Could Unemployment Breach 12%? 13%?

Economist David Rosenberg made some news last week on Bloomberg's Surveillance when he speculated that the unemployment rate in the United States could hit between 12 - 13%, higher than most economists are currently projecting and clearly an outlier forecast. I'm not entirely sure why the call is apparently so controversial.

Among the things that Rosie looked at in doing his analysis is the so-called Under-employment Rate (U-6) minus the Unemployment Rate. A chart of that difference looks like this:

The average difference between the two is just over 4%; it's currently a record 7.3% (17.5 - 10.2). (U-6 is only available since 1994.) Now, we can get back to the long-term average many ways, but it's certainly not out of the realm of possibility that one way we'll do so is to see unemployment at 12% while the U-6 drifts back down toward 16%. Would anyone consider that possibility crazy?

On a related note, continuing to add to the file on the plight of small businesses, I came across the following information over the weekend as to their importance to our economy:

Small firms (<500)
• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Create more than half of the nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

And, perhaps most importantly:

Firms with fewer than 500 employees accounted for 64 percent (or 14.5 million) of the 22.5 million net new jobs (gains minus losses) between 1993 and the third quarter of 2008.

This is the group that, according to the NFIB's monthly SBET [.pdf], is simply not seeing much light at the end of the tunnel. So the question needs to be asked: When the NFIB reports that the country's "job generating machine is still in reverse," and we know that its member firms account for ~64% of net new job creation, how are we going to achieve sufficient job creation to make a meaningful dent in the un- and under- employment rates before Rosie's forecast comes to pass?

Here's what the SBET survey looks like with regard to Hiring Plans:

So, hiring plans for small business are, in fact, incrementally worse now than they were one year ago (-1 vs. 0). There's no more inclination on the part of this business cohort to add employees now than there was one year ago, and in that period the unemployment rate has increased dramatically. Makes Rosie's forecast seem fairly uncontroversial to me.

Treasury Tuesdays

All charts are of the IEF -- the 7-10 year Treasury ETF.

Click on all charts for a larger image.


In general, the IEFs were in a downward sloping flag pattern for the last ~month. Also notice the lack of overall firm direction over the last 6 months; there is no firm trend in either direction. Instead there are really four moves: up, down, up then down. This tells us there is no overall trend in place.



A.) Prices broke through the downward sloping trend line and the 200 day EMA.

B.) Note the reversal in the EMAs -- all have turned upward. While the orientation of all three is still negative -- that is, the smaller is still below the longer etc... -- the movement is bullish. Also note that prices are above the EMAs which will contribute to this trend continuing.


A.) The MACD has given a buy signal.

B.) The accumulation/distribution line has been moving upward for the last 4 months. That tells us that despite the lack of overall direction, the overall tendency has been for people to accumulate Treasury's. That's especially interesting considering the stock market has rallied strongly over that period and the Treasury is issuing boatloads of debt. In other words, there is still a strong, fundamental long-term demand for Treasuries right now.

Today's Market

A.) Prices opened with a gap higher on good volume.

B.) Prices found support along various EMAs

C.) Prices broke through support and had increasing volume on the sell-off.

D.) Prices found support at the 200 day EMA.

Ideally, we'd like to see prices hold levels into the close as a sign of strength. When we see sell-off from gains on an intra-day basis it says traders are skittish about keeping positions overnight.

The Minimum Wage Canard (Revisited)

It's getting so tiresome to read about how the increases in minimum wage are the direct cause of skyrocketing teen unemployment. See here, here, and here for just three stories on the subject.

To support this argument, anti-minimum wage advocates trot out charts that generally look like this:

Now, what I see in this chart is that teen unemployment -- like most unemployment in general -- is much more highly correlated to recessionary periods in the economy than it is to the minimum wage. But that's just me. Honestly, I just can't look at that chart and seriously argue that there's a cause/effect relationship between minimum wage and teen unemployment. But we live in an age where arguments gain traction on the skimpiest of evidence (sometimes even none whatsoever -- see: the 1977 CRA caused the near economic collapse of 2008 -- a time bomb with a 30 year fuse!!!).

Allow me to make another argument, one that I think makes much more sense. I first made this argument over at Blah3, and I'll make it again here with some updated charts.

What I suspect is fairly simple: That simple demographics coupled with the damage wrought by this recession on the Baby Boom generation -- in terms of both real estate and investment portfolios (particularly retirement portfolios) -- is so great that many Boomers have realized they're going to have to postpone retirement (see one story on that here, there are thousands on "postponing retirement" out there on The Google).

Let's look at some charts and see if they might make more sense than the minimum wage argument. First up, let's look at the ratio of 55+ Employed persons/Teen Employed and see what that looks like:

Source: BLS.gov

Gee, what do you know -- this ratio has been on the increase since about the turn of the century, the exact time the first of the Boomers were turning...55. Whaddya know, they're staying in the workforce and, arguably, crowding their own kids out of it. There are now over 6 55+ employees in the workforce for every teen -- a record that shows little sign of letting up.

Second, let's look at the 55+ and Teen cohorts as a percent of the Employed Workforce. Again, what we see is that the older generation is crowding out the younger generation in a trend that well predates the recent set of minimum wage hikes we've seen.

Source: BLS.gov

Look at the two charts I've presented versus the absurdity at the top and ask yourself, which argument makes more sense? Which argument does the data seem to support?

In short, the minimum wage canard is yet another feeble political attempt to lay the economy's woes at the feet of Democrats. It's shameful, really, but not at all out of character. I expect I'll be revisiting this issue with each passing NFP print. Waste of time, but somebody's got to do it.

And, so I can preempt this ridiculous argument seven years hence (assuming the minimum wage rises again), here's a chart showing the BLS' forecast of exactly how lopsided these two cohorts are going to look in 2016:

What I suspect will happen in 2016, sadly, is that those with a political agenda will look at the numbers and claim the disparity is being caused by -- you guessed it -- minimum wage hikes that ocurred eight years prior.

'Nuf said.

Large vs. Small Business Decoupling Story Gaining Traction?

As Bonddad readers surely know, I've recently become fascinated by the hypothesis that small businesses are being left behind by whatever recovery is in store for the United States. Large businesses generally have three things that small businesses may lack: Strong(er) balance sheets, easier access to credit, and international revenues. Several of my posts have touched on this topic, and I recently cited a MarketWatch story by Rex Nutting, the NFIB's monthly SBET report [.pdf], and some mentions by economist David Rosenberg. It is, in fact, Rosie's work on Friday that has me revisiting this topic yet again. Wrote Mr. Rosenberg:

We noticed an interesting piece of research on U.S. GDP from Goldman Sachs’ Economics team that’s worth highlighting. The team questions whether the official government GDP statistics capture how poorly small businesses (ie, sole proprietorships) are doing. The weakness in small business sentiment is seemingly at odds with the recent 3.5% Q3 GDP reading but may explain why the unemployment rate has continued to steadily increase. Part of the reason for small business weakness is that most don’t have the same access to credit as larger firms and larger firms’ output tends to be better captured in the GDP data. While sole proprietorships tend to be small they collectively account for a nontrivial 17% of the U.S. economy.

The Goldman team uses a couple of different statistical approaches to test their thesis. They use timely data from the National Federation of Independent Business (NFIB) confidence survey, which shows that despite a recent improvement, confidence remains exceptionally weak (in fact two standard deviations below long-run trends). The first model suggests that the NFIB survey is consistent with overall GDP growth of 2.5% to 3.0% — not the 3.5% reported. As well, they find that current NFIB readings are more in line with below-50 readings on the ISM manufacturing index versus the actual reading of 55.7.

The second approach has to do with revisions to the GDP data and their relationship to the NFIB. U.S. GDP goes through many revisions as more, and better, information becomes available with lags — historically preliminary numbers are revised down by almost 0.5 percentage point. This second model suggests that Q3 GDP could be revised down by as much a 1-2 percentage points.

I've been trying to get my hands on the Goldman piece to read it for myself, but as yet have been unable to source it. In any event, it would appear that the decoupling story of large vs. small business is, perhaps, beginning to gain some traction. As a new and semi-permanent era of frugality dawns and consumers increasingly gravitate toward low-cost providers, I maintain this story will continue to percolate.

On a related note, I picked up this tidbit via Alan Abelson's Barron's column on Saturday regarding Friday's release of consumer sentiment:

"Richard Curtin, director of the survey, somewhat ruefully noted that a mere one in 10 consumers polled reported an increase in income, the fewest recorded in data that stretch back to 1946."

Stay tuned.

A Tale of Two Markets

Let's look at the difference between the S&P 100 (big stocks) and the Russell microcap index.


The S&P 100 continues to move higher. We have a clear pattern of lower lows (A) and lower highs (B). Also note the price EMA picture which is bullish -- all the EMAs are moving higher, the shorter EMAs are above the longer EMAs and prices are above all the EMAs.

In contrast:



A.) Prices formed a double top with the first top at the end of September and the second top at the end of October

B.) Prices fell to the 200 day EMA

C.) Note the bearish orientation of the shorter EMAs -- the shorter EMAs are below the longer EMAs, prices are below all the EMAs and all the shorter EMAs are moving lower.

In other words, big stocks have a bid and small stocks don't.

Some Saturday Market Trivia

Since first closing above 10,000 (March 29, 1999), how many times, on a closing basis, has the Dow Jones Industrial Average traversed that level?

Mouse over for answer: 29

Weekend Mini-Dog

Since Bonddad didn't put up his regular weekend doggie post, here's a shot of our new addition, small enough to fit in one of my baseball caps. And no, my allegiance to the Vikings is not Favre related -- it dates back to the Purple People Eaters. We'll see you all on Monday.

Weekly Indicators

It was a light week for data, but what data there was continued to show economic expansion.

The BLS reported initial jobless claims of 502,000, and the 4 week moving average declined to 519,750, the lowest in a year.

The ICSC reported that same store retail sales declined -0.1% WoW, the first decline in 7 weeks, but YoY sales improved to +2.9%. They also said that "same-store sales for November could be as strong as +5.0- +8.0 percent [YoY] for the month."

Shoppertrak finally also joined in reporting positive numbers. For the week ending 11/7/09, they reported a Year Over Year % Change of 0.1%, and a Week Over Week % Change of 4.8%.

Oil declined slightly under $80 to about $78, so there is still a little rationality in that market.

The Daily Treasury Statement through November 10, showed payment of $47.4 million in withheld state and local taxes for the month so far, compared with last year's $51.6 million on the same date, indicating state and local government's in severe distress even compared with last year (this is a lagging indicator which tends to bottom about one quarter after the end of a recession on an absolute basis).

The most interesting weekly statistic, however, was rail traffic, which held steady. Why is that interesting? Because by now rail traffic should be well into its seasonal decline (last year the decline was a "cliff dive"), but traffic has generally held steady at September-early October's levels or even improved, as shown on this graph:

This is a very bullish sign for the economy.

Consumer Confidence Drops

From Reuters:

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of sentiment for November fell to 66.0, the lowest level since August, from 70.6 in October. This was well below economists' median expectation of a reading of 71.0, according to a Reuters poll.

"Importantly, the decline in confidence was already in place before the announced increase in the unemployment rate to 10.2 percent on November 6," the Reuters/University of Michigan Surveys of Consumers said in a statement, adding "the likelihood that the sentiment index would drift even lower in the months ahead cannot be easily dismissed."

Within the survey, the 12-month economic outlook fell to its lowest since April.

Here is the chart:

We have two months of declines and a third is probably on the way. These are not good developments especially with the holiday shopping season already underway.

Why I'm Concerned About the Market

I'm a big fan of inter-market analysis -- that is, looking at a variety of markets rather than just one. On that front, I use the Russell 2000 as an index of risk capital. First, the Russell 2000 is

An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small cap stocks in the United States.

In other words, it's an index of companies that need a growing economy to increase profits. Unfortunately, the index is not sending us good signals.


A.) The IWMs (Russell 2000 ETF) printed a double top with the first top occurring in lagte Setember and the second top occurring in late October.

B.) Unlike the other markets, prices have not rallied to new highs, but instead have run into resistance at the 50% Fibonacci retracement level.

C.) Momentum is decreasing and has been for a few months. In addition, the MACD is now negative.

D.) The accumulation/distribution line is decreasing, indicating money is flowing out of the index.

But here's the kicker:


You could argue the Russell 2000 is forming a complex head and shoulders formation right now. That does not bode well for the future.

Forex Fridays

Notice that overall we are still in a very bearish pattern. The chart continues to print lower lows (A) and lower highs (A). All the EMAs are moving lower and the shorter EMAs are below the longer EMAs. However



Are prices printing a double bottom? Notice that the last two bottoms have been near the same level price wise. Also note the MACD printed a rising bottom (A) and the the RSI printed a higher number (B) on the second bottom.

Fundamentally it is difficult to see the dollar making big rise. US interest rates are very low and will be there for some time. Other countries (like Australia) are already raising their rates. While the US economy is growing, so are other regions. And there is little need for a safe haven play right now.

Yesterday's Market

A.) Prices moved higher through all the moving averages at the beginning of trading but could not hold the levels

B.) Prices move through all the EMAs printing strong bars and higher volume.

C.) Prices continue to run into resistance at various EMAs

D.) Prices again make a move lower as trading nears the end of the day.


A.) Notice how momentum has been decreasing for the last four months yet prices have been moving higher. Remember -- the MACD measures the difference between two EMAs. So long as that number is positive we're at worst moving sideways.

Today's Market

I'll post this in the AM -- I'm swamped right now.

Read This Now

I commented on the volume ">situation yesterday. Cory over at Afraid to Trade takes the analysis a bit farther.

About the "Banks Not Lending" ....

Notice consumer credit loans typically flatline during a recession and a little bit after. The one exception was the 2001 recession. While we haven't had a contraction like the current contraction in consumer credit, the decline is consistent with recession experience.


C and I loans either flatline or decrease after a recession. Recent experience is 100% in line with historical patterns.

The point of these charts is simple: during and after a recession credit demand drops. The reason is really simple. People borrow less money when the future is uncertain.

As demonstrated in the latest senior loan survey lending terms are getting easier; banks are trying to make loans. My guess is the terms are still harder than they were at the height of the "if you have a pulse you can get a loan" phase of the last expansion. But the point is business and consumer borrowers are decreasing their loan appetite at the macro-level.

Initial Jobless Claims Continue To Move Lower

From the Department of Labor:

In the week ending Nov. 7, the advance figure for seasonally adjusted initial claims was 502,000, a decrease of 12,000 from the previous week's revised figure of 514,000. The 4-week moving average was 519,750, a decrease of 4,500 from the previous week's revised average of 524,250.

Here is the relevant chart:



Here is a chart from the St. Louis Federal Reserve that shows the long-term trend for the 4-week average. This chart has not been updated with the latest reading:





This was the first piece of data that clued me into the fact that the recession was ending. The first time I noticed the continued decline in the 4-week moving average was maybe June(?) (there was a Barron's article that highlighted the trend). Since then the 4-week moving average has continued to move lower. Notice that the 4-week moving average is a good indicator for the end of a recession as evidenced from the previous recessions.

From NDD:

The 4 week moving average, at 519,750, is the lowest reading in a year, since the equal number on November 19, 2008. It appears the weekly jobless claims data are getting reading to test my hypothesis that net new jobs will be added if the jobless claims simply stay at this level for a few more weeks. In that regard, at the time of the 501,250 new jobless claims reading in 1990, payrolls lost 160,000 that month and 211,000 the next. In 2001, the new jobless claims high of 489,250 coincided with payroll losses of 325,000 that month and 292,000 the next. This year, we have already seen in August new jobless claims in the 560,000-570,000 range coinciding with a payroll loss of 151,000.

I have also surmised that, while Calculated Risk is correct that there will be little seasonal hiring this year, there will also be little seasonal firing this year either (believe it or not, layoffs increase dramatically as you move from September through New Year’s Day). Here is how the UNadjusted jobless claims look from their September lows through the first full week of November in the last 4 years:

2006: +86,500 weekly new claims

2007: +80,300 weekly new claims

2008: +203,100 weekly new claims

2009: +118,300 weekly new claims

In other words, so far my hypothesis is largely correct.

Thursday Oil Market Round-Up

The oil market is forming a classic pennant formation. There may be some issue with which top line trend line to use. I have added A and B because both are technically correct. Trend lines connect important points on the chart. Trend line A connects the tops of the candle's shadows which are the highest points of the candles. Trend line B starts and ends at the top of a candles and moves through various shadows. Regardless of which trend line you like the point is the tops are pointing downward.

C.) Prices bounced off of the 200 day EMA. This indicates we're still in a bull market.

We're still in a bullish EMA situation -- shorter EMAs are above longer EMAs and all the EMAs are moving higher. But the fact that prices are in a consolidation pattern indicates oil is waiting for something.

Today's Market

I'm not sure what to make of the market right now. Consider these charts:


A.) Volume has been decidedly weak.

B.) The market has printed two spinning tops the last two days. In addition, prices have yet to breach the technical level established a few weeks ago. In fact, prices ran into resistance just below that level, crossed it sometime today and couldn't keep the momentum going.


A.) Volume on this rally in the transports has been better -- we have had some decent days. But overall it is still weak.

B.) Prices however have printed some strong bars.


A.) Volume has been weak.

B.) Prices have printed one spinning top and one doji -- both weak patterns. And prices crossed technically important levels but couldn't keep going higher. That's weak.

3 Interesting Graphs about Jobs and Recovery

- by New Deal democrat

I had sorta promised an update to my "When will the Economy Add Jobs?" series this week, but since both industrial production and real retail sales will be updated next week, and I think both of them are going to be quite interesting from the jobs perspective, I've decided to defer my update until then. In the meantime, there are three items that shed some other perspectives on the subject.

From the Rockefeller Institute via Barry Ritholtz, here is a graph of Real Retail Sales comparing the last 5 (really 6, since they've combined 1980 and 1981) recessions:

This graph shows nicely the slope of improvement in real retail sales for all of the recessions. Note also the flat sales for the entire 2001-02 period (ex- the post 9/11 arrhythmia), and flat sales after a false start in 1991 -- presaging the "jobless recoveries" of 1992 and 2002-03. We've had flat sales since last December or this March, which may or may not have begun to trend upward with "cash for clunkers." More on this next week.

From the Conference Board, this is their Employment Trends Index (not including the last 2 months - this is the most updated version I could find):

You may recall that I have spent a lot of time researching leading indicators specifically for jobs. It turns out the Conference Board has also done that, and last year they premiered this Index as their leading indicator. Note that at previous troughs, it has turned 1-4 months before the BLS jobs number. The ETI made a bottom in August, and has been up the last two months (from 88.3 to 89.3). Interestingly, the Conference Board's Senior Economist, Gad Levanson said: “The Employment Trends Index has likely turned a corner in September, and the historical relationship between the index and employment suggests that job losses will end in early 2010,” i.e., 5 or more months later. I suspect this has something to do with the strength of the rebound or fear of a "false dawn," but they're not saying.

Finally, this is graph from Prof. James Hamilton at Econbrowser, showing the percentage of the average US consumer's budget that goes to energy purchases:


Hamilton says that:

When this share rises above 6%, it seems to become a more significant factor. The consumer energy expenditure share peaked [in 2008] at 6.8%, but collapsing energy prices subsequently brought it back down to 4.7%. The resurgence in oil prices this summer had pushed that share back up to 5.4% in September [2009].

He also says:

What do these estimates imply looking forward...? The relation ... assumes that there is a threshold effect before the next oil price shock would begin to do its damage. According to that relation, oil has to get back above $130....

I have included this graph because I believe (as do many others) the price of Oil is the most serious challenge to the sustainability of the economic expansion.

The entire article is well worth reading, and I encourage you to click on the link and go over and do so. This past "Great Recession" was maybe half really an Oil Shock, and Hamilton's research backs that up (as he explains in the post I link to). It appears that his research calls for more positive GDP this quarter.

It is also worth recalling that Hamilton's research suggested that there might abruptly be a positive jobs number in October 2009. Silver Oz has indicated that, except for the BLS applying an outsized seasonal adjustment last month, the jobs number would in fact have been +51,000.

Senior Loan Survey

I've been meaning to get to this but finally have the time. The Federal Reserve released its senior loan officer survey at the end of last week. This is a great report because it gives up a large amount of detail regarding the inner-workings of the lending business. It also comes with a chart book that compiles the information. Let's take a look at those graphs to see what they say. As always, click on all images to get a larger image.


On the commercial and industrial loan front we see that the number of institutions tightening their lending standards is still increasing, but at a far lower rate. At the end of last year/beginning of this year 80% of respondents were tightening their lending standards; currently that number is around 20%. In addition, the percentage of banks increasing their spreads is still increasing but at a lower rate. At the end of last year/beginning of this year that percentage was near 100%; now it's around 40%. However, loan demand is still negative. In other words, institutions are becoming more accommodating. The main issue with C and I loans is demand.


In general we see the same pattern with consumer loans. While the percentage of institutions tightening their lending standards is still increasing, the percentage is decreasing. At the end of last year/beginning of this year about 60% of banks were tightening their standards; now that total is near 20%. At the end of last year there was a noted lack of interest in making consumer loans; now that total is near 0%. However, note that since the beginning of 2006 we've been seeing a weaker consumer loan demand.

On the residential mortgage front notice the large drop in the number of institutions tightening their lending standards; we've seen a drop from right around 100% of institutions to about 20% now. Also note the increase in mortgage loan demand. While the loan demand was negative for the first part of this year it has picked up. Although still negative for sub-prime mortgages we are seeing a positive performance from the prime market.

Where this report tells us is the following: lenders are loosening standards to attract loans. The main issue is loan demand.

Wednesday Commodities Round-Up

Long term copper is still in an uptrend -- but notice that prices are approaching the long-term trend line.


A.) In June and July prices consolidated in a triangle pattern

B.) In August and September prices formed a rounding top, finding a large amount of resistance (supply area) in the ~ 40-41 prices area

C.) For the last two weeks prices have again been consolidating, this time in a triangle pattern


The EMA picture is still bullish -- the shorter are above the longer and all of them are moving higher. But notice that the angle of the uptrend of all the EMAs is slowly decreasing. Also note that the 10 day EMA is really losing it's angle indicating the upward momentum is taking a hit right now.

Today's Market

Today is a great lesson in why it's important to watch a variety of macro-level markets rather than just one.



The SPYs look pretty good. Prices are approaching a important technical level, the MACD is rising and so is the A/D line. The 10 day EMA has crossed over the 20 day EMA finalizing the bullish EMA picture. About the only problem with this chart is prices have moved higher at a quick pace and may need to pullback a bit.



Everything said about SPYs applies here.



And the riskiest side of the market -- the Russell 2000 -- just isn't confirming, is it? Prices today had an inside day -- meaning the body of today's candle is entirely within yesterday's candle. That can be bearish. But most importantly, notice that the riskiest part of the equity markets did not rise today as other parts of the market rose to just shy of important technical levels. That is warning.

From Invictus: No Recovery Yet on Main Street

Twenty two months from the December 2007 start of this downturn, the National Federation of Independent Business (NFIB) – “The Voice of Small Business” – reports that “Poor Sales” remain the single biggest problem facing small business owners. And it has now reached a new record, hitting 33 in this most recent report.

Although credit is harder to get, “financing” is cited as the “most important problem” by only four percent of NFIB’s hundreds of thousands of member firms. Although a nice gesture, enhancing SBA lending programs will not help much – too many owners have no reason to borrow. Record low percentages cite the current period as a good time to expand, more owners plan to reduce inventories than to add to them, and record low percentages plan any capital expenditures. In short, the demand for credit is in short supply and failing to understand the more major problems facing small business leads to bad policy. […]

Statistically, we are in a huge “V” recovery, with Gross Domestic Product rebounding from a 6.4 percent decline in the first quarter to 3.5 percent growth in the third. That is quite a “comeback,” a very steep “V.” But unless the consumer comes back, the recovery is likely to turn into the “square root recovery,” slower, flatter growth on the recovery leg of the V.

Overall, the Optimism Index rose by 0.3, from 88.8 to 89.1, essentially unchanged from where it was in May (88.9), and only slightly above where it was one year ago in October 2008 (87.5).

There is no wage pressure reflected in the report, and it’s clear that deflation is a greater concern than inflation with regard to pricing.

In short, the large company/small company decoupling seems to be continuing apace.

The Coming Inflation Scare: Ignore it

- by New Deal democrat

You're going to be hearing a lot in the next 3 months about inflation. While at the moment we are still about 1% into deflation, year over year, that is going to end in the next week or two when the October CPI comes out. By the time the December CPI is reported in January, we'll be at about +3% YoY. You are going to be told that Inflation has made a Big Comeback, and that various Highly Respected Analyists think that it might get Out of Control.

No doubt Larry Kudlow and his ilk will suddenly rediscover fiscal rectitude, and the econoblogosphere's Doom and Gloom contingent will be positively quivering in moist anticipation of the Final Vindication of their -flationary (hyperin, or de, they're not sure) prophecies, because government stimulus and deficits have finally crowded out private borrowing and interest rates are sure to hit 10% shortly.

Ignore them. They're wrong. What you will in fact be seeing is simply and completely All about Oil.

You may recall that near July 4 of last year, Oil was priced at $147 a barrel, and the average price for a gallon of gasoline was over $4. Then it crashed. Briefly at year's end, Oil was down to $35 a barrel, and you could get a gallon of gasoline for about $1.40. Now Oil is back to $80, and a gallon of gas costs over $2.50.

All of that was reflected perfectly in the monthly inflation statistics. Here is a screenshot of the BLS monthly readings, non-seasonally adjusted, of consumer prices for 2008 and 2009:

The roller coaster ride of the price of Oil is reflected in the surging inflation figures of early 2008, the crash in inflation in later 2008, and the renewed inflation of earlier this year. What has yet to be wiped out in the YoY statistics are the very large drops of October-December 2008. If consumer prices simply remain stable (NSA), then we will hit 0% or so this month, 2% in November, and 3% in December. All because some very large deflationary readings from a year ago will have disappeared from the calculations.

Unless the economy is surging next spring, and speculators are seriously stupid about bidding up the price of Oil, we are simply not going to see a repeat of the big positive numbers from the first half of either 2008 or 2009. More likely, inflation will settle in to something like the 2% to 2.5% range in the first half of next year, as smaller seasonal positive readings enter the annual calculations.

By next June the fiscal rectalists and hyperventilating Doomers will have moved on to their next wrong predictions. In the meantime, I've saved you a lot of trouble.

The long end of the Treasury market has been characterized by a trading range bounded by the lines labeled "A". However, prices are now below that line as (B) and momentum is clearly decreasing (C). The bottom line is momentum is leaving the long-end of the Treasury market. Finally, note the current EMA/price relationship -- all EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.



The shorter part of the curve is also in a downtrend (A). The EMA picture is very bearish: all EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs. Finally, momentum is dropping (C).

Fundamentally this also makes sense. First, overall risk appetite has returned; stocks are rising and riskier parts of the credit market are doing well. As a result there is little demand for Treasuries. Then there is the continued increasing of supply which will eventually lower prices. Finally, the Federal Reserve is nearing the end of its credit market operations. Bottom line: rates are probably moving higher.

Shorter Senior Loan Officer Survey

It was, in fact, released today. Here's the money shot, as I suggested yesterday early this AM:

"Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months."

While banks aren't necessarily tightening credit standards as much as they had been, fewer people are showing up to borrow (as reflected in Friday's consumer credit numbers). You simply cannot force people to borrow money.

Today's Market

Click for a larger image

A.) Prices opened higher on a gap up on strong volume.

B.) Prices bounced along the EMAs for most of the day.

C.) Prices moved higher at the end on strong volume.

This is what a bull market looks like.

Regarding This NY Times Piece

The blogsphere is all a twitter about an article in today's NY Times. People are saying the government's completely cooking the official data to such a degree that no data can be trusted. Except for the fact that that is a complete misreading of the article.

A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

“We don’t have the data collection structure to capture what is happening in a real time way, or what is being traded and how it is affecting workers,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who has done pioneering research in the field. “We have no idea how to measure the occupations being offshored or what is being inshored.”

The statistical distortions can be significant. At worst, the gross domestic product would have risen at only a 3.3 percent annual rate in the third quarter instead of the 3.5 percent actually reported, according to some experts at the conference. The same gap applies to productivity. And the spread is growing as imports do.

At worst, the distortion would lower GDP from 3.5% to 3.3%. And that's the worst case scenario.

Let's repeat a key piece of information contained in the article: the worst effect would be a .2% drop in GDP.

And the reason for this problem is the way we count a single piece of data: imports.

So, the story is "US needs to rethink the way it counts imports in GDP data."

How this has been translated into "all government data is crap" is beyond me. Wait a minute -- no it's not. There are a lot of people who write about economics that don't know point one about economics. For example, they don't know there are actually two different employment surveys (just as an example). Or, they claim a 50% stock market rally is a bear market rally (ever read WD Gann or John Murphy?) So to hide this high level of stupidity they claim any data they don't understand is somehow flawed.

Or, these people are still wedded to the belief that the sky is falling (despite a rising stock market, expansionary ISM numbers .. you get the idea). So they have to somehow save face from overlooking the obvious trends of improvement in the data. As a result, any piece of data which isn't bearish is cooked, while any piece of data the is bearish is lauded.

Regardless in both cases you'll see these same people quote data from official government sources when it conforms to their opinions.

To recap

1.) The US is thinking about changing the way it counts imports in the GDP report.

2.) This does not mean there is a plot to fool the people of the United States. Unless of course you either don't know anything about government statistics or are so completely bearish that all of the positive data released in the last 6 months must be discredited. In which case, it's all a big lie from the man specifically targeted at you to make you look foolish.

You may now return to your regularly scheduled conspiracy theory....

October Leading Economic Indicators

The very same data that foretold the end of the freefall back in April when it first turned positive, and economic expansion thereafter, looks like it will continue its ascent albeit more gradually in October. Here's my best estimate of how the 10 leading economic indicators appear to have performed in the last month:

The yield curve is still positive +0.25
Jobless claims were strongly better +0.1
Aggregate hours in manufacturing were up 1/10 of an hour +0.07
Stocks' 3 month gain is worth +0.05
Durable goods' strong growth add +0.05
Consumer nondurables up significantly +0.05

New home sales were flat 0.0

ISM deliveries down slightly, subtracting -0.05
Consumer sentiment was down -0.1
Real M2* has been trending slightly negative, so -0.1


Bottom line: it looks like October Leading Economic Indicators (and revisions to September) will net about +0.3, the seventh positive reading in a row. This suggests that economic growth will continue through this quarter and the first quarter of 2010 as well.

Typically, even in the last two "jobless recoveries", jobs began to be added to the economy when the YoY LEI was up +5% or better. This month will replace the awful -1% of October 2008, meaning that for the last 7 months, the LEI will probably be up 5.9%. YoY they will be up about 4.2%. If the LEI simply print flat for November and December, the YoY growth will be +5.0 %, consistent with jobs being added in December or January.

NFP -- Weakness Throughout

There were, in my opinion, only two needles to be found in Friday’s NFP haystack:

1) The previous two months’ revisions were positive to the tune of about 91k
2) There was a 34k add in temp help (often a leading indicator for the labor market)

That’s about all one can say about Friday’s report.

On the downside was the 10.2% unemployment sound bite and the much broader U-6 print at 17.5%. Most other measures showed similar deterioration.

One part of the release that usually goes virtually unnoticed is Table B-7, Diffusion indexes of employment change. BLS notes: Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.

Coming off a March 2009 trough of 19.6, this index stood at 37.5 last month, which is to say that industries were still shedding jobs, but at least we were working our way back to 50 (breakeven) or above, where more would be hiring than firing. This metric slipped back down to 33.8, a clear step in the wrong direction (click through for larger image):




David Rosenberg also makes this interesting point (which I've harped on previously):

While the -190,000 headline nonfarm payroll print was not that far off the consensus, and while there were upward revisions to the prior two months (of over 90,000), the major problem is that the Establishment Survey, at this time, is missing a very important part of the story, which is the strain that the small business sector continues to face. Small businesses have less cash on the balance sheet, less access to credit and less exposure to overseas growth dynamics compared to large companies. The Establishment Survey (nonfarm payrolls), has a "large company" bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recessions.


We will get another peek into the health of small buiness tomorrow when the National Federation of Independent Business (NFIB) releases its Small Business Economic Trends (SBET) report. I believe the big business/small business decoupling is an incredibly important story that is being woefully overlooked by the media. Stay tuned.

Lastly on this, I would also note that Average Weekly Hours, which had ticked up to 33.1 in both July and August, have now ticked back down to 33.0 in the last two reports. This is obviously a troubling sign that employers do not yet see the need to ramp up hours (which always lead bodies).

Separately, I noted here that I thought there was some nuanced cross-fire between former ML Chief Economist David Rosenberg and his successor Ethan Harris (along with the team Rosie left behind). As I mentioned, I don't buy into the more optimistic forecasts ML has been publishing since Rosie's departure. Well, it would appear that Harris and his team are already walking back some of their forecasts, as this "D'oh" moment in Friday's NFP analysis clearly demonstrates:

“Given that this [10.2%] was our anticipated peak in unemployment this suggests that there is an upside risk to our peak unemployment rate.”

Gee, ya think?

This is the problem with trying to sugar-coat the state of the economy -- when the numbers prove you wrong, you wind up with egg on your face.

And, finally, I would note that the Fed released its Consumer Credit numbers on Friday afternoon and, once again, it tanked -- down about $14 billion month/month and now roughly $122 billion over the past year. The YoY decline is now 4.8% -- the largest decline in consumer credit in over 65 years. Folks, this is not just about banks not lending (which they're arguably not); it's also about people no longer having an appetite for credit. On this file, I believe the Fed's Senior Loan Officer Opinion Survey is released today, so we'll get a fresh take on lending and credit standards.

Market Monday's

Notice that on the long-term chart price action is now occurring below the long-term trend line. That line could also become top-side resistance if this rally continues to progress.


A.) Overall, prices moved from about the 110 level to 103.6 level -- a drop of about 6%. This is a bit low for a solid correction. Ideally we'd like to see at least 10%. But price fell to a bit below the 50 day EMA which is a standard technical sell-off level. Also note the increase in volume as the sell-off continued.

B.) Prices retreated to just below the 50 day EMA. This is a standard technical level.

C.) Prices have now moved through all the EMAs -- a bullish development.

Let's look at the Transports:


A.) Prices dropped about 10% as

B.) prices fell to the 200 day EMA

C.) Prices have since risen through all the EMAs. However they have done so on decreasing volume -- a bearish development.

Overall, it looks as though the sell-off is over. However, there are two key technical points to remember.

1.) Prices are still below the long-term trend line.

2.) The latest move higher has been on decreasing volume.