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Thursday, October 22, 2009

If It Were Not For The Honor Of The Thing

Initial claims were revised up for the previous week to 520,000, and rose last week to 531,000. I know that this is a recovery because of the broad-based improvements in shipping, production etc, but this little bug of a recovery doesn't seem to have much carrying power. This is the list of states with increases of over 1,000 in initial claims for the previous week:
State Change
State Supplied Comment
MI +1,096
No comment.
SC +1,247
Layoffs in the manufacturing industry.
OR +1,253
No comment.
PA +1,253
Layoffs in the service and transportation equipment industries.
MO +1,373
Layoffs in the service, transportation, and warehousing industries.
GA +1,500
Layoffs in the service and manufacturing industries.
TX +1,631
Layoffs in the transportation, service, and manufacturing industries.
WA +1,740
Layoffs in the transportation, warehousing, and manufacturing industries.
KY +1,834
No comment.
IA +2,181
Layoffs in the manufacturing industry.
KS +2,544
Layoffs in the manufacturing industry.
MD +2,783
Layoffs in the trade and service industries.
IL +3,172
Layoffs in the trade and service industries.
AR +4,704
Layoffs in the construction industry.
IN +4,977
Layoffs in the automobile and manufacturing industries.
WI +4,999
Layoffs in the trade, service, and manufacturing industries.
NY +5,411
Layoffs in the construction, service, and manufacturing industries.
FL +9,976
Layoffs in the construction, trade, service, and manufacturing industries, and agriculture.


One hardly knows what to say or write. Here's a website with a list of presidential opinions on the thrill of the office. Very funny, and I found it because I thought of Lincoln's famous remark and googled it to make sure I remembered it correctly:
Lincoln: “I feel like the man who was tarred and feathered and ridden out of town on a rail. To the man who asked him how he liked it, he said: ‘If it wasn’t for the honor of the thing, I’d rather walk.’”
Anyway, I guess my attitude toward this recovery is a cross between Lincoln's view of the presidency and the situation of the Chinese workers who now have a new washing machine gleaming in their house, but no electricity or running water. It's pretty and a trophy of sorts, but what use is it really?

To fully understand my glumness, look at this progression of WIET (Withheld Income and Employment Taxes) from the Treasury Statements:
The August comparison was very favorable to 2009, because several more days of revenue were shifted into September. When one accounts for that and the shift in the auto company schedules in July, a very nasty progression develops on the order of -8%, -9%, -11%, -12.5%. Some of it is undoubtedly due to people falling off unemployment due not to jobs but to expiration of benefits. Some of it is probably due to retirements.

Nonetheless, this is not the tonic a person recovering from viral pneumonia needs. When this data is read conjointly with the household survey's report of 1.2 million wage and salary jobs lost from July through September (see Table A-5), the very poor NFIB small business report for September, the previously noted disturbing business expectations from the Chicago PMI report last month, and the continued high initial claims reports, a rather cohesively dark expectation on US incomes and business spending emerges. It's worth noting that according to the household survey, over 350,000 of the wage and salary positions lost were in government.

Then I read the FOMC report and I conclude that those poor dudes and dudettes probably all have the flu, or have OD'd on the Prozac. Whatever drugs they are on, those drugs most certainly have taken the FOMC members to a happy place. Would that the general public could share the same experience. It is true that at the time of the September meeting, some of the later reports were not in, but the chirpy talk about stabilization of business spending, housing values, and a reduction of the economic drag from incomes in 2010 was a little off the wall. It reminded me of the deeply reassuring projections in early 2008 about the expected reduction in economic drag from the bottoming of the residential sector - that on the eve of the worst collapse in the residential sector post WWII.

The reason why weakness in wages, government jobs and small business incomes is so determinative is that these are the stable structural pieces of the economy that generally carry it through recessions. In short, we are now seeing cuts to the bone, and chipping of the bone, and insults to the bone marrow - a structural economic anemia of sorts. The extremely poor tax figures suggest that sales tax receipts will rise briefly and then sag further, implying that the state and local government restructuring has much, much further to go.

Nor can one possibly talk of a stabilization in bank profits or in the housing market with employment figures like these. We need to factor in a wave of new defaults on consumer debt, including mortgages, CC balances, and other consumer loans.

And then one must take seriously energy costs; rises of these magnitudes from earlier in the year would indicate a negative 50 basis points on GDP expectations on energy movements over the summer, which is not something we can afford to swallow right now. There is at least a negative 25 basis points coming in Q1 2010 from the end of some of the stimulus provisions (tax credit, 1st quarter decline in refunds from overcounting of the tax credit, end of COBRA copays?). There is some sort of negative coming from unemployment expirations, but we don't know what that will be. A minimum of a negative 15 to 25 basis points from swine flu. We would expect about 20% of the population to get severe enough cases to impair their work/mobility for a couple of weeks, and that does affect sales. The small business and Chicago PMI look-sees indicate that business spending will continue to decline; that's another negative and not a weak one. Government revenue is going to force government spending on non-social programs and probably social programs to decline. State and local governments are in many cases in death spiral in which declining revenues plus the need to put ever higher contributions in pension and medical retirements funds have created a rapidly shrinking pool of spendable funds. Something's going to break there, but until it does, that is a long term and extremely widespread economic drag which will affect previously somewhat immune economic segments. It's a diffusor of economic stress.

If, which I do not think likely, something similar to the Baucus bill passes additional taxation will exert a perceptible drag on the 2010 economy. Time to go back and look at CERF's last forecast. Look at their US projections. I still come out somewhat more positively, but 2010 isn't looking very green at all.

There are some relative bright spots. Because household formation looks to be suppressed for some considerable time to come - years - one would expect that consumer electronics of the novel/prestige type would have room to penetrate the younger population. When younger people don't form households, they tend to buy visibility goods.

At some point, enough consumer debt will be written off, defaulted and eliminated through bankruptcy to provide an underlying economic floor for recovery.

Over the last few months, it has become clear that business profits are close to stabilizing in the current environment. If we go significantly negative in Q1 2010, that will reverse.

Comments:
The only green we're going to be seeing is the facial complexion of the general populace next spring when the reality of the second dip of the lazy W recession sinks in.

I don't think that the 2010 political victors will exhibit any better grasp of reality than the 2008 victors did. I suspect we'll have to wait for 2012 for any hope of reality setting in.
 
"Oh for our honor, our madams plainly mock our manhood and they will give their bodies to the lust of foreign youth, to new store America with bastard economists!!"

With apologies to Bill S.
 
Mr. Sensitive - "bastard economists"? Have I been insulted?

I truly think you do owe the bard an apology. Isn't that a bit of mangled quote from Henry V?

I laughed, I really did.

John, I fear you to be a prophet. They always come to bad ends, you know. I'm guessing that you are right about the politics too.
 
MOM,

"We need to factor in a wave of new defaults on consumer debt, including mortgages, CC balances, and other consumer loans."

Meanwhile...

"Kindle has become the #1 bestselling item by both unit sales and dollars - not just in our electronics store but across all product categories on Amazon.com. It`s also the most wished for and the most gifted." - Jeff Bezos, Amazon.com founder and CEO

"The launch of Poppy in July, along with our new pricing strategy, which gives the consumer more choices at prices she is willing to pay or is able to afford, resulted in an increased sales penetration of handbags." - Lew Frankfort, Coach Chairman and CEO

$250+ book readers and handbags for the win! It matters not that oil is $80+ a barrel and rising or that unemployment is 10% and rising apparently. The American consumer will NOT be denied! Mwuhahaha!

Note to self: continue to hoard basic necessities on the off chance that a sustained long-term economic recovery is nothing more than a pipe dream.

http://impossible-world.blogspot.com/2008/08/poster-with-eschers-waterfall.html
 
The GOP leadership (if I may so abuse the term by applying it to those fools) acts as if nothing has changed, it's just a normal swing of the political pendulum. The Dems are mistaking "throw the GOP bums out" for "yes we want to embrace all the political fantasies of the Left". They are both wrong. It does not take a prophet to figure out that it will take more than one election cycle for either party to start smelling the rich aroma of reality.

The next 3 years are going to be grim, and I take no pleasure in predicting that.
 
Three years? I still give even odds that Obama is re-elected.

He's not so unpopular that people will vote for a Republican by default. Unless the Democrats in Congress are suicidal, they'll eliminate or postpone the really nasty stuff until after 2012, and most voters will say yea or nay based on what has been done (which so far is reasonably populist) not what might get done.

The conditions for Obama losing in 2012 are 1)the Republicans can find a candidate that actually excites people or 2)the Democratic Congress screws up royally and actually passes something that takes effect in the next three years. Oh, and a third party would probably guarantee Obama gets re-elected.
 
I suspect that we won't see a shift at the national level, but will at the local level. The GOP doesn't seem to be able to come up with great candidates for the presidency. The Dems have been in office for awhile at the local level and it may be getting old. I also think that the Democratic strategy to elect more conservative Dems in the South is still going to come around and bite them. Might help keep the more liberal side in check.
 
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