Monday, December 06, 2010
An Unmitigated Disaster
A) No increase for SS/Disability folks.
B) Severe governmental constraints.
C) Bad freight figures.
D) Declining profit-per-unit figures across a bunch of industries.
E) An inventory replacement cycle with a high sell-off factor.
This all adds up to a sudden, explosive burst of inflation. Companies that were tightly managing margins will abruptly raise prices, which will signal other companies to raise prices.
However the money is not out there to pay these prices, so you will suddenly see very concentrated falls in spending in more discretionary categories over the next three months, which will produce some job attrition.
And then we must discuss services. Services are less subject to base-levels of inflation, but they are acutely sensitive to consumer spending patterns. So you can figure some major, major job and income losses in services.
I am out walking around looking at the disaster unfold. The problem is that the Fed won't see it until it is too late and we have dumped another 500K jobs, and after that it will be hard to recover.
Obama's proposal to cut employee payroll taxes is a very good one; unfortunately he is pushing on one side of the economic truck with a bunch of Fed governors pushing on the other side, so the truck is doomed to move backward.
The October 1% drop in YoY Medicare wages was the first sign of the apocalypse. The November employment report was the second sign of the apocalypse. Rail data shows a distinct slowing now.
This was a very sudden reversal. To understand the problem fully, look first at historical Census income (look at all races and scroll down to get it in 2009 dollars) for households by fifth of incomes (quintile):
Second Lowest Quintile:
Second Highest Quintile:
2009: $100,000 (and this is a shame number, the real number is lower)
Now sit and think about the fact that in October 2010, total wages and salaries were LOWER than in October 2009. Yikes!
From November's employment report (which really covers half of October):
On an NSA basis (Table A-1), total employed persons rose by 283,000 persons from the PREVIOUS NOVEMBER. That's it. That's all. A whole year in recovery, and we netted less than 300K extra jobs, which did not even keep up with population growth. The employment/population ratio fell from 58.8% to 58.4%.
On an SA, month-over-month basis, we see that total employment peaked in November at 139,391, fell to 139,061 in October, and fell again to 138,888 in November. In August and September, even though there was clearly a negative impact from school-system related government employment cuts, we were still running ahead YoY.
November's Monthly Treasury Statement should be published this week, and I'll update you when it is. But although I am expecting some improvement YoY from October's, it is unlikely that we will be positive YoY.
When you look at Table A-8, matters become a bit clearer. Table A-8 splits wage and salary workers out between government, private household (domestic staff), and other industries. And here we see that private household employment has fallen by over 100K over the year, that government employment has fallen hard, and that private employment was making nice gains. However, once you look at the data split this way, it shows that private other industry wage and salary jobs peaked in AUGUST, and fell (on a seasonally adjusted basis) over 700K since then. November actually added about 11K jobs. So this is the end of the inventory cycle and some knock-on from government cuts.
I am not so concerned about government employment. It simply must fall. And I am not concerned about November's disappointing showing, because the seasonal adjustment is probably off due to retail jobs. No way were retail jobs cut; what probably happened is that fewer workers were added because existing workers took a lot of the extra seasonal hours. That's why I expect November's Medicare wages to come in better YoY than October's.
So that does not concern me, but when you factor in higher heating, transportation and food costs, it means that a population with dropping incomes is going to see their incomes drop much faster, and that spells disaster (B. E. R.N.A.N.K.E).
Our entire hope of bridging this temporary slack period was based on the idea that private employment was slowly growing and that the base had formed, which would carry us through. That is becoming an extremely implausible scenario. Additional deductions from worker's incomes include higher health insurance and copay costs. An additional factor is that a surprisingly high number of households were living rent and mortgage free, but as the pace of foreclosures picks up, that bonus is rapidly dropping out of the picture.
Excellent post. I can give you an example. Current gasoline prices here in Dallas TX are $.33 /gal higher than last year. My house insurance is going up $125 next year. My dental insurance is going up 6.1% and my health insurance is going up 10.6% (with increased deductibles! #$%^% Obamacare!!!) next year. To top it off my interest income is down thanks to !@#$ing Bernank. I refuse to cut savings so it all comes out of discretionary expenditures.
What is your source for the Y-o-Y Medicare wages? Keep up the great blog. Best of health to you and Chief.
You can find them here.
I can't believe the tax deal that was just announced. Basically there is no help at all for the long-term jobless.
I understand the concerns about creating a new welfare system, but if that is the concern, how about a public jobs program?
We're going backwards on jobs now. If every single one of them would take whatever job was available at whatever wage, at least 4 million of them would still be without work. Most states don't have anything much in the way of assistance programs for adults without dependents.
Are we really going to leave these people with the alternative of beg or steal?
I can't wait to see the bond market reaction to this proposal. The Bernank formula is to support house values at current levels. But how does the market clear when prices are stable but incomes are declining. The Bernank can't print that much money. If the bond market lays an egg tomorrow, mortgage rates will go up, putting even more downward pressure on house prices.
I share your concerns about the unemployed. The trend I have noticed most is that they are moving back into the parents basement until they get on their feet.
I would also point out that many people have $0 Fed Inc Taxes withheld from their unemployment checks. Then they are shocked when they find out that they owe FIT on their unemployment benefits in April.
Boeing and Microsoft doing okay. (If they go south the fit hits the shan here.) My daughter's business (mental health) is holding up. In fact she and her associates moved into new, bigger offices last summer.
The food drives are very big around here and there is need, but with all the charitable orgs and churches here, no one, and I mean no one, has to go without food, clothing, and shelter.
Now, what is coming? The tax deal is a help. But it will be after January before the pro business, pro energy, less regulation legislation will start moving through the House. You mentioned it in your comment a few posts back. We've got to get the environmental road blocks out of the way.
New, unreachable EPA standards on ozone are going to cost a bundle and will not make the air any safer/cleaner. It is aimed at shutting down the industrial revolution. The House neesds to put a stop to it post haste. Aaaarrgghh!!
Try imagining the picture after 18 months of a second dip (the 2nd leg down of the lazy W Great Recession). Factor in that the Eurozone problems will be in Act IV or Act V of Götterdämmerung (choice of German for the phrase intentional). Look at how 3 of the states with the biggest fiscal problems (CA, IL, NY) are on track to go right on over the cliff, and think about what that does to domestic bond markets when they have a blatant example of the near future playing out across the Atlantic. Plan on a nice round of food and fuel inflation as QE2 (and perhaps a future QE3) show up as food and fuel inflation. Ask yourself (as MOM pointed out today) what the long-term unemployed do when there are either no more benefits, or the benefits aren't worth much because QE2 has devalued them. Then tell me why the picture today isn't a mere glimpse of the abyss by comparison.
"We're toast, folks. Bernanke is doubling down, and the base inflation rate (low-to-mod income) is shooting through the roof."
I'm of the belief we're about to get another dose of Greenspan's "Age of Turbulence", but it will be based in China and it will trickle indirectly to us.
The inflation is hitting China (very low to low income) very hard right now. The inflation story needs the commodity story. The commodity story needs the China story. I think all stories are at risk.
A Christmas First?
"While this fund does offer China external protection, Mr Pettis notes wryly that the only other times in the last century when one country accumulated reserves equal to 5pc to 6pc of global GDP was US in the 1920s, and Japan in the 1980s. We know how both episodes ended."
My word verification is "sphing". Perhaps it is a combination of siphon and f***ing in honor of both gasoline prices and Bernanke's (and Krugman's) misguided Phillips Curve policies.
The Administration and Congress must choose between
multinational corporations and the American worker.
My guess is that this worker is screwed.
Re: Fed Hospital Insurance Trust Fund (aka medicare taxes) on the monthly U.S. treasury report.
Are there any withholding taxes on Fed. unemployment benefits? Do they deduct Medicare or FICA? I'm trying to understand if this date series is affected by transfer payments in anyway.
Also, what do you think would be the best metric to deflate this date series to convert into real term?
I use the hospital tax because it is paid on all wages and salaries. It's not a perfect measurement, but there are no perfect measurements.
Among other things to consider is that we are into the wave of retirements. So more money is being paid to retirees and less in the form of wages and salaries. We expect to see the retirement wave hit faster in government workers, and government workers are paid more than private sector workers, so there will be a disproportionate effect.
But even in August and September, there was a YoY increase. The big shock hit in October, representing more than a 1.5% fall compared to August and September.
I do not think using any measure to deflate it is worthwhile. Right now we are having an argument about deflation, so the nominal drops over the last few years are important.
When November's numbers are released I will have more on this topic. That post should be published this week, because Treasury data is due out this week.
Self: 89 (Note 2010 was better, and this corresponds with a slight improvement in NFIB)
Earlier this year we had finally gotten to YoY gains on wages and salaries. I was crestfallen and shocked to see October's numbers. For about a week I waited, thinking it was a mistake. Then I realized it wasn't, which was confirmed by the bad November employment report.