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Monday, July 19, 2010

Notes From The Darker Side

I really won't be posting that much for a while. My brother and his wife are at Children's Hospital in Philadelphia - there appears to be a major problem with the twin buns in the oven.

But from last week, a couple of items which may or may not be colored by my current dark mood:

1) Initial Claims: These fell nicely to a seasonally adjusted 429,000, although of course NSA claims rose. But the insured unemployment ratio rose from 3.5% to 3.7% because the quarterly adjustment for covered jobs showed a loss of over 1.5 million jobs last quarter. Covered employment is now at 126,763,245. The previous tally was 128,298,468.

Regardless of all the talk, we really aren't generating JOBS yet. BLS uses a different measure of employment - did people work in an income-generating activity? This is a broader measure, because people will sometimes find work as contractors, or mowing lawns, or painting an old geezer's house, or picking up cans and glass to recycle. You only have to have spent 1 hour in the reference week in such activity to be counted as employed.

But as to the jobs, we were still losing as of last quarter, and according to BLS' figures, which are seasonally adjusted, we lost 300,000 jobs in June. Thus one is reluctant to say that the lower figure is purely from a trailing effect.

Over this cycle, covered employment (to get these numbers go to this page and enter the year sequence you want) followed this arc:
To fill in these numbers, it's best to use tax receipts (especially the quarterly self-employment ones) and the NFIB survey. The covered jobs figure lags the overall economic cycle. Going into a downturn, employment will continue to rise in part because job take-up rises - people will take poorly paid highly unattractive jobs because that's all they can get, and this boosts the numbers.

Anyway, June's tax receipts showed an improving YoY trend (we were down 2% instead of 2.5% in April), but it is not clear that we are in a self-sustaining rebound yet. The reason it is unclear is that the YoY comparison is getting easier!. If you look at self-employment receipts and freight trends YoY, it does look like we are in rebound. But against that there are unusual effects related to the housing tax credit and Census employment, both of which are dropping out of the economy. And then, NFIB for June was quite, quite disappointing.

This is the reason that I completely disagree with the idea that unemployment benefits should not be extended. The reality is that there are not jobs for even a third or a quarter of the people who need them and will take them. I'm not talking good jobs - I'm talking any jobs! If you are fortunate enough to be in my position you can make yourself a job. But most people are not. And from here on out, people losing unemployment benefits will tend to lose transportation and the ability to get a job.

Please realize that we now have only about 600,000 more jobs total than we did in 2004, but the civilian labor force increased from 147,460,000 in June 2004 to 153,741,000 in June 2010. That leaves us with 6.3 million more people chasing essentially the same number of jobs. It ought to be obvious that many people won't get employment of any type whatsoever.

Nor are they going to be seeing much improvement any time soon. In 2004, although there was a small business dip in optimism in 2003 to the mid 90s levels, the small business optimism index had rebounded to the mid 100s. That's basically what created a lot of the jobs.

We are not in the first stages of a housing recovery either. Inventory is rising, and mortgage standards as controlled by the GSEs are rising, which means that fewer borrowers will qualify. In particular, FHA is tightening (proposed rule so far, but it will basically go through html version pdf version) its debt ratios which will have considerable impact - FHA's insurance fund has now fallen below statutory limits. This involves lower DTIs, lower seller concessions, lower loan-to-value ratios and so forth.

Residential construction helped generate a lot of jobs in the recovery from the last downturn, and it can't in this one for a few years.

Commercial construction is down and out. In many areas there is a huge oversupply of commercial structures of most types. You want offices? Take your pick. You want retail centers? We got em for over a decade to come.

I don't see much hope for big impetus on the horizon. The best we can hope for is a slow climb out of the abyss, and the ability to juice it is just about gone.

My best wishes to your brother and his wife.

As for your view being coloured by mood, I think one could wear the best and the brightest rose-tinted glasses and yet be appalled at the dismal scenes on offer.

My best wishes and prayers for your brother, wife and offspring. Childrens' Hospital is very good...our friends have had good things happen there.

And then there's the economy...prayers are also needed there. We have a choice to make which is a Hobson's Choice. On the balance, I would let the tax cuts expire and extend unemployment.

But I'm not happy...

Good Ole Charlie
Saloner - my opinion is that not even a steady IV drip of some euphoria-producing drug could improve the picture much, but then my opinion could be skewed. On the other hand, my opinion really isn't that different than it was a month ago.

I hate to say this, but one of the best arguments against a true double dip right now is simply that the economy has bled enough to produce low blood flow. It's not that easy for us to produce a sudden massive hemorrhage.

And thanks for the good thoughts for the agonized.
Charlie - A Hobson's Choice it is. That is what kind of drives me nuts in a lot of the economic commentary from highly credentialed economists. They appear to be implying that there is some "right" thing to do that will keep us safe and magically avoid all the unpleasantness, and there is not.

Anything we do now has significant bad side effects. Failure to recognize that is going to produce an even worse outcome.

This morning I discussed my brother's and wife's situation with a very Catholic doctor, who basically conveyed the same message - don't run after unreasonably optimistic outcomes or you may wind up with a higher body count.

The impact of not extending unemployment benefits is going to be a high body count. That's direct and unavoidable. But I do think we have to compensate somewhat for the extra spending. Either cut other spending or raise taxes.

And, quite frankly, I cannot see how many of our official great plans are going to be funded.

Everything banking has taught me amounts to the doctrine that recognizing failure early and addressing it firmly is necessary to produce an overall and sustained growth pattern.

The best possible outcome I see would derive from continuing income supports at some level (doesn't have to be the current level), continuing basics, like food stamps, raising personal taxes somewhat (not that much) to compensate, and cutting business taxes.
Well, it is confirmed Twin-Twin Transfusion Syndrome. They are offering some hope, but multiple surgeries will be required.
My prayers to your brother and sister-in-law.

You mentioned that you don't know how we will pay for it all? If you will look closely, you will see that it doesn't matter. In the last four years, we have raised our borrowing by a factor of 8, and there has been no increase in cost! We have shown that the law of supply and demand do not apply to government borrowing. So from now until the end of eternity, we will never fail to find bidders for our treasuries, and they will never want more than 4%. You seem to think that utopia is only a dream, but it has been realized here in our midst. We are living in the financial equivalent of Lake Woebegone: all the rates are low, the bid to cover is high, and the yields are always below average.
First of all, your brother and sister-in-law are in our thoughts.

On fiscal matters:

One thing that would help is to focus on raising tax revenue by increasing the efficiency of the tax regime, and on lowering spending by cutting ineffective spending.

Far too many of our government's budget line items, both income and costs, are there for the sole reason of benefiting some particular faction required to maintain support for the old New Deal/Great Society, at the expense of the whole. I think that's the biggest variable factor that is going to limit our recovery if we don't change it. There are some things we cannot change and must simply endure, but if we accept that political factor as a constant then we're never going to recover from this.
Keep hope. Doctors can do amazing things.
The blogging can wait.

I think the situation in the Gulf will be the tipping point economically and politically. I'm not sure if
that is a good thing or not.

Anon - yep. The same utopia Greece had discovered. It's like jumping off the Empire State building on LSD. The flight is great, the landing is NOT. But it usually takes major drugs to make people forget about the landing.

I'm hearing The Doors in my mind - this is the end, my friend....

It's interesting to watch the action on Treasuries. The short terms are hit hard, and the impulse travels only weakly through to the longer term bills.
Neil - yep. We need to look at throughput and multipliers, because rates don't have the same effect in an economy that is severely debt-loaded.

So yes, a combination approach would be most rational.
MoM,my prayers for the parents and the children to be. Here in Sonoma County Ca the midrange Real Estate market just seized up. opened escrows this month are down 70% over june in all three major brokerages. Prices dropped significantly in late may to mid june (10% plus) and the buyers apparently decided that it would be a good time to wait. A nicely updated 3/2 on .6 acres,good neighborhood $539k now,$600k may 1st.The high end still moves,but oddly enough not many $1MM plus buyers are out there...maybe when the strawberries start coming in?
My prayers for your brother and his wife.

I'm not expecting any help from our "betters" ... we're on our own in this mess, and the best we can hope for is enough gridlock after the November elections to keep them from actively making things worse.
My thoughts are with you and your family.

I hate to say this, but one of the best arguments against a true double dip right now is simply that the economy has bled enough to produce low blood flow. It's not that easy for us to produce a sudden massive hemorrhage.

I share that opinion. However, my county wishes to divert another 0.2% of the remaining blood flow.

Sales tax measure heading to King County ballot

SEATTLE -- You will be asked to say yes to a sales tax increase in King County.

If you squeeze the turnip slowly enough, rumor has it that the last few drops of blood can be removed.

Some local polls show most voters are inclined to say no.

Or not.
Oh wow, sorry for the news. All my best. Twin-Twin issue is not a small deal.
Good luck to your family. May they have a good result.

Up nawth here in Minnesota, I've never seen such perfect crops. We had some hail last week, but not everywhere. Wheat, corn and soybeans are looking better than anyone can remember.

I was at the farmer's market this morning and bought some foot-long carrots. In August, yeah, you can see carrots that big. Not in the middle of July, never before.

With all of that corn, at least there won't be tortilla riots in Mexico this year.
I am sorry you, your brother, and his wife have to go through this. I had to look up the syndrome on Wikapedia.

I liked the comment "don't run after unreasonably optimistic outcomes or you may wind up with a higher body count". It is appropriate in so many situations.

"Recognizing failure early" is appropriate for just about any industry and any project. The further down any wrong road we go the more expensive and difficult it is to correct. Government plans for our economy have failed precisely because they are afraid of the short term pain, so we are trading that for long term pain in the outlandish hope the total pain can be avoided. It cannot.
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