Retail sales up 1.3%, Indicate Jobs Growth in December

- by New Deal democrat

The Commerce Department reported a surprise 1.3% increase in retail sales for November, also up 1.2% ex autos. October's sales were revised downward to +1.1%, and ex-auto were revized to 0 from +0.2%.

The report also said that Year over Year sales were up 1.9 percent. This is the first YoY gain since August 2008.

Improvements were broad-based, including cars and parts, and also building materials and appliances and electronic goods. The only negative was the increase of +0.6% in gasoline sales.

Assuming that November's CPI will come in very close to +0.1%, this means that real retail sales have increased about +1.9% in the 7 months since their smoothed 3-month bottom in April, (and ex-autos are up about +1.4%). This translates into a rate of about 3% real growth per year.

As of right now, all of the most recent reported data from the ISM manufacturing index, industrial production, initial jobless claims, and now real retail sales satisfy the criteria I set forth in my series When Will the Economy Add Jobs, namely:

ISM manufacturing index is above 53, ISM employment is at -5 or above, initial jobless claims are at least a sustained 16%-20% off peak, and both Industrial Production and Real retail sales have advanced at a rate of 2.5% or more year-over-year from the bottom.

. If there are no negative surprises next week in industrial production, jobless claims, or the CPI, then (subject to the inevitable revisions!) this strongly suggests that actual job growth will be reported by the BLS for December nonfarm payrolls.

Flow of Funds Observations

The Fed's Flow of Funds report was released yesterday and, as usual, it contained a treasure trove of (somewhat stale) data that's nevertheless fascinating. Herewith some observations:

Household net worth rose by about $2.7 trillion in Q3. It now stands at about $53.4 trillion, the highest level in a year (click through for giant charts):

Our debt-to-income ratio, unfortunately, is still too elevated at 128%, and is only coming down very slowly. Continued improvement needs to be seen here.

Owners' Equity as a Percent of Household Real Estate was revised (downward) to a first quarter trough of a staggering, almost unthinkable, 33.5%. It has rebounded in the subsequent two quarters to a merely hideously pathetic 38%.

The chart above ties in beautifully with an article that coincidentally appeared in the WSJ (sub req'd) the same day the Flow of Funds report was released:

American Dream 2: Default, Then Rent

PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.

But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.

Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.

The housing bust has brought big changes to the 3100 block of Club Rancho Drive in Palmdale, Calif. See details on the homes, debts and residents.

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

As a societal matter, is the appeal of homeownership -- notwithstanding the various (mostly tax) advantages of owning (e.g. having a mortgage with an interest deduction) over renting -- going the way of the dodo bird? Could one not infer as much from the steady decline in owners' equity over the past many decades, as this metric has moved steadily downward from over 80% to under 40%? Are we destined to become a nation of renters, particularly in light of the pain that's been inflicted by the bursting of the housing bubble? What are the longer-term implications if such a shift is, in fact, taking place? (Our demographics -- an aging boomer population -- are going to further slow the housing market's recovery, but that's another post.)

Today's (Yesterdays) Markets

The IWCs - the Russell Micro Cap index -- is also having problems advancing. Notice that prices have essentially stalled in their advance. Also notice the EMA picture -- they are bunched together indicating and overall lack of direction.

I'm a big fan of Dow Theory, which essentially states that averages have advance together. That is, if the SPYs are advancing, then other averages have to advance as well. This would indicates that traders are moving into all areas of the market as opposed to a specific security or average.

The above chart of the transportation average indicates we are not seeing confirming price action. Once prices hit the price level of the first price peak, they stalled. Also notice the types of candles we are seeing at this point -- small an narrow. These are not the types of candles you want to see if you want the market to move higher. In addition, the overall technicals are bullish -- the MACD is rising and the EMAs are in a bullish configuration. But prices have not confirmed this move.

These two charts indicate we are not seeing a broad based advance -- in fact, we are seeing fewer and fewer stocks advance. Some of this is probably due to the end of the year -- we've seen a strong advance and traders are taking profits off the table. This may only be temporary. That is, when the new year starts and everyone has a clean plate we could see additional money committed to the market. However, the current technical position is a bit dicey.

Today

Forex Friday

Click for a larger image

A.) The dollar was in a downward sloping pattern for the last few months.

B.) Prices have moved through the upper trend line, printing a strong bar earlier this week. Now prices are finding support on top of the 50 day EMA.

C.) The MACD has moved with the momentum, indicating traders are moving into the security.

D.) The RSI indicates that prices are strengthening.

The central question to this chart is "is this actually a change in the trend or a quick pop up?" The main test of that theory will be if prices stay above the EMAs.

Today's Market

I'm just getting back from a late dinner. I'll put this up in the AM.

Merchant Wholesalers See Another Month of Increases

From the Census:

The U.S. Census Bureau announced today that October 2009 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $326.2 billion, up 1.2 percent (+/-0.7%) from the revised September level, but were down 9.6 percent (+/-1.6%) from the October 2008 level. The September preliminary estimate was revised upward $2.0 billion or 0.6 percent. October sales of durable goods were up 0.8 percent (+/-1.4%)* from last month, but were down 11.1 percent (+/-2.6%) from a year ago. Sales of computer and computer peripheral equipment and software were up 5.8 percent from last month and sales of electrical and electronic goods were up 5.3 percent. Sales of nondurable goods were up 1.6 percent (+/-0.7%) from last month, but were down 8.3 percent (+/-1.1%) from last year. Sales of petroleum and petroleum products were up 5.9 percent from last month and sales of farm product raw materials were up 5.1 percent.

Here is a chart of the relevant data:


Click for a larger image

Notice that sales have increased for six straight months. Some of this is a rebounding from low levels, but not all.

Initial Jobless Claims: 474,000

The BLS reported that for the week ending December 5, seasonally adjusted initial jobless claims were 474,000, up from last week's number of 457,000.

The 4-week moving average is now 473,750, down 7,750 from last week. The 4 week seasonally adjusted moving average is now about 27% lower than the peak of 658,750 on April 3 of this year. (In the last two "jobless recoveries", new claims never declined anywhere near 27% from peak).

Unadjusted, there were 664,865 new claims, an increase of 204,703 from the week before, and well below the 759,531 initial claims in the same week last year.

There is a lot of seasonal variability in jobless claims at this time of year, and arguably this week's reading is closer to the "real" declining trend number, which is obviously still getting better. Next week's initial jobless claims number is the Big One, because it will coincide with the week during which the BLS will do its December jobs survey. Here's the relationship between the initial jobless claims number in the refernce week (left) and the monthly jobs number (right) for the last few months:

2009-09-01 (+564) (-139)
2009-10-01 (+532) (-111)
2009-11-01 (+513) (- 11)

In summary, assuming there is no horrible surprise next week, initial jobless claims are predicting actual job growth in the economy during December.

In case you missed it, Berkeley Economics Professor Brad DeLong commented yesterday that he hopes I'm right about the relationship between jobless claims and payroll growth. I hope that if he is right (we need to get down to 400,000 jobless claims), I am proven wrong quickly!

From Bonddad:

Here is a chart of the relevant data:


Notice the 4-week moving average has been dropping since the mid-Spring. In other words -- the trend is strongly in place.

Two Minor Items

I was flattered when Barry Ritholtz asked me to contribute a guest post over at The Big Picture -- it's here, Part II of my When Economists Collide series (which I'm sure will be ongoing).

Fed's Flow of Funds will be released later today. Although the material isn't exactly fresh (in fact it's a bit stale), I love sifting through the household balance sheet, and I'm confident I'll get some posts out of it, as usual.

Thursday Oil-Market Round-Up

Click for a larger image

A.) The oil market was in a downward sloping trading range for the last two months

B.) Prices have broken through the lower line of support. At first they did so tentatively, but yesterday we saw a strong bar printed on a big volume surge.

C.) Momentum has been decreasing for the last two months

D.) The EMA picture has turned bearish -- all the EMAs are moving lower and the 10 and 20 day EMA have crossed below the 50 day EMA.

E.) Prices are weakening

F.) Money has moved out of the USO/oil market but not a alarming rates. However, this in conjunction with other indicators is bearish.

Today's Market

Click for a larger image

A.) Prices have been in a range for about the last month. Also notice that within the last month we've seen lots of poor candles -- narrow ranges, long shadows etc.. What we're seeing is a weakening of the market.

B.) The EMA picture is still bullish -- the shorter EMAs are above the longer EMAs. However, notice that prices and the EMAs are still in a tight range with prices moving around the EMAs. Also note the 10 day EMAs is moving almost sideways and the upward trajectory of the 20 day EMA is lessening.

C.) Momentum is in a clear downward trajectory.

D.) But we're not seeing money flow out of the market. At least -- not yet.

White House Announces Job Creation Plan

Here are some specifics from the plan:

* To encourage investment by small businesses and improve their access to capital, the Administration is calling for a one-year elimination of the tax on capital gains from new investments in small business stock. The Recovery Act allowed a 75% exclusion from capital gains taxes on small business investments.
* Extension of enhanced expensing provisions for small businesses: The Administration is also calling for the extension through 2010 of the Recovery Act provision that allows small businesses to immediately expense up to $250,000 of qualified investment.
* Extension of Recovery Act bonus depreciation tax incentive: To give businesses an incentive to invest, the Administration is calling for extending the Recovery Act provision that accelerates the rate at which business can deduct the cost of capital expenditures. This provision will put more than $20 billion in the hands of businesses in 2010, while enabling Treasury to recoup much of the funding as business regain their strength.

* A new tax cut for small businesses to encourage hiring in 2010. Although the economy is now growing again, many businesses remain reluctant to hire. In this economic environment, an employment tax cut for small businesses has the potential to accelerate the pace of hiring. The Administration believes it is important to provide a short-term tax incentive to encourage small business hiring and support employment, and will work with Congress to design a provision that accomplishes these goals.
* Eliminating fees and increasing guarantees for small businesses that borrow through major SBA programs in 2010. The President called for the elimination of fees and an increase in guarantees for loans through the Small Business Administration, a measure that extends provisions in the Recovery Act through the end of 2010. In addition, the President called for continued Treasury efforts to use the TARP to support small business lending.

1.) This is a stupid idea unless the tax cut extension lasts for longer than 1 year. 1 year is enough time to invest and start the business. It is hardly enough time actually grow the business to meaningful levels such that selling stock is a good idea.

2.) Anything that allows for increased investment is a good idea.

3.) Extension of depreciation deductions is a standard way to encourage investment. However, I would add the removal of the deduction calculation from the alternative minimum income computation. That would encourage high net-worth individuals to put money into small business.

4.) Credits or tax incentives fir hiring is a good idea as well. The bottom line is businesses are worried about hiring right now. Anything that gets them off the fence is helpful.

5.) This should increase the flow of credit to small businesses -- another good idea.

* Additional investment in highways, transit, rail, aviation and water. The President is calling for new investments in a wide range of infrastructure, designed to get out the door as quickly as possible while continuing a sustained effort at creating jobs and improving America’s productivity.
* Support for merit-based infrastructure investment that leverages federal dollars. The Administration supports financing infrastructure investments in new ways, allowing projects to be selected on merit and leveraging money with a combination of grants and loans as was done through the Recovery Act’s TIGER program.

6.) Infrastructure is perhaps one of the best things to invest it, largely because of the high multiplier effect and fact that the multiplier lasts a long time. The multiplier effect tells you how much national income each dollar of spending gets you. Infrastructure has a high multiplier. And the multiplier lasts a long time. For example, build a road between two cities that had no transportation between them and you will increase business between them for a long time (as in decades). Eisenhauer built the national highways which forever increased the US' productive capabilities.

7.) I need to see more details to make a call on this one.

* New incentives for consumers who invest in energy efficient retrofits in their homes. Smart, targeted investments in energy efficiency can help create jobs while improving our energy security and saving consumers money. The President today called on Congress to consider a new program to provide rebates for consumers who make energy efficiency retrofits. Such a program will harness the power of the private sector to help drive consumers to make cost-saving investments in their homes.
* Expansion of successful oversubscribed Recovery Act programs to leverage private investment in energy efficiency and create clean energy manufacturing jobs. The Recovery Act included historic investments that have helped to build the foundation for a clean energy economy. The Administration supports expanding programs for which additional federal dollars will leverage private investment and create jobs quickly, such as industrial energy efficiency investments and tax incentives for investing in renewable manufacturing facilities in the U.S.

8.) Cash for caulkers: good idea for two reasons. First, it lowers peoples utility bills -- always a good thing. Secondly, it puts construction employees back to work. This part of the work force has been hit really hard because of the housing crisis. Bottom line -- thumbs up.

9.) Why we are not investing billions of dollars in clean energy is completely beyond me. He who creates cheap, clean energy will have customers for generations.

You're reading the right blog

- by New Deal democrat

In view of last week's jobs data, and with Bonddad's permission, I am reposting in its entirety an entry of mine from September 21 of this year, which was entitled, Getting it wrong about Initial Jobless Claims and Nonfarm Payrolls (with a few updates at the bottom) for reasons that I hope will seem obvious as you read along:
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Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a "note to self" that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this "Great Recession." This "note to self" was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser. It is well on its way to becoming Holy Writ.

Let me say first of all that I have the highest respect for all 3 of the above gentlemen. Nevertheless...

IT IS WRONG.

The 1991 and 2001 recessions were very mild. Peak initial jobless claims in those recessions were 501,250 and 489,250, respectively. It would be nuts to think that jobs would be added to the economy anywhere near the 500,000 high water mark in jobless claims from those recessions.

The 1973-4 and 1981-2 recessions are much better comparisons. They were the two most severe post-WW2 recessions up until now, respectively featuring 9% and 10%+ unemployment. Furthermore, peak initial jobless claims in those recessions were 560,750 on February 1, 1975 and 674,250 on October 9, 1982, respectively; both peaks being much closer to our recession's peak initial claims number of 658,750 on April 4, 2009.

In the case of the recoveries from both of those recessions, payrolls started to grow as the ievel of initial jobless claims crossed 500,000, not 400,000.

Here it is in graph form, including initial jobless claims (in blue and green respectively) ending as of the week each crossed below 500,000, together with nonfarm payrolls (in red and orange) ending the same month:


It is easy to see that nonfarm payrolls troughed in the preceding month, and grew during that month that initial claims crossed below 500,000.

Here is the raw data from the St. Louis Fred site:

1975 Recovery

Initial jobless claims:

1975-02-01 560750 (peak)

1975-04-05 543250
1975-04-12 540500
1975-04-19 535750
1975-04-26 525250
1975-05-03 517250
1975-05-10 514000
1975-05-17 509750
1975-05-24 504750
1975-05-31 497250

and Nonfarm Payrolls:

1975-01-01 77297
1975-02-01 76919
1975-03-01 76649
1975-04-01 76463
1975-05-01 76623
1975-06-01 76519
1975-07-01 76768
1975-08-01 77154

1982-3 Recovery

Initial Jobless claims

1982-10-09 674250 (peak)

1982-12-04 586250
1982-12-11 569750
1982-12-18 554500
1982-12-25 523750
1983-01-01 518000
1983-01-08 512250
1983-01-15 503000
1983-01-22 500500
1983-01-29 492750

and Nonfarm Payrolls:

1982-10-01 88894
1982-11-01 88770
1982-12-01 88756
1983-01-01 88981
1983-02-01 88903
1983-03-01 89076

For good measure, in the 1980 Recession, in which unemployment peaked at 7.8%, jobs showed growth in August 1980 at the same time as Initial Claims averaged 546,000:

Initial Claims:

1980-06-07 629000 (peak)

1980-07-05 599250
1980-07-12 584500
1980-07-19 576500
1980-07-26 559250
1980-08-02 556750
1980-08-09 556750
1980-08-16 546250
1980-08-23 534750
1980-08-30 518000

Nonfarm Payrolls:

1980-05-01 90415
1980-06-01 90095
1980-07-01 89832
1980-08-01 90092

[NOTE: When I originally posted this, a commenter noted that the way I posted the above was somewhat confusing. As I responded at the time, all of the data above is positive, e.g., +536,000 new jobless claims. The bolded numbers are the low point for payrolls during each recession, e.g., 76,463(,000) in 1975; and the two weeks marking where initial jobless claims crossed the 500,000 mark.]

IT IS SIMPLY NOT TRUE THAT INITIAL JOBLESS CLAIMS MUST DECLINE TO 400,000 BEFORE NONFARM PAYROLLS TURN POSITIVE.

Note that for all three Recessions/recoveries, I've included jobless claims from the previous month, when nonfarm payrolls troughed. In 1975, payrolls actually troughed at 536,000 new jobless claims. In 1980, they troughed at 580,000. In 1982, they troughed at 559,000 (the 4 week average of the months involved).

That is partly why I have taken the position that in this recession/recovery, payrolls will trough once there is a sustained reading of ~530,000 if there is a slow decline in initial claims, and 500,000 if the decline quickens.

I am utterly confident that there will be job growth long before jobless claims fall to 400,000.
----------
UPDATE: Now, here is the data since I originally posted the above:

Initial claims
2009-04-04 658750 (peak)

2009-09-26 548750
2009-10-03 540500
2009-10-10 533000
2009-10-17 532250
2009-10-24 526750
2009-10-31 524250
2009-11-07 520500
2009-11-14 513000
2009-11-21 495500
2009-11-28 481250

Nonfarm Payrolls

2009-08-01 131257
2009-09-01 131118
2009-10-01 131007
2009-11-01 130996???
2009-12-01 ???

Four days after that post, in a note entitled When Will the Economy Start to Add Jobs (VI), I concluded that it was most likely that jobs would turn positive in November or December, +/- 1 month, and gave a possible "glide path" to that number. That "glide path" is the first column below (in thousands). The current BLS revision is the second column:

2009-09-01 (-145) (-139)
2009-10-01 (- 91) (-111)
2009-11-01 (- 28) (- 11)
2009-12-01 (+ 34) ???
------------------------------
I am sure the data will make me look like a smacked a@@ soon enough, but just at this particular moment, I am smelling like a rose.

Economic Populist = Economic Idiots

Economic Populist has an article up titled Bonddad v. Bonddad. Here are the points where they are wrong.

1.) Economists use charts to present data. That's because economists base their analysis on numbers. Graphs depict this data in an easy to understand form. A simple perusal of any economics text illustrates this point. To argue that using graphs is bad economics is the logical equivalent of saying, "Get the government out of my Medicare."

2.) Analyzing graphs of data is not "technical analysis." Technical analysis is the analysis of price charts for trading purposes. Again -- this is a rudimentary economic point. To not know the difference is another freshman mistake -- almost as bad as arguing an economist shouldn't use charts to ... oh wait -- he already did that.

3.) I still do plenty of fundamental analysis. Simply go back through all the postings and you'll I cover most major economic releases.

4.) I use to write a great deal about the amount of debt in the US economy. Then came the deflationary scare of 2008. For those of you who don't know history, this is what led to the Great Depression. To not use massive amounts of debt at the end of last year and this year would have resulted in a Great Depression II. I explained the logic in this article titled, Why the Stimulus is Needed. And I explained my new rationale about national debt in Can We Afford All This Spending. Here was the conclusion:

So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.

Let's look at the basic problems. First, EP doesn't know basic economic presentation methods and terminology. This is not a debate about the difference between two economists -- it's about how they don't know the basics of economics. In addition, a simple search of my work would have revealed why I changed my position about public debt. And that goes to the second issue -- they don't do their research. That makes all of their writing suspect at best. And in reality, it makes it all meaningless scribes of intellectual illiterates.

Economic Populist is angry because I called them and others out in an article titled Why Hysteria and Economic Blogs Are Best Friends. Economic Populist didn't like being told they are fitting facts to ideology. In actuality, that is all they have because arguing economists shouldn't use graphs and not knowing what technical analysis is indicates economic populist doesn't know anything about economics.

Wednesday Commodities Round-Up

Copper has been in an uptrend for the last four months. Along the way we've seen several consolidation patterns (a rounding top in August - September and two pennant patterns after that), but the overall trend is still up. A.) In addition we've seen a continued increase in the A/D line indicating increasing volume flowing into the markets. B.) While momentum dropped a few months ago, it is returning.



The EMA picture is bullish. The shorter EMAs are above the longer EMAs, all the EMAs are rising and prices are above the EMAs.

Today's Market

A.) The QQQQs are forming a broadening top

B.) Now we have the possibility of a double top which is confirmed by

C.) Declining momentum.

This is a general theme across all the markets -- a slowing down at the end of the year. It's been a good year since the March 9 lows. Traders will be looking to book some profits for end-of-the year's sake. My concern is what will happen after the first of the year?

November Leading Economic Indicators

- by New Deal democrat

The very same data that told Bonddad and me seven months ago that the economic free fall was going to stop, and that has ever more strongly pointed to recovery, the Leading Economic Indicators, are now known for November.

As I hinted last week, this could be the first month since then that the LEI actually go down, although my best estimate is for a small gain, thanks to a surge in the manufacturing workweek, making it 8 positive months in a row. Here's the list with my best estimates:

The yield curve is still positive +0.25
Aggregate hours in manufacturing were up strongly +0.21
Stocks' 3 month gain is worth +0.1
Jobless claims were much better, +0.13
Durable goods' strong growth add +0.2
Consumer nondurables up substantially, + 0.1
Real M2* has turned slightly positive, so +0.05

ISM deliveries down, -0.08
Consumer sentiment down, -0.15
New home permits were down strongly -0.55

The bottom line: November LEIs (and revisions to October) will net the positive reading of +0.3; however, it is certainly withing the range of error if the weightings are slightly different for the index to go negative. Indeed, had the manufacturing workweek not grown, or had consumer nondurables not turned up, my estimate probably would have been negative.

I have bolded housing permits for an obvious reason: the shocking decline in housing permits and starts almost singlehandedly takes down the whole index for November. While I expect that number is a one-off event and will not be repeated in the next few months, it is a valid number and so the combined mediocre showing for October and November point to a softening economy during the first quarter of 2010.

On the bright side, YoY the LEI will probably be up 4.5% as of November. Simply going sideways this month would make the YoY LEI index up 5.1% this month, consistent with actual job growth in previous economic recoveries.

Alan Grayson Has No Clue About the Federal Reserve

This diary isn't just about Representative Grayson (D-FL) but about all the other Ron Paul retards in our Congress that seem to not understand the Federal Reserve System and economics/global finance in general. In the following clip Rep. Grayson questions Federal Reserve Chairman Ben Bernanke about $500 billion in currency swaps reported on the Fed's balance sheet and really shows how Grayson has absolutely no clue what he is talking about.

Listen very carefully to Ben Bernanke's response. We trade a central bank (say the EU) dollars for their euros. We are out no money. It is not a loan that we can lose money on. It is not money that the American public is out. It is simply a swap of currencies to provide liquidity to another market during the crisis (ie to stem a run on dollars). There is no conspiracy here and Grayson really shows his ignorance on the issue when he persists in questioning Bernanke about where "our dollars" went (ie to which specific banks). The answer from Bernanke is simply who cares. We have the euros from the central bank on the balance sheet and made the swap with the other central bank, not with other foreign banks directly. This is simply another one of Ron Paul's conspiracy theories that have been latched onto by some democrats for reasons unknown to me (other than a fear of what is not understood). Bernanke almost seems like he just wants to tell Representative Grayson to take an econ class and get back to him with the somewhat condescending nature of his answer.

For further evidence of Grayson's lack of understanding on issues related to the Federal Reserve, watch this video:


This line of questioning is pure conspiracy theory shit. This is right up there with the moon landing being filmed in a warehouse in Virginia or the Illuminati running the world. The only issue here is that the attorney (not being an economist) simply doesn't respond with enough force. The Fed does not manipulate the stock market other than through interest rate policy (ie lower rates tend to lead to growth, while higher rates constrain it). He also doesn't understand primary dealers (the banks that are forced to bid on auctions of treasuries to provide guaranteed liquidity) and clearly thinks that it is somehow linked to the stock market (hence the frontrunning comment attached to the question on primary dealers). This is so sophomoric that it should be insulting to Americans as a whole.

The question of whether the Federal Reserve possesses the gold it claims is in fact a conspiracy theory. This conspiracy theory is commonly touted by Ron Paul and his legion of worshippers and gold bugs and is so absurd I was loathe to even bring it up here, but since Representative Grayson seemed to have no problem bringing it up I felt like it needed to be rebutted.

Finally, I love Grayson's question of who got the increase in the balance sheet. The answer was not only simple, it was widely reported everywhere. Most of this increase was used to provide liquidity to the economy through the purchase of treasuries and various agency backed securities. What this means is that the Fed essentially bought bonds (broadly defined) in an effort to keep interest rates (especially mortgage rates) low in an effort to enable economic recovery. There simply is nothing nefarious going on here except for the conspiracy theories that Representative Grayson keeps postulating.

This showcases why we get into financial problems in this country, as the people who write the laws (or unwrite them in the case of Glass-Steagal) are simply ignorant about the issues but like to pretend otherwise. Don't count on Congress to fix the root causes of this mess anytime soon.

A Note from Bonddad:

I fully agree with SilverOz's statements here. The bottom line is Congress is full of economic incompetents who have absolutely no idea what they are talking about. Most are great at spouting talking points (government bad from the right or big banks bad from the left) but no one has the ability to address the extremely complex nuances of economic policy. And this whole "audit the Fed" crap that is going around -- despite the fact that all the Fed's finances are on their website -- is absurd on its face. And finally there is this point: like it or not, Bernanke and the Fed saved our collective economic asses with their "extraordinary measures. How do I know this? Read a Monetary History of the US -- especially the part about "The Great Contraction".

NFIB: Small Business Optimism "In The Tank"

The NFIB's SBET has just been released and, consistent with last week's tease, it paints a deteriorating story:

Small Business Owners'Optimism in the Tank; Index Falls Again

WASHINGTON, December 8, 2009 – The National Federation of Independent Business Index of Small Business Optimism lost 0.8 points in November, falling to 88.3 (1986=100), 7.3 points above March’s recession bottom. In the deep 1981-82 recession, the Index never fell below 90 and quickly surged to a record high early in 1983. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn.

“The biggest problem continues to be a shortage of customers,” said NFIB Chief Economist William Dunkelberg. “Apparently, owners can’t find a good reason to be optimistic about the future of the economy or their personal future. The legislative agenda in Washington is a major factor blunting consumer and owner optimism.”

Source: NFIB

Putting aside Mr. Dunkelberg's politics, this report seems to follow the big business/small business decoupling trend that appears to have taken hold. It is hard to overstate the importance of small businesses to job creation, and this report indicates they are nowhere near out of the woods.

One of a Million Possible Outcomes

In a recent correspondence with a friend at the St. Louis Fed, we briefly discussed what the jobs trajectory growth rate might look like as we (hopefully) turn the corner. Suprisingly (at least to me), my friend commented that he'd been modeling "numbers from 1.8 to 2.7, but I've seen other forecasts with growth rates over 3 percent by the end of 2011." Personally, I think that's a bit optimistic, but let's go with it for the purposes of this post.

What I've produced below is a chart that represents:

The average jobs recovery of eight recessions from 1948 - 1981 (gold)
The 1990 "jobless" recession (green)
The 2001 "jobless" recession (pink)
The current recession with a forecast (red)

Vertical lines represent the point in time that employment reached its previous peak, the longest recovery currently being the 2001 recession.

While we of course know that nothing goes from Point A to Point B in a nice, neat, linear fashion, it is interesting to see how things might play out. Using the comment from my St. Louis Fed friend, my forecast incorporates the following: Starts at 2 percent growth immediately and increases by 0.5 percent every six months (2.0, 2.5, 3.0, 3.5) until the previous high is reached. (Click through for giant chart.)

Source: Data: St. Louis Fed, Forecasts mine

If we could get started straight away -- and Friday's number provided some hope that we can -- and get some jobs momentum going as detailed above, it's possible we could recover to our previous high just one month later (47 months) than in the 2001 recession (46 months). I think the odds of this outcome are very long, but not impossible. It is fairly clear to me that this will be the longest jobs recovery on record, and this chart from Calculated Risk tells much the same story:

What we need is a catalyst. My vote -- since I don't believe the consumer is going to lead us out of this -- would go to stimulating business in the alternative energy space, which I would like to see be the next "big thing."

Absent a catalyst, I don't think this forecast has a snowball's chance. Consider that there was no real catalyst after the 2001 recession but for the Bush tax cuts, perhaps one reason that recovery now defines "jobless recoveries" -- there was no big thing. But it will be interesting to check in on this post from time to time to see how it's playing out (and I will obviously be tracking the monthly numbers).

How does anyone else see it? How would you handicap the employment glide path going forward?

(Just noticed -- after completing this post -- that Floyd Norris sees things differently). And I also see that Tim Iacono has weighed in on this issue over at The Big Picture. Lastly, I see Calculated Risk has a very interesting post as well.)

Treasury Tuesdays

A.) In the last week we've seen a broad sell-off in the Treasury market. Notice the large gaps down.

B.) However, the EMA picture is extremely jumbled. Notice there is no clear direction. First, they are all in a very tight range. Second, prices are clustered around the 200 day EMA. The reason for this EMA confusion is



The Treasury market is moving sideways -- there is no trend.

Today's Market

A.) Prices were flat for most of the day, unti

B.) A late day sell-off

The late day sell-off is important. It tells us that traders are not comfortable holding an overnight position. That means there traders are skittish -- they're nervous about what might happen overnight. In addition, it tells us that traders are more prone to pull the trigger on a sell-order.

Today's Markets

Bonddad reports that he is currently sitting in bumper-to-bumper traffic and therefore unable, for now, to give us the skinny on today's markets. I've been telling him for a while to get a better chauffeur, but he just won't listen to me.

Consumer Credit

Consumer Credit, which is going through an unprecedented contraction, and has declined by over $125 billion since August 2008, will be released by the Federal Reserve later today. Consensus estimates are for another drop, this time by about $9 billion.

UPDATE: The contraction was $3.5 billion, less than expected.

Signs the Bull Market is Aging

From the WSJ:

On the surface, things look pretty good in stock land, with indexes on the rise. But when analysts check the engine behind the recent growth, they see things that make them worry.

When stock advances are young and strong, a wide variety of stocks join in, led by smaller stocks that investors hope will respond quickly to an economic turnaround.

Now some of the early gainers are running out of steam, which can be a sign that the bull market is aging. Investors who track indicators like these don't expect significant declines anytime soon, but they are watching for problems next year.

As the Dow Jones Industrial Average and Standard & Poor's 500-stock index, both big-stock indexes, pushed to new highs in the past week, indexes of small and medium-sized stocks haven't kept pace. They have remained below their mid-October highs.

Financial and energy stocks, leaders in the recent rebound, also haven't yet surpassed mid-October highs. Technology stocks, another group of former leaders, have managed only small gains beyond October levels. Stocks that depend on strong economic growth seem to be losing favor, as investors shift toward health-care and telecommunications stocks they consider safer. That shift toward safety is another sign of weakening enthusiasm.

I have made this point several times over the last few weeks(see here and here and here) but it bears repeating. Consider these charts:



The miocrocap index is nowhere near new highs.



The Russell 2000 is nowhere near new highs.




The energy sector is heading lower


The financial sector has yet to make a meaningful advance


The NASDAQ advance/decline line is weakening and


The NYSE advance/decline line is stalling.

Bottom line: fewer and fewer stocks are participating in the rally.

A Final Thought on NFP

There was no shortage of commentary in the wake of Friday's jobs report. Among the more idiotic comments I saw from a prominent talking head with his own television show and the intials LK was this gem (emph. mine):

I think that because businesses have become much healthier, the layoffs are about over. There may even be a labor shortage.

Seriously, who in their right mind would look at Friday's report and suggest we may be facing a "labor shortage"? Whatever.

More interesting (and sane, and rational) was the commentary out of Merrill Lynch, whose economics team has done a very decent job of calling the tune for the past few months. Here's the part that caught my eye (emph. mine):

The U-6 measure of unemployment, which is the broadest measure around, ticked down to a still-depressing 17.2% in November from a record 17.5% in October. What was missed by the unemployment rate was the pick up in the duration of unemployment. The median duration of unemployment jumped to a record 20.1 weeks in November from 18.7 weeks in October. And, a record 38.3% of workers have been unemployed for at least six months. In other words, the unemployment the US economy is dealing with is structural in nature, which suggests that it is going to take a long time to absorb the over 15 million workers that are unemployed and that the natural rate of unemployment has likely moved higher this cycle. So, while this employment report forces us to bring forward our expectation for job growth to next month we are not ready to change our Fed call – we still see the Fed on hold for the duration of 2010.

First off, Merrill's spot-on analysis here (and I've been critical of them) points out the absurdity of any notion we might be looking at a labor shortage any time soon.

Beyond that, the prospect that job creation is going to be painfully slow and that we may be in for a "naturally" higher rate of unemployment is exactly what concerns me most, and is what I fear will retard our ability to get back to any semblance of trend growth. Our recent gains in productivity would seem to support this notion.

To be clear: I'm not trying to be a doom and gloomer here by excerpting a research piece that happens to cite the rise in duration of unemployment. I'm solely focused on what the consequences of that fact might be: A painfully slow, jobless recovery with an attendant, semi-permanent higher unemployment rate.

I'll have a post up tomorrow morning that will examine further what the employment trajectory might look like.

Market Monday's

The above chart has one purpose: to show that the market has not been able to get above the 110/112 area. That tells us there is a fair amount of exhaustion in the bull camp.



This daily chart shows the same thing but from a, well, daily perspective. Notice that prices are finding a large amount of resistance in the 111/112 area.


A.) On Friday, prices gapped higher at the open and then attempted to move higher. But prices could not keep the upward momentum.

B.) Prices then retreated on high volume.

C.) Prices remained in a subdued mood for the rest of the day.

What's important about this chart is that Friday the rally should have started early and continued all day. The one thing dogging this economy has been jobs. And Friday we learned that the pace of job losses is decreasing. We also learned that previous months job losses were revised lower, temporary hiring (a leading indicator) increased and hours worked increased. In short, this was the best employment report we've seen in a long time. The market should have screamed higher. Yet, it fell. That tells us the bulls are really tired right now.

Weekend Weimer and Beagle

For reasons unknown it is currently snowing in Houston. So, the dogs are tucked in under blankets. Why? Because I am a total sap when it comes to the dogs.

We'll be back on Monday.

Weekly Indicators

- by New Deal democrat

It is anti-climatic to say the least to post this message after today's NFP number, which at -11,000, blew away just about every prediction out there. September and October were also revised closer to 0 (remember when September's original -263,000 caused some serious navel gazing about whether there really was a recovery or not?). Hours worked in manufacturing were up, as were durable goods orders - both leading indicators. Aggregate hours worked also turned positive, for the first time since the start of the recession. Overtime was up. Wages were OK.

Earlier this week, auto sales for November were also strongly positive. On the negative ledger, both ISM Manufacturing and Non-manufacturing data came in weaker than expected, the latter going back into contraction and serious labor contraction there still indicated. Additionally,
November same store sales came in negative:

Overall, sales fell 0.3%, reversing the gains seen in September and October, according to the International Council of Shopping Centers. The trade group had cut its November forecast twice to a sales increase of 3% to 4%.

Turning to the high-frequency weekly indicators, the BLS reported new jobless claims fell again, to 457,000. Together with today's NFP number, this does suggest that job growth may actually arrive this month.

Black Friday weekend sales were up.:

Sales at U.S. retailers rose an estimated 1.6 percent during the U.S. Thanksgiving weekend, the start to the key holiday shopping season, according to ShopperTrak

The ICSC weekly seasonally adjusted weekly data on U.S. chain store retail sales were unchanged WoW, but up +3.1% YoY.

Rail traffic, including cyclical traffic, was still going up through November 28. I haven't compared carefully with prior years for this week, but if memory serves correct, this is just about unprecedented.

The Daily Treasury Statement for November 30 showed $127.7M in withholding taxes paid for November, down about 6% from a year ago (one of the best comparisons this year] and up from the last two months. This may indicate that 3Q was the bottom for this number - one quarter after the recession's end, as was the prior pattern.

Gasoline usage continued its seasonal decline, and was only slightly ahead of last year.

Bottom line: this was an excellent week for almost all current data, except for retail services, which continue to look pretty awful.

Unemployment Rate Drops; We're Almost Seeing Job Growth

From the BLS:

The unemployment rate edged down to 10.0 percent in November, and nonfarmpayroll employment was essentially unchanged (-11,000), the U.S. Bureau of Labor Statistics reported today. In the prior 3 months, payroll job losse had averaged 135,000 a month. In November, employment fell in construction manufacturing, and information, while temporary help services and health care added jobs.

Let's look at the data:


First of all, the trend of establishment jobs continues in the right direction. Notice the rate of jub loss continues to decrease. However,


While the unemployment rate dropped last month, the overall trend is still rising. We need a few more months of data before we can claim a change in the overall trend.

There are some other good tidbits of news in the report.

A.) The civilian labor force dropped and the number of employed people increased. This goes to the method of calculating the unemployment number. The decrease in the unemployment rate was caused by an increase in employment -- not a statistical "method of calculation" issue.

B.) Good producing employment is still down: construction jobs decreased by 27,000 and manufacturing jobs decreased by 41,000.

C.) Professional services saw an increase of 86,000. Health care/education jobs increased by 40,000.

D.) Government jobs only increased by 7,000 -- so this is not a "public sector" job creation issue.

E.) Temporary employment increased 52,000. It has increased 117,000 since July.

F.) Hours worked increased as did overtime hours worked.

This is a damn good report.

NFIB -- Small Business Gets Coal in Its Stocking

The NFIB has teased Tuesday's release of its monthly SBET, and the picture is not pretty. Their economist, Bill Dunkelberg:

NFIB Jobs Statement: Expect Coal in Small Business Stockings

“The job generating machine is still in reverse as November’s report represents the 22nd consecutive month with more small business owners reporting employment declines than employment increases. Sales are not picking up, so survival requires continuous attention to costs – and labor costs loom large.

“Eight percent (seasonally adjusted) of owners reported unfilled job openings, unchanged since August. Over the next three months, 17 percent plan to reduce employment (up one point), and 7 percent plan to create new jobs (down two points), yielding a seasonally adjusted net negative 3 percent of owners planning to create new jobs, two points worse than October. Still more firms are planning to cut jobs than planning to add.

And, to take a page from my playbook:

“The consumer is the key to job creation, when businesses have more customers, they will hire more workers. Workers must generate enough sales to pay their salaries, or the firm loses money."

More on this when the SBET is released on Tuesday and the data is fully available, but it appears that much of this report will actually be a downtick from last month's. If that is, in fact, the case, it's another very troubling development.

Forex Fridays

A.) Prices are clearly in a downward sloping channel.

B.) All the EMAs are in a bearish alignment: the shorter EMAs are below the longer EMs, all the EMAs are moving lower and prices are below all the EMAs. Also note the prices have had a difficult time getting above the EMAs -- there is not enough upward momentum to keep prices moving higher through these indicators.

C.) The RSI is medium -- that is, it's neither bullish or bearish.

D.) The MACD is trending lower, but at a very weak angle.

Bottom line: these is little reason to think the dollar will do anything except continue to move lower.

Today's Market

A.) Prices spiked at the beginning of the trading session and then quickly fell. The reason was the contractionary reading of the ISM services number. This was enough to keep prices subdued from the remainder of the day.

B.) The late day sell-off had two causes. First, traders were worried about Bank of America's announcement that they would sell additional stock. There is concern that current shareholders will be diluted. But the second reason is more important: people are concerned about the jobs report tomorrow. If the number comes in low it could get very ugly tomorrow.

Beige Book Sees Improvement

Yesterday the Fed released the Beige Book. This gives us a good opportunity to take a longer look at the economy to see exactly what is going on.

Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed.

Consumer spending was reported to have picked up moderately since the last report, for both general merchandise and vehicles; a number of Districts noted relatively robust sales of used autos. Most Districts indicated that non-auto retailers were holding lean inventories going into the holiday season. Tourism activity varied across Districts. Manufacturing conditions were said to be, on balance, steady to moderately improving across most of the country, while conditions in the nonfinancial service sector generally strengthened somewhat, though with some variation across Districts and across industries. Residential real estate conditions were somewhat improved from very low levels, on balance, led by the lower end of the market. Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating.

Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality. In the agricultural sector, the fall harvest was delayed in the eastern half of the nation due to excessively wet conditions during October and early November. Most energy-producing Districts noted a slight uptick in activity in the sector since the last report. Labor market conditions remained weak since the last report, though there were signs of stabilization and scattered signs of improvement. While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods.

Short version: things are moving in the right direction. The vast majority of districts sees improvement (8 of 11 districts saw things get better), but we have a long way to go. Let's break the data down into some smaller pieces.

Let's break the data down into smaller pieces:

Consumer spending strengthened since the last report, with sales of both general merchandise and autos improving across much of the country. Non-auto sales were reported to have picked up in the New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco Districts; sales were described as steady or mixed in the Boston, Chicago, Minneapolis, and Dallas Districts. St. Louis described retail sales as below expectations and down from a year earlier. Auto sales generally improved since the last report, in some cases rebounding from a brief dip after the "cash-for-clunkers" program ended. Increased vehicle sales were reported from New York, Philadelphia, Richmond, Chicago, St. Louis, and Dallas, while sales were described as flat or mixed in the Cleveland, Minneapolis, Kansas City, and San Francisco Districts. A number of Districts reported that used vehicles have been selling better than new ones.

Here is a chart of the relevant data:

Notice the year over year number has been increasing all year. This is to be expected as the number is coming off of an incredibly low bottom. However, also note the gray lines on the chart. These represent month to month increases and decreases. We've had nine monthly reports this year. Three have shown a decrease. That's not bad for an economy that was in a recession for most of the year. While I would like to see the month to month numbers increase, that's not going to happen in the near future.

Most Districts reported mixed to moderately improving manufacturing conditions since the last report. New York, Philadelphia, Cleveland, Minneapolis, Kansas City, and San Francisco all noted modest increases in manufacturing activity within their Districts. Manufacturing conditions in the Boston and Dallas Districts were characterized as mixed, with some improvement noted for biopharmaceuticals companies in Boston and high-tech manufacturing firms in Dallas. By contrast, Richmond and Chicago both reported that manufacturing activity had leveled off since the last report, while activity continued to decline in the Atlanta and St. Louis Districts, although at a somewhat slower pace than the last report. Tighter credit limited the ability of customers to place new orders in the Richmond District, while in the Chicago District, contacts noted a slowdown in the restocking of inventories. Increases in activity related to the transportation industry were cited in the Chicago, St. Louis, Cleveland, and Kansas City Districts, although such activity was mixed in the Dallas District and reported as declining in the San Francisco District. Several Districts noted an uptick in food-related production.

Here is a chart of the relevant data:

The ISM manufacturing index has rebounded from incredibly low levels to print numbers in the expansion area (plus 50) over the last four months. Looking back before recession, these numbers are in line with what we were seeing pre-recession. Also note these numbers are consistent the the continual improvement we've witnessed in the various regional Federal Reserve surveys (the Empire State index etc...). Bottom line: manufacturing has rebounded.

Activity in the service sector generally picked up since the last report, though results were mixed across Districts and across service industries. New York and Philadelphia reported that service-sector activity overall remained steady to up slightly, while St. Louis noted expanding activity. The information technology industry was reported to be showing improvement in the Boston, Minneapolis, and Kansas City Districts. A pickup in activity at staffing firms was reported by Boston and Dallas, whereas New York noted that activity remained sluggish. Strength in health services was noted in the Boston and Richmond Districts. Shipping activity was characterized as flat in the Cleveland, Atlanta, and Kansas City District, while Dallas reports some gain; however, Dallas and Atlanta both noted particular weakness in rail shipping activity. Professional and business support firms reportedly registered some improvement in the St. Louis and Minneapolis Districts but flat to declining activity in Richmond and San Francisco.

Here is a chart of the relevant data:

Like the manufacturing sector, this number has rebounded from low levels to show expansion. This index (like the manufacturing number), has been steadily increasing sign October of last year.

Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end. Increases in sales activity were reported in the Boston, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, whereas sales were described as steady or mixed in the New York and Philadelphia Districts. Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond. In contrast, prices were said to have firmed somewhat in the Dallas and San Francisco Districts and stabilized in the Chicago and Kansas City Districts. Most reports maintained that the lower end of the market has outperformed the higher end: New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Kansas City all noted relative weakness at the high end of the market, with relative strength at the lower end; in most cases, this strength was largely attributed to the homebuyer tax credit (which was recently reinstated and expanded to include existing owners).

Existing home sales have clearly bottomed and are now moving higher.

New home sales have bottomed, although they are not as strong as existing home sales.

And while home prices are still declining, we're seeing clear improvement in the pace of the decline.

Short version: housing is getting better as well.

And then there is employment:

Labor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts. However, contacts in the Atlanta, Cleveland, and Richmond Districts reported that the pace of job cuts generally slowed in their regions, and most contacts in the Dallas District reported stable employment levels. Despite generally weak employment conditions, some signs of improvement were noted. For example, contacts in Boston reported that they were beginning to hire and reverse pay cuts or freezes that were implemented earlier in the year, and contacts in the St. Louis District reported that the service sector had started to expand recently. Expectations for the holiday season were mixed across Districts, with contacts in the New York and Dallas Districts reporting lighter-than-normal seasonal hiring and/or increases in the hours of existing employees, as opposed to hiring temporary workers, to meet the seasonal demand. On the other hand, most retailers in the Richmond District have hired the usual number of seasonal workers this year.

The good news is the front end of the labor market -- initial unemployment claims -- continues to decrease:

The 4-week moving average has been dropping since the Spring.

However, there is still no job creation. However, the rate of establishment job losses continues to decrease indicating we should start seeing job creation within the next 3-6 months.

Overall, the Beige Book indicates things are moving in the right direction.