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Thursday, November 05, 2009

Aw, Heck, It's November

When economic data is confusing, the temptation is often to interpolate or interpret the confusion away. This is not a good strategy, because as the fudge factors multiply, the underlying confusion multiplies too. What you are really doing often enough is substituting your inclinations for the data. So it is best to let confusing economic data just snooze in the sun for a while and come back and check on it later.

This summer I was baffled by initial claims. In June, there was a broad-based uptick of a bunch of freight indicators, and I had tentatively marked the economy as shifting into growth then. Not, mind you, strong growth, but growth. And there was also a nice correlation with initial claims. The height for initial claims was in March in the upper six hundred thousands (max 674,000, min 644,000). By June we had dropped into the lower six hundred thousands (max 630,000, min 605,000). That was confirmed by July (max 589, min 524,000). So while I was not expecting fireworks, it was clear that things had taken a sustained upward trajectory, and because we were getting close to the magic numbers on inventory/sales measures, it seemed safe to say that we had a few months of growth in the works.

By late August (mind you, this is after CARS and a decisive fall through the magic numbers) initial claims were already puzzling me (max 580,000; min 554,00). I figured that the problem was seasonal adjustments due to variance in the usual auto shutdown schedule, and then I whacked myself on the hand with a ruler for interpolating and interpreting too much, and told myself that the appropriate thing to do was let those suckers lie fallow until November. If they had gotten down to the upper four hundred thousands then, no problemo. If not, I'd have to come back and think about this some more.

So, unfortunately, it is November. And these are the last few weeks beginning Oct 10 (520,000, 531,000, 532,000, 512,000). There have been some upward revisions recently, which is not a thing one likes to see.

Now, unemployment is a lagging indicator. Initial claims are a coincident indicator. Generally, a sustained shift of 10% flags a real economic change. For demonstration purposes, we started out 2006 with initial claims in the high two hundred thousands. By the beginning of 2007, we had moved to the lower three hundred thousands, and as 2007 wore on, they just kept slowly and inexorably creeping up past the ten percent line to about the 15% line. So by December we were in the mid three hundred thousands, and from there, we entered into the realm of sad economic history.

Especially when emerging from a recession, one hopes to see a little more decrease in initial claims five months into a recovery. So at this point one has to take this seriously.

The most comparable period is the 1982 recession (actually the longer cycle from 1979 on). You can get reports on initial claims here. In the tables below SA claims are the third data column.

In 1982, trough was November according to NBER dating. The peak in inital claims occurred in October:
10/02/1982 565,600 81.4 695,000 3,720,000 80.4 4,629,000 4.2 5.3 87,597,222
10/09/1982 638,100 98.0 651,000 3,674,000 78.4 4,689,000 4.2 5.4 87,597,222
10/16/1982 540,300 82.3 656,000 3,899,000 84.8 4,599,000 4.5 5.3 87,597,222
10/23/1982 577,600 92.7 623,000 3,872,000 82.6 4,686,000 4.4 5.3 87,597,222
10/30/1982 576,800 90.6 637,000 3,891,000 84.7 4,595,000 4.4 5.2 87,597,222

Five months out from first pickup (December) was May 1983:
05/07/1983 435,000 88.0 494,000 3,582,000 96.4 3,714,000 4.1 4.3 86,723,382
05/14/1983 385,200 83.0 464,000 3,451,000 95.2 3,625,000 4.0 4.2 86,723,382
05/21/1983 380,300 82.6 460,000 3,369,000 91.0 3,701,000 3.9 4.3 86,723,382
05/28/1983 373,000 82.2 454,000 3,071,000 88.8 3,457,000 3.5 4.0 86,723,382

My tentative conclusion is that even initial claims show that we are not through the adjustment cycle. It seems clear that production is really picking up, but services are not following strongly. Brooding upon that, my guess is the underlying drag from not just credit but from the state and local government funding problem. They are paring jobs, hours and spending enough to show up in services and unemployment.

ISM services showed services employment falling faster this week, whereas manufacturing had shifted positive. However employment is related to consumption, and services are a derivative of business, government and private spending plus exports.

The inventory restocking should continue for a few more months. I am probably wrong, but I thought restocking and draw-down in the third quarter had proceeded more slowly than the advance GDP report showed, which would imply more growth in the fourth quarter, but a bit slower growth in the third quarter. Regardless, we should have one more growth quarter.

In terms of relative contributions in current dollars, these are the shares as reported in Q3 (billions of dollars):
To look at the yearly cycle, from Q3 08 to Q3 09, expressed in current dollars:
As the cycle picks up (inventory restocking) you expect imports to rise, which negates a positive effect. Thus the state and local trends assume more significance. Some of current state and local spending is being sustained by federal stimulus dollars. Also, as retirement obligations claim an ever-higher portion of state and local revenues, necessarily spending and investment is going to drop.

As a side note, NBER's standard practice is not to call the end of a recession until we get nearly to or to the GDP levels pre-recession, so don't expect them to be calling an end any time soon.

One reason why the US is not pulling out of recession as quickly as it used to be is the fall in domestic production of goods consumed. What happens is that as consumption picks up, imports pick up. For example, in Q3 current dollars, exports increased 69.5 billion. But imports increased 117.9 billion, so net exports was a net drag.

See page 25 of the foreign trade release (52 page pdf) and see the crude inventories report. It is amazing how much of this is hanging on oil prices. On a YoY YTD basis, US imports of crude dropped 9.6%. Needless to say, the recent run up in prices is cutting import volume sharply - the four-week average is down 20%. On a YTD YoY basis, US usage of petroleum products is down 4.3%. The balance is increased domestic production.

Because we are really not going to resume strong growth until we redress our trade imbalance. and the only way to redress it is to produce more oil internally (which we could very easily do, but just don't), I capitulate.

The whole world economy is being driven by the price of oil. The price of oil is being driven by speculation. Roubini is right, and world trade growth is about to be curbed again. South Korea is muttering, Singapore's production has already contracted a bit, India is in trouble over inflation (especially food inflation), the trends for slightly higher-end foods in SA are poor (like cereals), and in general we are chipping away at the ability to consume.

Sounds to me that if Gov't expenditures decrease we're backsliding again.
If we raise taxes to increase government spending we take it out of PCE.

The other piece is debt. As that gets written off/paid down the ability to spend increases.

What we need are more bankruptcies....

The reason for going through all the hassle with the tax receipts to impute wages is then to correlate with debt levels. As wages drop the magic consumer debt number drops too, so we are chasing a moving target.
My guess is that the average job lost paid more then
the job that may eventually be created. A lower
standard of living is baked into the cake. Time for tariffs.

Another good post. You are on my check every day list.

It would help if you had the headings in your post for the unemployment claims as one doesn't know what each number represents until they pull the UC data.

This is not your garden variety business cycle collapse so it is hard to compare to almost any recession we have had since the Depression.

In the monthly payroll jobs reports, it shows the workweek at 33.1 hours. We have gone so far down that we could probably cover a 10% increase in production without hiring a person.

We as a nation are still in denial. When we created so many of our labor laws, the economy did not have machines as an available substitute for labor in many applications (for example, we didn't have robots to weld or paint).

As an employer, I hate to hire people. You have a ton of paperwork to hire him (immigration, background, credit), then you have to act like his parent (notify states that you hired him so that if he has child support due you can withhold and pay them), worry about his/her behavior, pay FUTA, SUTA, FICA, FIT, work comp. You have to have placards everywhere notifying him of his rights, not to mention worry about them stealing from you. Americans have forgotten how to work and don't realize how well off they are.

Global labor arbitrage is happening and the US standard of living is coming down and the Asian standard is coming up until they meet. Just ask the person that had dental work in Mexico, heart surgery in India, and their X-rays read in Bangalore over the internet.

I don't like being negative, but when you follow the policies that Japan has, why should we expect anything different?

With compensation flat to declining (as you brilliantly pointed out in previous posts), and a continuing contraction in credit (remember in 2006 how much mortage equity withdrawal was happening), end demand is going to continue to decline. Almost all the corp earning reports are on declining revenues but declining expenses. You can only cut expenses for about 4-6 quarters and then you are toast, unless end demand picks up.

"We as a nation are still in denial. When we created so many of our labor laws, the economy did not have machines as an available substitute for labor in many applications (for example, we didn't have robots to weld or paint)."

I absolutely agree. I would point you to Itron. They make meters that will eliminate the need for many of this country's 47,000+ meter readers. Their factories for making said meters are fully automated. I saw it on CNBC and was blown away. The only arms doing work on the assembly line were robotic ones. That's where at least some of the government stimulus is going.


They said that due to demand, they'd be hiring a whopping 100 people. 14 million smart meters under contract and that's the best they can do? 100 additional workers?

Of course, it isn't just robots taking jobs. Rumor has it that a billion workers in both India and China want some of the action too. At least robotic workers don't have dreams of burning oil in their new automobiles.

Of course, thoughts of billions of workers driving their own cars is all it takes for cash register noises to appear in the minds of oil traders.

And lastly, what can really be done about it? It isn't like I don't welcome the new automated checkout at my local grocery store. I use it just the same. It's handy and saves me time.

It's the prisoner's dilemma.


"Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal."

We are rewarded for actions that help us individually but hurt the group as a whole. The free market has no way to compensate for that. Wouldn't that be a great slogan for Wal-Mart?

Prisoner's Dilemma Pricing!
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