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Friday, November 06, 2009

Unemployment Jolt

I am not surprised by the seemingly high rise in official unemployment from 9.8% to 10.2%, but there are other aspects of this report that are wincingly painful.

Report. Table A-5. Table A-12. Basic summary for household: 589,000 jobs lost (which is an improvement over recent months). Unemployment increased by 558,000. What is different this month is that the labor force dropped by much less, probably due to people trying to get seasonal jobs. Adult unemployment rose by 0.4% and teenage unemployment rose by 1.7%.

On alternate measures, U-6 rose to 17.5%. That is involuntary part-time plus discouraged workers and marginally attached. U-4 rose to 10.7% (includes discouraged workers).

The punch in the gut on this report is in Table A-5 which breaks down employed workers by class. Government employment rose by 190,000 wage and salary jobs, whereas private wage and salary non-ag jobs lost a deeply disturbing 549,000 jobs. I suspect that some of the government jobs are Census jobs, because I know they are at least holding another round of recruiting seminars (sample). But in any case, if government jobs had not increased, we would be holding the same trajectory on total jobs as in recent months. This is a total disparity with the ISM reports. I do not know what to make of it. Job losses, yes. But not to this degree, unless a huge amount of the private job losses are sitting in small businesses. And if so, they will not be coming back any time soon.

Now I believe the household survey, because last quarter's FUT basically bore it out. Further, the best fit between WIET and household is for some government hiring, because the MoM losses slowed, and on average government jobs pay much better than private industry.

Now I have been pretty much ignoring the establishment survey, because once its index of weekly earnings started to diverge strongly from WIET receipts, I figured it had become too unreliable for use. Nominal is nominal, and when establishment shows average private weekly earnings going up, but nominal FICA tax receipts are going down, I gave up on that data.

According to Table B-1, which shows hiring by industry, government jobs did not change. It does show a net gain of 16,000 jobs in the federal government along with a net loss of 16,000 jobs in local government. The establishment survey ought to be accurate for government jobs, but I strongly expect it isn't, because I hunted up some union data that seemed to disagree with the establishment government jobs but did agree with household government jobs.

There is one bright spot that provides some relief - this month temporary agencies reported a gain of 33,700 jobs, and employment services were plus 36,000. Those upticks usually are the first sign of an improving general employment outlook three to four months later. This number is very consonant with ISM, which had manufacturing adding, but services cutting faster. If manufacturing is moving through to the addition of steady jobs, then services will follow. If it is a temporary thing related to the tail end of the inventory drawdown > restocking cycle, then services won't get much of an uptick. Because services employ so many more people than manufacturing, it is still possible that we can see a more consolidated move to the upside over the next few months.

If it were not for the troubling indications of a more structural loss of the small business jobs, I'd be more optimistic. But small businesses have a different cycle than big businesses, and if many of them are closing, it will have a long-term effect that I cannot accurately predict. Another inescapable fact is that many big businesses still seem to be in the mddle of a cost-cutting cycle. The combination tends to suggest a very subdued employment outlook for 2010.

If it were not for early retirements, we would already be very close to 11% unemployment and we would certainly surpass that by the employment trough.

PS: Consumer credit comes out later today. Because unemployment measures have a great deal to do with collection of debts, I am trying to develop a new method of deriving the income data usually provided by the establishment survey. There are several methods of estimating future defaults on loan portfolios, but no one ever claims that employment and income levels have no effect on defaults. Back a few years ago the Fed had gotten around to claiming that incomes had no effect on home prices, but banks never forgot that incomes have an effect on loan defaults - which might suggest a flaw in the overly academic approach to economics.

Finally, a banker tells the truth, apologizes for the repeal of Glass-Steagall and admits what needs to be done. The one thing you can be sure is that the current administration will not do what needs to be done - that is because this is in the hands of Congress. And a Congress that is handing out tax credits to rich people and retroactive tax cuts to industries that reaped billions and billions on the housing bubble is not going to be in the mood to deal with reality. I think they like the steady flow of cash derived from businesses lobbying Congress.

I am working on the whole explanation of the banking industry, and the link above covers some of where I am going. I should have the first couple of pieces of it ready to post this weekend. It is necessarily somewhat long.

Automated checkout at my local grocery store for the win!

Sorry. I use gallows humor when confronted with bad news.

It certainly isn't that I'm insensitive. My girlfriend continues to be unemployed so I believe that entitles me to joke.

She was recently offered a job though. It was a part time job that paid $8 an hour (MUCH less than she was making) a full 36 miles away (72 miles round trip). At today's mileage rates (~50 cents a mile), that's $36 worth of car expenses for a 4 hour job that pays $32. That's not even counting taxes. Needless to say, she decided to continue on unemployment.

The word verification is "bramp". It must mean bad ramp, which in my opinion is exactly where this economy is headed long-term.

We're bickering over another $11 billion home buyer tax credit and yet Fannie Mae apparently needs another $15 billion too. I must be desensitized now. They actually seem like small numbers. Thank goodness Bernanke has a printing press that can print all this money "at essentially no cost".

If there's one thing I can always appreciate it is free lunches. Well, that and sarcasm.
David Rosenberg says "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." He also states "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. The Estab Survey has a "large company" bias that the companion Household Survey does not have.

Using Table A-1 the Household survey showed a net job destruction of 589,000.

Rosenberg was one of the few that got the recession call right.

Let's see what consumer credit brings us at 2 pm today.

Stay healthy!
EST Consumer Credit is 3:00.

I appreciate your comments. Given the imbalances, it kind of smacks one in the face that our hole seems to be getting deeper.

Mark - your girlfriend's situation is the new reality. Obviously one can't take that kind of a job, and those who want to raise fuel taxes need to realize that it precludes a lot of people from getting employment.

The colleges, junior colleges and universities are full up! Many of the "marginally attached" have no other options.

"The colleges, junior colleges and universities are full up! Many of the "marginally attached" have no other options."

Fortunately, my girlfriend was let go early enough to avoid the stampede (she's in college now and was actually the last person accepted by the state's worker retraining program for the college she's attending) and late enough to still have plenty more COBRA benefits and unemployment checks coming. It could be worse.
A data point, for what it's worth:

My consulting business has really picked up the last month or so, as far as inquiries and requests for estimates. This is a huge improvement - the first half of this year, the phone just didn't ring.

The downside is that I wouldn't call most of it really healthy economic activity. I'm constrained in what I can say about my projects, but I have 5 current or soon-to-begin projects running. All are R&D stuff - the most immediate has applications one year out (even though it's the most speculative technology of the bunch - go figure).

Of the bunch, there's one company transitioning an existing product from a politically-favored market to a lower-value, but politically safer market. Two companies are designing testbeds to suit multi-year government technology grants (I've no idea what will happen to them when the grants run out). One is trying to sell some IP that I helped create, they're exiting the business. And finally, (the bright spot) one company is developing new testing and production equipment to enable them to ramp up new technology in capital equipment.

Sorry that's so vague, but it's the best I'm allowed to do. These projects are on par with the inquiries I'm getting, too. I'm not sure what conclusions can be drawn from it, but it mostly smacks of decision-making processes getting unfrozen. Companies are beginning to adjust. If nothing else bad happens, we might see real gains from this activity in a year or two, IMHO.
Sorry, that should be "from a politically *un-favored* market to a lower-value, but politically safer market."
An observation on temporary employees:
Historically the progression has gone from a perceived upswing to temporary workers to confirmation of upswing to permanent workers to period of growth. Could it be that the hiring of temporary workers is a signal that "I will if you will." In other words, businesses are optimistic, but rather than sink the costs of hiring permanent employees when the situation is uncertain, they go with temp workers. They are not all in on growth yet. Now it is up to the economy to take the next step. The progression has gone as it has historically because the economy has confirmed its initial optimistic movements. That is not a guarantee that it will.

All to say that the increase in temporary workers is a sign that employers have taken a step of trust, and now it is up to the economy to make the next step. Will it? If it does we are on the way to a recovery. If it does not, those temp workers will never become permanent.

The best way to keep a temp worker a temp worker is to make business uncertain about the future of the economic landscape, including among other things the costs of employing workers. Enter Cap & Tax and Healthcare Re-form. Artificially inserted uncertainty. My bet is that the next step will be backward, but I hope I'm wrong.
My guess on the Temp worker increase is that it is
coming from the Christmas season. More and more companies are using the temp staffing agencies
as their HR depts. The figure we need is the temp
to permanent employee number. I look for a drop in
temp employees aroung the 2nd week in January.
2nd Anon - but retail employment dropped by 40K, and transport and warehousing dropped by 18K according to the establishment survey.
1st Anon - I don't think there is widespread trust in the economy. I think people are hiring temp because they consider the workers temp, and I don't think anyone wants to add permanent workers at a time when the employment benefit mandates may increase sharply.

But beyond that, everything I hear and most of what I read in financial statements shows that the larger companies are still firmly in cost-cutting mode - fully in a downsizing cycle. Shutting down and consolidating facilities, paring workers, and transitioning less-profitable ventures into run-off.

As for many of the smaller companies, I believe they just are getting fiscally exhausted and turning up their toes. For them, the duration of this downturn in sales has just gone on too long.

And no, we are NOT going to climb out of this by ever-expanding government employment.
Neil - what I hear from the larger companies is that they are chopping. I think everyone's trying to restore profits, no one wants to hire, etc. Even companies working on new product lines (like consumer electronics) are cutting in other areas.

New positions being created are sometimes the result of entire facilities being shut down and the remaining ops being transferred to consolidation offices, with not everyone offered a transfer to the new facility able to accept it.

I think CRE is going to fall for years.

What is CRE?

That more or less fits with what I'm seeing. The two contracts that depend on government grants are (I believe) partly a matter of retention of key personnel using government money--if they can develop some new competencies as well, then bonus.

My viewpoint may be skewed, too. A very long time ago I chose to learn about a set of technologies which have come into fashion in the last few years. I might have a rosier viewpoint than other folks.
The large scale unemployment numbers reflects excessive credit creation over the past 15 years coupled with the on going shrinking of the manufacturing sector. While credit innovation is the heart and sole of modern economies its excessive use to bolster economies experiencing large scale manufacturing automation, moving plants to lower cost foreign countries along with job outsourcing has created a unstable financial structure.
The reality is that large parts of our economy are fabrications of the credit bubble as it contracts companies,industrial and business sectors will shrink or disappear.

"As for many of the smaller companies, I believe they just are getting fiscally exhausted and turning up their toes. For them, the duration of this downturn in sales has just gone on too long."

I cringe at the thought of small business debt being racked up on the hopes that things will soon improve.

My first real career job was for a very small company that was on the decline.

They offered me 5% of it rather than give me a raise. A few months later one of the founders traded his 30% for the software company's rowboat (there were just 4 of us) and left. No joke!

Needless to say, I then put the value of my 5% on equal terms with oars! I stayed until the end though. They eventually were forced to lay me off.

The "just hold on one more month" mindset is indeed very exhausting, and I was just an employee with no personal money on the line. I felt so bad for them that I actually ended up doing some work for free. The writing was on the wall by that point though.

P.S. Sorry to hear about your dog's issues. I'm crossing my fingers for you.
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