing the 12-month change in the core consumer price index through May above its level of a year earlier. Upward pressures on core consumer prices appeared to reflect the elevated prices of commodities and other imports, along with notable increases in motor vehicle prices likely arising from the effects of recent supply chain disruptions and the resulting extremely low level of automobile inventories. However, near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers moved down a little in May and early June from the high level seen in April, and longer-term inflation expectations remained within the range that has generally prevailed over the preceding few years.
Available measures of labor compensation showed that labor cost pressures were still subdued, as wage increases continued to be restrained by the large amount of slack in the labor market. In the first quarter, unit labor costs only edged up, as the modest rise in hourly compensation in the nonfarm business sector was mostly offset by further gains in productivity. More recently, average hourly earnings for all employees rose in April and May, but the average rate of increase over the preceding 12 months remained quite low.
Global economic activity appeared to have increased more slowly in the second quarter than in the first quarter. The rate of growth in the emerging market economies stepped down from its rapid pace in the first quarter, although it remained generally solid. The Japanese economy contracted sharply following the earthquake in March, and the associated supply chain disruptions weighed on the economies of many of Japan's trading partners. The pace of economic growth in the euro area remained uneven, with Germany and France posting moderate gains in economic activity, while the peripheral European economies continued to struggle. Recent declines in the prices of oil and other commodities contributed to some easing of inflationary pressures abroad.
The following sectors are slowing: job growth, personal consumption expenditures, industrial production, business spending and international markets.
Housing has yet to recover in any meaningful way.
In short -- there is little to cheer about right now.
A Closer Look at Employment, Pt. III (Or, The Drop in Government Jobs is a Big Problem)
The chart above shows a close up of total non-farm job growth. Eyeballing this chart, we see growth, but growth that is hardly linear. Notice that at the beginning of 2010 we see strong job growth (remember this is around the peak census hiring time), which then dropped until near the end of 2010. Since the beginning of the year, we've had decent job growth which has leveled out the last three months.
Consider the following chart of government employees:
Notice the continued drop in government employees, which has acted as a drag on overall job growth for the last few years.
Dealing with the government jobs number is a bit tricky, because we have to account for two spikes with the first being census workers. So, I'm going to do a simple, back of the envelope calculation which should get us in the ballpark. In February, 2010 there were 24,474,000 government employees, which increased to 22,980,000 in May, for an increase of 506,000. For the sake of argument (and simplicity) I'm going to assume this increase was composed entirely of temporary census employees. In addition, there was a spike in government employees to 22,681,000 in April 2009 that quickly moved lower, indicating the spike was temporary. I'm going to take these bumps out of the equation as well.
All that being said, the maximum number of government employees in the last 7 years occured in January 2009 where there were 22,582,000 employees. Currently, there are 22,064,000 for a decrease of 518,000. In other words, as the the number of non-farm payroll jobs has been increasing for the last 6-7 quarters, the drop in government employment has been a net overall drag on the employment figures and probably provides a partial explanation for initial unemployment claims remaining over 400,000 this far into the recovery.
Tuesday, July 12, 2011
Wednesday Commodity Round-Up
The five minute charts shows prices moving up strongly, gapping higher at the open several times and maintaining upward momentum throughout the last week.
Prices have advanced through key resistance areas and are now ready to move too record highs.
We've had a short term bullish crossover as the 10 day EMA has moved over the 20. The A/D line shows new money has been flowing into the market, although the CMF shows the move has been a bit weak. Momentum declined as prices consolidated, but the MACD has now given a buy signal.
Prices have spent the last few months consolidating in a sideways pattern. Now they stand to move higher.
Two events move gold higher: inflation and uncertainty. Inflationary pressures are diminishing as commodities move lower in price. That leaves uncertainty as the primary driver of the gold trade.
Repatriation Tax Holiday Could Fund Infrastructure Bank
Using a repatriation tax holiday — a tax break for companies bringing back overseas profits to the U.S. — to help fund an ‘infrastructure bank,’ would be a good idea, GE Chief Executive Jeffrey Immelt said at the U.S. Chamber of Commerce on Monday. Lawmakers have proposed starting a national infrastructure bank to provide low-interest loans and loan guarantees to build highways, energy projects and water infrastructure.
“We favor repatriation of our foreign cash back into the U.S., where it can do some good,” Immelt said. “I believe Senator Schumer has a good idea: taxes from repatriation could go toward creating the infrastructure bank that in turn creates jobs.”
Sen. Charles Schumer (D., N.Y.) has said that his party would be willing to consider a tax repatriation holiday, provided the companies that benefit from the lower tax rate use the funds to help create jobs.
Under a repatriation tax holiday, U.S. companies would be enticed to bring foreign profits back to the U.S. by taxing them at a roughly 5% tax rate, rather than the current top corporate rate of 35%.
mmelt told reporters after his speech that he wasn’t sure how much support there was for a repatriation tax holiday. Academic analysis of a previous repatriation tax holiday in 2004 showed that companies then used the profits more for share buybacks and dividends than for creating new jobs. But Immelt said the current economic backdrop made the situation different now.
The last time this was tried was in the last expansion which had some of the weakest job growth on record, so we know the "this will create jobs"argument doesn't work. However, using the money to fund infrastructure makes perfect sense and should be done ASAP.
The Dollar and Euro Have Broken Out of Consolidation
Technically, the next stop is the 200 day EMA. But that assumes the US won't default on its debt, the deadline of which is just a few weeks away.
At the same time the dollar has broken out of its consolidation at low levels, the euro is falling from consolidation at high levels, as traders fell the EU region because of he debt crisis issue.
A Closer Look At Employment, Pt II; Educational Achievement and Unemployment
The above chart to me is still the most important chart of the unemployment series. It tells us that the higher the educational achievement, the lower the unemployment rate. In addition, it also tells us that in the current US economy, the specialization that comes with higher education is valued and important and frankly, a requirement.
Consider this in contrast with yesterday's post on goods producing jobs -- which are typically associated with lower educational attainment. In this recession, the less educated have taken a tremendous hit.
Monday, July 11, 2011
Given the low trading volume and the price action around the 200 day EMA, I'm thinking the TLTs will pause here or rebound into the EMAs. However, I think the IEFs are targeting the 200 day EMA. Given the Fed's departure, I believe the Treasury market is moving lower for the time being.
What I didn't count on was EU problems leading to purchases of US Treasury bonds as a safe have play.
Let's take a look at the charts:
The 10 day, 5 minute chart shows the strong advance in reaction to the EU situation over the last few days. On Friday, the market was concerned about the EU changing the conditions of the Greek plan in a manner that would indicate default, while yesterday, the market was concerned about Italy. As a result of both, the US Treasury market caught a safe haven bid despite the ongoing debt negotiation situation.
The IEF prices have moved through key Fib levels. Also note the 10 and 20 day EMA have both turned higher and the 10 day EMA is about to move through the 20. However, the volume is less than convincing and the bars are incredibly weak.
Overall, the last two days' price action is more a fundamental reaction to the EU situation, which is interesting, as this has occurred at exactly the same time as the Fed backing away from the market lowering demand. And then there is the possible impact of the debt negotiation deal. It's my opinion this is a temporary bounce, caused by the EU situation.
A Closer Look At Employment Part I; How Did We Get Here and Where Are We?
The above chart shows total non-farm jobs for the US economy. The series hit its peak in January 2008 when there were 137,998,000 jobs. The trough was in February 2010 when there were 129,246 jobs, for a total loss of 8.7 million jobs. Currently there are 131,017,000 jobs for a total loss of 6.9 million. In other words, the economy has been creating jobs (about 1.8 million since the trough), but at a frustratingly slow pace.
The above chart shows the same series, but goes back to 2001. The point of the above chart is to illustrate that the job losses during the great recession completely wiped out all job gains of the last 10 years. In other words, this was akin to a natural disaster that wipes out an entire city, meaning rebuilding takes a tremendous amount of time and effort.
Now, let's look various sub-parts of the data.
The above chart shows total goods producing jobs. In January of 2007, there were, 22,432,000 goods production jobs while in the latest jobs report there were 18,006,000 for a total job loss of 4.426 million. In other words, a little less than half of the total jobs lost were in goods producing industries. Also note that while the bleeding has stopped in this area of employment, the pace of job growth has been very small. Let's examine why the pace of goods producing jobs growth has been slow.
For the last 10 years, we've seen large drops in US manufacturing employment. Part of the reason is the increased use of automation -- which is a natural by-product of technological development. As for offshoring, most offshoring is not bad. Remember that other markets have been developing for the last 20+ years and are now to the point (and have been for at least 10 years) where locating facilities in those countries makes practical sense. For example -- Brazil, India, China and Russia are all emerging economies with growing manufacturing and consumer markets. Locating manufacturing facilities in these countries (at the expense of US production) cuts down on transportation costs and creates new profit centers and local goodwill for parent companies. In short, loss of US manufacturing jobs represents as much an overall realignment of global manufacturing, consumption and economic patterns as it does an "evil plot by those nasty capitalists." Most importantly, this also means the manufacturing jobs lost will not be coming back.
As for construction, the housing boom created a massive oversupply of houses which was great for construction employment during the last expansion, but terrible for this expansion. The height of construction employment occurred in April 2006 when there were 7,726,000 construction jobs. That total is now 5,513,000 which means there have been a total of 2,213,000 construction jobs lost. Given the dismal state of US housing, construction employment will continue to be to in poor shape for some time. Because of the housing bust, these construction jobs will not coming back either.
As for service sector jobs lost (about 4 million), let's assume that 20% were real estate related. This really isn't so hard to imagine when you consider real estate agents, mortgage brokers, building inspectors, financial jobs etc.. related to the industry. That means an additional 800,000 jobs were real estate based -- which means they're not coming back anytime soon either.
So, goods producing industry losses (about 4.417 million jobs) have the extreme misfortune of being the victim of the housing bust -- which means there will not be a quick rebound from the massive losses in construction employment -- while a fundamental change in technology (increased automation) and a fundamental realignment of global consumption and economic centers of influence has led to a drop in manufacturing employment -- which means most of the job losses in that area won't come back either. As for service sector employment, a back of the envelope calculation about the effects of the housing bubble and bust indicates that about 800,000 jobs were lost from over reliance on a single sector of the economy for growth.
In other words, the slow pace of job creation in the current environment is as much the result of macro-economic issues -- such as the long-term effects of the bursting housing bubble and the lower importance of the US market relative to international markets -- as anything else.
Yes, these Hard Times will end
After a brutal week like last week, and a brutal report like Friday's June jobs report, it helps to step back and take a few deep breaths.
Yes the report was awful, and in almost every respect. Even the leading parts of the report, especially manufacturing hours, declined. Substantially.
Further, it's hard not to be discouraged by the nonsense coming out of Washington. In the face of the worst continuing economic conditions in over 70 years, austerity reigns triumphant. Austerity will not work. It will make matters worse. That Social Security and Medicare are being served up allegedly as part of a "Grand Bargain" but really just for the first course, is even more discouraging.
All of this is bad. But at the same time, please remember that we had Panics and Depressions all through the 19th and early 20th centuries, some worse than others, and all of them eventually resolved even though there was no New Deal or stimulus program to assuage the most needy.
Let's start by remembering that what got us into this mess was too much debt, and specifically a housing bubble that burst, eventually dragging down everything including a highly leveraged financial sector with it. But eventually these factors - the housing bust and the household debt issues - are going to be worked out, and turn into positives. A time horizon of the next two or three years is not unreasonable.
The first factor is the housing market. Here's a graph of housing permits and starts for the last 10 years:
The bad news is that the housing market has been flat on its back for the last 2 1/2 years. That housing hasn't participated is a very big reason why the recovery from the trough of the "great recession" hasn't been enough to translate into real improvement in people's lives. As Prof. Edward Leamer has compellingly shown, typically housing leads both in recessions and in recoveries, creating jobs not only for construction workers, but also having huge multiplier effects over a year or two, as new homeowners buy furnishings, appliances, landscaping, and other improvements both interior and exterior.
The good news is that it's hard to generate a significant economic contraction without housing participating in that, either. In other words, if there's been no upturn, there also hasn't been any significant downturn in housing sales in the last 2 1/2 years. So, we might face stagnation, or in the worst case, a relatively shallow double-dip. That would make a bad situation even worse, but on the other hand, not Armageddon.
And as I pointed out last year, the Millennials or Echo Boomers are arriving at home-buying age. Demand is beginning to get pent-up for these first time home-buyers. Meanwhile prices and mortgage rates have continued to decline, so that housing affordability (meaning how big of a monthly payment is necessary to own a house via a mortgage) is at multi-decade lows. So once housing does begin to improve, the expansion it creates may very well resemble an economic opening of the floodgates.
The second factor is the accumulation of personal savings. Here is a graph of inflation-adjusted, "real" personal savings for the last 50 years:
As you can see, for the last 2+ years, more savings have been accumulated than at any point in the last 25 years. There are $100s of Billions of dollars more than before the recession that can be spent, once the confidence and opportunity arrive to do so. Inevitably this is skewed towards top earners, but this has always been the case, even if moreso now than at any point in over half a century.
The third factor is the deleveraging of households. Here is the latest graph of the percentage of disposable income needed to service household debt:
This data is already over 3 months old. If deleveraging continues for the next 8 months like it has since the middle of 2008, households will probably be in their best position to service debt in the last 30 years.
Unless there is some major new event, within about two or three years we are going to have households much more able to pick up spending, and a housing market ready to take on some of that pent-up demand. It's also worth noting that with new discoveries coming online, and more energy-efficient vehicles being sold over the next 3 years, Oil's choke collar is also likely to loosen.
On the other hand, I do have one big concern, and that is the issue of wage deflation. We just had our second (tiny) outright monthly decline in hourly earnings in the last seven months. We have had this before, most particularly in the mid-1980's, so it isn't necessarily fatal. Indeed, as the below bar graph of the last 30 years shows, hourly earnings tend to hit their cycle lows several years into a recovery, so the present is consistent with those past expansions:
But here is a graph showing the quarterly trend in hourly earnings in the last 10 years:
We need to see renewed strength in wages soon. If the current trend continues, then within about 2 years or so we are going to tip over into outright wage deflation. We very much need to see the three positive factors I've outlined above kick in before a debt-deflation is triggered. As I wrote last January, we are in a race between deleveraging and deflation. I do consider it likely that deleveraging will win.
Once housing begins to improve again, household deleveraging has been accomplished, and Oil's choke collar loosens on a more sustainable basis, these Hard Times will end. How much of an improvement we will see at that point will depend on how much actual wages grow.
Economic Week in Review
Consumer: the big news here was the employment report, which was terrible (my friends at the Liscio Report called in "unspinningly bad). A gain of 18,000 jobs that will probably be lowered in the coming months to a gain of 0 or slight loss. There was nothing good in this report: wages dropped, the unemployment rate increased and we had a deeply concerning spike in the number of short-term unemployed. At a time when the consumer is already slowing his spending, this is the worst possible report, plain and simple. Interestingly enough, consumer credit increased last month, propelled higher by a 5.1% increase in revolving credit (credit card debt).
Manufacturing: factory orders increased .8% in May, which is a rebound from the drop of .9% in April. While the news stories touted the increase as a sign that fallout from Japan was lessening, I'd wait a few months before we make that call. We've seen a drop across a variety of countries in manufacturing, leading me to have concerns about the overall economic direction.
Services: The ISM services index printed at 53,3, which is down from 54.6 the previous month. Both the production and new orders components dropped, indicating the overall pace is slowing. Although 15 industry areas were increasing, the anecdotal quips were mixed. Overall, this area of the economy is still growing, but there is some erosion around the edges.
The employment report was a terrible report, and dominated the news. It indicates the recovery is in serious danger.
Equity Week in Review and Preview of the Upcoming Week/Month
At this point, we should acknowledge that the stock market is a leading indicator. The question now becomes, was this week's advance a sign that equity traders think the worst is over, and therefore it's time to get into the action? The weakness in the Treasury market last week would bear this out, as would the rise in the oil market and copper's recent advance through key resistance areas. However, I'm personally not sold on a third or fourth quarter rebound yet. Consumer spending is weakening, global manufacturing is softening, emerging economies are increasing interest rates (US exports have been strong during the recovery) and Washington is full of idiots doing everything they can to screw up the economy. I would need to see an advance through previous highs on multiple indexes (with the Russell 2000 being one) before I'm sold on the veracity of this rally.In short, the issue for the market was, "is this a technical bounce for an oversold market, or is it the beginning of new advance in the market?" Last week added evidence that the former is the case. First, consider this chart of the 10 day, 5 minute chart:
In the preceding week, prices advanced strongly whereas last week, prices moved sideways.
Prices have clearly advanced beyond key resistance levels and the shorter EMAs have advanced through the longer EMAs -- all of which are also rising. However, last week's candles were weaker and appeared to be stalling in their upward advance.
All of the technical indicators are showing a rally -- the A/D and CMF indicate money is flowing into the market at an increased pace, and the MACD shows increased momentum. However, consider the following two additional charts:
Neither the QQQs nor the IYTs -- which were both at important technical levels -- advanced beyond those levels.
Part of last week's action could simply be a consolidation of gains after a strong advance. This is standard market behavior. However, Friday's employment report should put the kabash on any strong upside rally in anticipation of economic acceleration in the third and fourth quarter. The pace of job growth is slowing, not advancing, and indicates there are problems underneath the economic surface. Any advance beyond resistance levels should be viewed suspiciously at this point until the fundamental picture improves.