Monday, November 29, 2010
Blasted Euro Monday
Nonetheless, it is not helping, and Italy's and Spain's bonds are once again taking a licking. More here.
The healthier Euro countries can't keep bailing out other countries. Greece will default. Ireland maybe not or only marginally. But it seems clear that Europe can't shore up Spain if it needs to do so, and Italy looms like a specter on the horizon.
The only thing that will really drive these bond yields down is if the European Central bank starts buying a lot of them. Perhaps it will, but even that has its limits. They can get the private money in there only by guarantees, and the more solvent countries are on the hook for the guarantees. So I think a lot of these bonds will be repudiated to some extent. Italy? It might only need to knock 10% off if it does so soon. Greece? 30-40%, at least, but the longer they extend and pretend, the greater the eventual loss. Going out seven years might take it to 60-70%.
The entire situation is not at all helped by the fake Euro bank stress test earlier this year, which was supposed to test European banks ability to survive another recession. The results were announced at the end of July. Seven banks failed the stress test; five of those were Spanish savings banks which were already in the consolidation pipeline. One was German (Hypo) and the last was Greece's ATEbank. You will notice that there were no Irish banks on the list. At the time, the European finance honchos were claiming that the Euro test was much more rigourous than the US test.
So, less than six months later, with the European economy growing relatively well, it is costing over 100 billion USD just to shore up Irish banks. Realizing the problem, Europeans are now planning a new round of stress tests. These, we are assured, will be really, really strict. Probably the official announcement will be made on a state with a troupe of clowns performing in the background.
The EU has tremendous value to its participants as a free-trade district, and countries next to the Soviet Union are undoubtedly very thankful for the mutual defense pact. I expect the EU to continue, but it is clear that it must abandon the current strategy and work out a way for countries to mutually default on their debt. This would not be that much of a problem, except that Germany doesn't have any trading cards of bad debt, so it is not going to be pleased, and France will be positively enraged because it does need to destroy public debt and Germany doesn't.
The magic of mutual debt destruction is that if I owe 50K to everybody, including 10K to you, and you owe 70K to everybody, including 15K to me, and if you and I both agree to destroy 10K of mutual debt, the transaction is basically a net zero for each of us, but suddenly both you and I look a lot better to the other creditors.
In the meantime, the Euro is dropping which helps the Germans quite a bit. If the Germans were to go along with another of these bailouts, their accumulated liability would push German public debt into French territory. I cannot see how this is in their interest. I expect that either the German High Court will rule in favor of the bailout dissidents or that the German voters will pull the trigger.
The end is certain already. There will be multiple defaults on Euro-denominated sovereign debt. The French strategy appears to be aimed almost solely at maneuvering Germany so that in the end it appears to be in the same shape as France, rather than changing the eventual outcome.
In the meantime, this will generate accumulating effects for US states. Up until the November election, the quietly floated idea was that the US federal government would pick up a good chunk of the unfunded state government retirement costs. Now this is less plausible. The idea of the average taxpayer paying to continue much-higher-than-average retirement funding for government workers while Social Security and Medicare are being cut is a bad one, and it is one that the taxpayers will never knowingly accept.
However this places increasing pressure on states to get their own finances in order, and over the next two years states that seem weaker than average are going to start being pushed over.
In China, bank reserve ratios were increased twice in a month, and that seems to be having an effect. Margin requirements on Chinese commodity exchanges were raised. Calibrating all this is going to be a challenge for China's internal economy. It will constrain stock prices in the short term, and it is definitely going to exert downward pressure on most commodities globally. Most seem to expect China to raise interest rates. It did in October, but I am guessing China can maybe raise interest rates only once more. The last government bond sale wasn't fully taken up.
More broadly in Asia, the first signs of a synchronized slowing have emerged. This is not near a contraction, but it is a slackening in the pace of growth across countries such as Japan, Malaysia, and Indonesia. As a result of apparently slowing exports, Malaysia and Indonesia are expected to stop their campaign of slowly raising interest rates to more normal levels. Japan - well, Japan is an ongoing, quiet tragedy. Japan's domestic economy just keeps chugging downhill. Thus exports and yen-selling have to pull an ever-longer train. Japanese exports are still rising, but most recently at a somewhat disappointing pace.
Indian stats are erratic, but the Indian CB has correctly targeted inflation with a tightening campaign which is having some marginal effect so far. PMI stats for India are great, but actual industrial output growth slowed in September mostly on a decline in capital goods. So I do not know. Money is relatively tight in India due to large business purchases of rights from government.
My hunch is that we are in a worldwide inventory cycle adjustment, and these are quite unpredictable. Generally it is easiest to sort out trends in this environment by looking at edge areas. For Asia, the two most reliable edges are Singapore and Australia. Singapore's leading growth rates appear probably to be slowing, but not in any dire way. Australia was growing very fast, but the current indications are that Q3 will come in much slower. Negative adds to inventory are not as serious a problem as one might think as long as the situation rebounds in the next quarter, and it may.
My guess, therefore, is that China is in something of a pickle. It is very serious about trying to slow inflation, but it probably doesn't have a lot of wiggle room to do so. It will have to act cautiously; the stunning disparity between urban building sales rate growth and urban building growth rates is something of a blinking warning light, especially when one looks at starts and completions. Stats here through October.
Given the situation in Europe, exports to the US have been very important for Asia. We are doing our spending thang the best our little shop-until-you-drop hearts can imagine, but we are not going to be able to maintain the growth pace. Incomes, baby. Incomes. Incomes after taxes.
Thursday, November 25, 2010
I am so thankful to have another Thanksgiving with the Chief.
Sunday, November 21, 2010
TSA Song "Comply With Me"
I'm a little bit nervous about all this because the Chief is flying tomorrow. It's important to know that people are getting arrested for balking and even for filming the process. That's a report from San Diego (opens pop-ups):
Powell also stated that there was another arrest of a woman who was allegedly illegally filming the x-ray, and TSA screening process with a video camera. The young woman’s camera was confiscated and she was given a citation and released from Harbor Police custody.The guy arrested for stripping to his underwear (he wanted them to handle his clothes instead) had his iPhone confiscated also.
Reddit has "Operation GrabAss" covered.
A medical cartoon:
I thought that was funny, because you know those gloves they wear? Those are for their protection, not yours. They're not supposed to touch skin, but of course they do sometimes - it's inevitable. So there is risk that say, lice or a more unpleasant skin infection can be transmitted. Like HPV or staph. And don't tell me that's not going to happen sooner or later.
I don't think this will fly. It is a reasonable security procedure given what they are trying to protect against, but it is not reasonable from the point of view of the passengers, it does entail some risk to the passengers, and in the end, only profiling and very thorough baggage searches will really work, and that will entail other problems and cause more offense.
I would imagine frequent fliers are the most supportive, because of course their risk of being in a plane with a nutcase is higher - but also, their risk of radiation exposure or contact infections or infestations is higher. Sooner of later some poor old lady who got the under-the-waistband treatment is going to end up at her doctor's with crotch crickets, and then the whole thing will blow. This is a major public-relations issue.
Saturday, November 20, 2010
If you wanted to get rich, would you invest your energies in starting a business to sell an innovative new product or service, or would you move to Washington, D.C. and become a lobbyist?Hah. It's a really good post with a link to an article with some substantive attempt to assess the differential.
But hey, we've seen this rising tide for some time. It's no coincidence that surveys of college and graduate school students has shown that most of them prefer to go into government in recent years. It's no coincidence that small businesses, who have by far the worst problem with medical insurance, got bent over the barrel with health care reform. For years they have been lobbying to get equal treatment with large businesses, and for years their lobbying has been defeated by lobbying from insurance companies.
Consider the capital alone. It's hard to raise capital now, the regulatory barriers to setting up any business which manufactures ANYTHING are large, thus the legal costs are huge, and you put that capital at risk. You need very little to go into the lobbying or dealing with regulation business. This is so bad for our country that until it is somewhat redressed our economic problems will continue.
Second great post - No Oil For Pacifists covers the Colorado register-to-lobby case. In detail, as you might expect. This is a very important issue, because just as businesses have difficulty starting due to regulation, average people have difficulty engaging in politics when politics becomes regulated by the state. Effectively, this is a back-door abrogation of First Amendment rights.
This is just my opinion, but I think we have reached the tipping point. We will either evolve a new philosophy of government or our society will tip over under the weight of this. Since I have made my living off dealing with regulation, I think my opinion has at least some weight. I believe banks ought to be regulated, but I have become skeptical of the current reform law. Even that is rolling over.
But read the posts, and see what you think. The average person wouldn't know about the laws in his or her own state until the average person needed to organize against a local political initiative. The average person doesn't know about business regulation, because most people don't directly deal with much of it. Up until now, our society has been ignorant of the growing mass weighing down the economy.
But now the EPA is going after farms and industrial boilers, and the stupid 1099 rule has pissed off every small businessman in the country, and TSA's crotch-groping is about to really hurt the airline industry in a very deep way. It's good for car manufacturers, but death to airlines.
Much of this stuff has just resolved to "Stupid" in the public's eyes. However the public still doesn't know just how stupid the official stupid has gotten. It's really stupid - and going along with the stupid is a very sure and certain way to make money, even if you are a scientist. Because believe me, everybody who studied paleoclimate already knew that the rainforests were hurt by cold (due to lack of precipitation) and prospered during the warm periods, but the "scientific consensus" had come to be that a very small rise in current temperatures would hurt the rainforests. So now a few brave souls are doing studies that confirm what everyone already knew before denying reality got you tons of grant money.
Friday, November 19, 2010
BED And The Inventory Cycle
Here it is, but unfortunately the BLS website is due to go down for maintenance today and over the weekend, so you may not be able to get it. Therefore I am posting some of this data so you can see what Our Lady of Stupid Data Fitting is babbling about:
Let's just say that we are looking for a pretty steep downward revision in the Establishment series of the Employment report.
BED figures are used to adjust the imputations in the B/D model.
The longer data series in Table 1 is here. From the POV of the average person, recessions end when these job losses stop.
If you can get Table 1, you can see that the 2001 recession was really a double dip, with job losses being at their height in the last two quarters of 2001. If you can't, here are two partial images
This corresponds much more with how the public perceived that recession. The first half of 2002 was okay, and then from the job-hunter's perspective, we got another year in the land of sorrow, finally emerging in the last half of 2003.
Which, of course, was one of the reasons the public voted for Bush again.
It also points up the wisdom of the Bush tax cuts at the time, because the economy was not really recovering.
Here is our current cycle, so far as we have this data.
You notice that we went negative first in the third quarter of 2007. This is not that surprising - when the economy is in a slower growth mode, the third quarter usually shows a significant slump in job growth compared to the rest of the year. I believe this is because that's when private job growth dominates the the numbers.
If you can get to Table 1, you can see the openings/expansions vs the closings/contractions. In September of 2007, there was a notable fall-off in expansions which is what caused the job figures to be negative that quarter. The other three categories didn't show much.
This fall off in expansions is the first sign of a recession, and it doesn't show in the initial claims series well. You don't file an unemployment claim because there wasn't a job created for you. To pick this up, you have to watch the continuing claims series for changes, but even there the change will be very subtle, because the real impact is on new entrants, or more broadly, speed of uptake.
There is a tremendous amount of change in US employment each quarter. For example, in 2005 Q3, total jobs gained from opening and expanding establishments were 7.965 million, and total jobs lost from closing and contracting establishments were 7.288 million. So speed of uptake is an edge indicator that shows changes in the current environment in a very sensitive fashion, probably because it mostly measures expanding establishments.
A way to approach the B.E.D. survey data, which is obviously out of date by the time you get it, is to use BLS data by month and look at changes. Here is one attempt that approaches this for the third quarter:
Note: peaks are bad on this graph, because the represent rises in unemployment rates.
This graphs shows the changes for non-ag private wage and salary unemployment for experience workers - therefore it should come close to capturing the effect we see in Business Employment Dynamics.
The thick green line shows the July/Oct change, and the thin blue line (I'm working on my adjustments for the color blind) shows the change for Jun/Sept.
Obviously workers do switch from government to private employment and vice versa if necessary, so this is not really discrete from government jobs. This graph indicates some trend weakening, but notice that you saw a rapid escalation in 06 (the industrial contraction which preceded the main recession) and 07. This looks quite different. In fact, it is quite comparable so far to the 91 recovery.
NBER recession dates. Although officially the 91 began in July of 1990 and ended in March of 1991, the employment cycle was very different. Since we entered into an economy dominated by services, the slow recoveries in jobs have been the norm rather than the exception.
The reason for this is that manufacturing leads into a recession, but then leads out as inventories are exhausted and manufacturers have to ramp up. Closely associated with the manufacturing cycles are the transportation/WH cycles. Services are far slower to ramp down and far slower to ramp up.
So you see the stall pattern which lasts for about two years after each recession. What happens is that there is a quick manufacturing recovery, which then glides out, and from there the services industry slowly picks up the slack. So far, none of this data shows how we ended up going negative on wages in October. Theoretically, this should not have happened.
However, one possible clue is the thin blue line (Jun/Sept). It should be above the thick green line (Jul/Oct change) in growth cycles and it should be below the thick green line in recoveries, and it may be crossing. It should not cross this soon - the crossing should be about the middle of next year.
I do not know quite what this means. I use an AI program named P-Nat (which I wrote) to assimilate data, run projections, and hunt for useful correlations, and this is a P-Nat find.
Nor can I use P-Nat to run projections, because P-Nats are biased toward strength and predictability. If data seems erratic and erroneous they get pissy and refuse to process it. These things are true AI, they are not predictable or guidable, and in fact often they act like toddlers.
So the current P-Nat cannot predict because it can't handle the fact that the most relevant current variables are government actions. I think I am telling it that the world is essentially random, dominated by possibly irrational gods that will do destructive things, and I don't want to drive this one nuts.
The previous P-Nat was older and more seasoned, but it developed the electronic equivalent of some sort of neurotic anxiety disorder over world food supplies and starving people, and locked itself into an endless cycle in which the only thing it would process was information about basically food, and parenthetically energy, and kept demanding info about those matters which I do not have. So I had to put it in hibernation.
Wednesday, November 17, 2010
Jimmy Buffet Time Again
Wasting away in Bohicaville,As far as your blogging host (hereby named Our Lady of Stupid Data Fitting) can tell, we are actually in a contraction right now. Admittedly, early in a contraction, but you know, contracting.
Searching for my lost shaker and salt,
Some people claim there's a Fed Bank to blame....
But I know ... it's my own darned fault.
That means that I have been wrong. I guess the Fed's action, which really took effect long before they officially did anything about it, was a factor, but underlying growth effects in the economy before they started running their mouths were clearly weaker than I thought. I knew this was going to be a bare patch, but now it's a DOA.
Many of the reports are still mixed, but Treasury data is showing that it started in October (Medicare HI wages went negative YoY, after having been about 1/2 a percentage point better in August and September):
And now, it appears that the patient flatlined in November. Because other taxes were higher, October's WIET looked okay in the Daily Treasury Statements. But now....
WIET, CIT, Excise. Zip, no heart beat.
It seems that the compression in company profit margins involved in higher underlying costs and slim-to-none ability to raise final prices due to poor personal income gains finally shunted companies into a slow-down.
In partial defense of the Fed, this epic and sudden crash-into-the-wall fall is what they were trying to avoid.
Now other people aside from Our Lady of Stupid Data Fitting read this stuff, and it seems like commodity prices will be undercut by Mr. Market looking at Mr. Reality. Inflation overseas in the biggies (China, India, etc) has been running very hot all year.
Things are getting a bit dicey in India. Their current account deficit is worrisome and the Sensex is selling off, although the tech sector is still running hot. They're beginning to get in potential trouble with teaser rate loans, too. Since it is mostly financial-instrument capital inflows that are offsetting their current account deficit, it is time to get a bit cautious. Also, the recent pattern of inflation segregating to food is not a promising sign.
As for China, uh, they seem to be trying to go the Jimmy Carter route to control food inflation, which is not going to work, and will only spook investors. China's food inflation rate is lower than India's, but this is not good. A selection of commentary here. While food inflation is a serious social problem for China, their inflation is showing up in a lot more than food! This is from China's National Bureau of Statistics, and please note that the "previous period" is October 10th of this year. The picture gets worse when you look at the survey of individual food commodities and note the difference in price increases between staples and higher priced items. Also remember that Chinese, in aggregate, spend over 30% of their incomes on food while we spend less than half of that, and it is no wonder that consumer confidence has started falling in China.
The meltdown in the fading ashbeds of the erstwhile European Ring of Fire is epic, and I doubt it can be controlled. If it is not controlled, Italy is next, and no, I don't think Berlusconi's gonads are the underlying problem. Bond traders and prudery are not correlated. Italy's debt is so high (over 115% at least) that it cannot stand to pay much more interest, and it has to roll over a lot of debt within the next year. German long Bunds are yielding lower than US Treasuries, which is not surprising given our current uncontrolled rise in debt. Only worries about the Euro/USD are holding shorter Bund yields up, it seems. BondsOnline.
Our problems are not occurring in a vacuum; the world is going through a disruptive patch and we can all expect a volatile environment.
Tuesday, November 16, 2010
Here it comes again.
That's an almost perfect start of a business-led contraction right there.
The rest of this post has been deleted due to the very high percentage of expletives.
Monday, November 15, 2010
Please Mr Market, Just Gimme Three Steps To The Door
So, in a helpful spirit, here's the crib:
This isn't QUITE what they were looking for, is it? But it is what they bought - Caveat Emptor.
First thing your young drinking southern banker learns is that rates have three components - cost to service, cost of funds, and risk premium. I think the Fed does not realize that it, too, is a bank.
The Fed thought Mr. Market was going to have what it was having
But instead - instead the reaction is best described by one of the best jokes EVER:
After staying late at her sick grandmother's cottage, the young and devout peasant woman bravely leaves to walk home through the forest past the cursed castle.
Clutching her cloak around her just below her neck, she walks along the dark path ignoring the forest sounds. The rustles, the animal snorts, a shuffle of leaves as a deer moves stealthily past. She keeps her eyes on the path ahead and looks neither right nor left.
But now the sounds have changed - what is that? Footsteps? Almost running, but too light to be a man's ... she whirls, she stares, she starts. A pale spectre with glowing eyes and two small fangs is almost upon her.
She drops her cloak and pulls her crucifix away from her neck, pushing it toward the apparition. And the last sounds she ever hears are "Tough luck, shiksa."
Sunday, November 14, 2010
You Play The Deficit Game
Here is my first effort. You will note that I have way overshot for both 2015 and 2030, but that is because the numbers given are not realistic. In fact net savings would be less. And one or two things I picked for political viability; realism has to incorporate political realism.
You try. You criticize. You think about it. There should be a write-in feature because there are options not being examined in the menu.
Update: Thanks to Wacky Hermit, we have a link to the Pajamas Media version, which just shows spending by broad category. I would use both; the PJ version is great because it shows the scale and slope over time changing, but the NYT version gives more specific policy actions.
Further update: Robert Samuelson is consistently writing some of the best and most thoughtful substantive economic analysis out there. His latest is exceptionally good. It is rather sad that the economists who have written on the economy have failed to distinguish between temporary and structural economic issues. The reason why the US is throwing so much stimulus into the economy and failing to get much of a bang for it is that we have underlying structural issues we never address. Read the column.
Saturday, November 13, 2010
An Insane Waste Of Money
The Western Massachusetts Electric Co. site in Pittsfield, New England's largest solar project, promises to produce enough electricity for about 300 homes starting later this month. That's a tiny fraction of what the region needs to run computers, lights, TVs and everything else utility customers take for granted.Yeah, because solar power plants really generate a ton of electricity in the north during those dark, short winter days and very long winter nights when the heating is needed. If you want to stop using heating oil in New England, you are not going to manage it using solar power.
But the $9.4 million solar plant and an even larger project planned for Springfield next year are expected to spur job growth in the solar industry and eventually make the cost of solar power competitive with the oil-burning furnaces that are common in New England.
Blue states need more engineers and less politicians.
Btw, when MA asks for more federal help with its other costs, just remember how they spent these $$.
DU, of course, is thrilled and impressed.
Thursday, November 11, 2010
The Most Depressing Veterans Day I've Ever Spent
We seem to be locked in an ever-expanding series of actions on an ever-expanding series of fronts, with no exit strategy. And these are the worst possible types of venues.
We're fighting a holding action.
The only conclusion I could come to all day was that the performance overall of the line troops has been unbelievably good. The line combat officers - mostly superior. The brass - not always so good.
The political brass? Fort Hood. 'Nuff said.
About the only thing we can do to repay these people for their sacrifices (and even if never hurt or injured, the endless grinding deployments are sacrifice enough) is to try to tighten things up on the home front and deal with our own problems. No matter how bad we think we have it, we don't have it as bad as they do.
So thank you, veterans. The words are not enough. Nothing can ever really be enough.
Wednesday, November 10, 2010
Early report on the Deficit Commission (Catfood Commission) work. So far, so good. This seems realistic.
We pretty much have to whack across the board to make any impact at all, and this proposal does. WaPo article. The flatter tax structure is good, and the cut in corporate tax rates to 26% is good. That would help with job creation and to generate investment.
So, scream on. There is no way to get this done without raising taxes on the middle class, and that includes a lot of current retirees. One thing about this proposal is that it suggests throwing just about everyone in the barrel.
Bayh has already come out supporting the basic approach. I suspect he is going to run for president in 2012, and I'm interested.
Further update, a graph taken from the proposal:
The "current policy" line includes the doc fix fix, the extension of at least most the Bush tax cuts, etc. That is the path we are on.
This does the trick mostly and would eventually create a huge number of new jobs. It can't do it all - a lot of legislative change is needed in the environmental law/energy areas - put it would make it almost as profitable to run a company in the US as in say, Sweden or Denmark.
If you're not going to compete with Sweden or Denmark, you are not going to compete.
Monday, November 08, 2010
Well, that top yellow line is District 12.
I realize that not everyone knows the Fed Districts, so....
The most indebted area is the area which held Dem.
This is just consumer debt, and does not include government debt.
Sunday, November 07, 2010
Progressive Political Dementia
Yes, American history is replete with examples of presidents and parties who experience political difficulties in hard economic times, only to regain public esteem as the economy regains its balance. But there is more to the losses that President Obama and the Democratic Party suffered in November 2010: the public punished them, not only for high unemployment and slow growth, but also for what it regarded as sins of both commission and omission. The White House and congressional leaders pursued an agenda that the people mostly rejected while overlooking measures that might well have improved the economy more, and almost certainly would have been more popular, than what they did instead. In short, while Obama was dealt a bad hand, he proceeded to misplay it, making the political backlash even worse than it had to be.This is the sort of thing that makes progressives howl at the moon, but I think there is considerable evidence for Galston's theory.
It is an interesting paper, although its worst fault is that it does not mention Nancy Pelosi.
She has been a very strong and determined leader of the House who has brought a historic electoral disaster upon her own party, who is now running to be the head of that party in the House once more. She will probably win, because the numbers are in her favor. There is a solid core of innumerate progressives from the Left, West Coast who will support her!
However, if she wins Obama may be truly cut off at the knees; for Pelosi to advance her agenda she would have to attack the Democratic president in substance if not overtly.
Even though Republicans are pretty much despised, the leadership of the Democratic party decided to ignore political and economic reality and has shoved the country back into Red territory.
That is what elitism gets you, but progressives don't get it and can't recognize that their fundamental agenda amounts to warfare against the middle and working classes. That's a battle that can't be won because the numbers are too skewed.
If you are a hardline conservative, this is a dream come true. What progressives cannot grasp - because American progressive thought has been seized by people who cannot add and subtract, and cannot tell the difference between a million, a billion and a trillion - is that if they succeed in blocking repeal of the health care reform legislation, they will force some states to exit Medicaid, and that will force other states to follow suit.
California is dominated by this too-big-to-deal-with-reality agenda, and California is creating an utter fiscal nightmare for itself. Further, loss of the House ensures that California can no longer pretend it is Goldman Sachs and demand a federal bailout for itself. Eventually, California will bust, and with it, this generation of progressives will bust too.
If you are a moderate, this is pretty much a nightmare scenario. Only a Democratic party that advances very workable and fiscally sustainable proposals can force the GOP to do the same. If that were to occur, the solid and experienced core of politicians in the middle of both parties would end up cooperating to salvage what we can from the Clinton/Greenspan initiated flight of fantasy.
The truth is, both conservatives and liberals, cooperating, steered the US onto this path of doom. It will take both, cooperating, to steer us off. In order to survive, we are either going to have to go hard right and almost completely dismantle the social safety net, or go center and dismantle welfare for corporations (which means junking the entire alternative energy subsidy program, crippling the EPA, and legislation passed through Congress that removes the ability of interest groups to sue for environmental reasons) and dismantle welfare for the upper and middle class. We can afford a social safety NET, but not what we have now, and if we try to actually implement health care reform, we will end up destroying the social safety net we have now.
We are so screwed. The future our current laws offer us involves a progressive series of Bernanke type cuts in real incomes for most of the middle class and the lower class. That is not going to provide the basis for legislative success for either party. If continued much longer, it would push the country hard right as people decided to abandon Eva Pelosi rather than experience the fate of the Argentinian middle class.
Friday, November 05, 2010
What A Crappy Week
|Effective with the release of January 2011 data on February 4, |End update.
|2011, the establishment survey will begin estimating net busi- |
|ness birth/death adjustment factors on a quarterly basis, re- |
|placing the current practice of estimating the factors annually. |
|This will allow the establishment survey to incorporate infor- |
|mation from the Quarterly Census of Employment and Wages into |
|the birth/death adjustment factors as soon as it becomes avail- |
|able and thereby improve the factors. Additional information on |
|this change is available at |
Oh heck. I know the headline number for jobs is good, but when you look at the household survey it just isn't there.
Here's the official Table A-1. Emp/population ratio falls YoY no matter whether you look at NSA or SA data 58.8 > 58.6 or 58.4 > 58.3. That is just a kick where it really hurts.
If you look at raw month over month, we added a piddling 35K jobs. Seasonal adjustment turns that into a monthly loss of over 300,000 jobs. If you look at SA month over month, we lost 330,000 jobs. I do not like that, but it is pretty consistent with ADP's last two months. The two month SA employed change in this survey is about -190,000, which works well with ADP data. I have noticed that when ADP and household survey go in different directions they tend to even out over a couple of months when you adjust for government jobs.
Table A-15 Alternative Measures of Unemployment. U-1 rose 0.2%. In this table you can clearly see this summer's education layoffs traveling through the various stats. Job losers (U-2) rose in August and September and fell 0.2% in October. We are not making progress at all on clearing the backlog of unemployed. U-5 rose 0.1% to 11.1%; U-6 fell 0.1% to 17.0%. U-6 is the broadest indicator and it includes involuntary part-time workers. Since this summer U-6 has risen half a percentage point. U-4 (unemployed plus discouraged) rose to 10.4%. U-4 has risen 0.2% since this summer.
It's clear that over the past year, the private economy has added jobs. Unadjusted Oct-Oct, household (maids, nannies, etc) employment dropped 140,000. However other industries (real private non-ag wage and salary workers rose about a million. That's really good.
Unadjusted, government employment fell almost a million and a half during that same period. Some of that government jobs figure involves Census workers, which were just a blip anyway. Still, I cannot figure out how the seasonal adjustment converts the raw loss of 1,475 government jobs to a YoY loss of only 400,000. This appears impossible.
I was thinking that I could use this numbers to back in an estimate of the education/local gov component of unemployment but no, that's not going to work.
I was going to publish something about tax receipts because Brian asked for it, but that will have to wait for tomorrow because I don't have all the data yet, and there's a huge bunch of caveats to go along with it.
We have a discontinuity in this data because there was a coordinated effect from school closures this summer. That's going to insert a "step" downwards in the tax data.
Looking at this employment release, ag wage and salary hiring showed up with very strong year over year increases. Probably commodity prices have something to do with it. That may be offsetting some of the negative blip caused by school closures.
I have a busy day today, and I'll try to get back to this subject tomorrow. At any given time, as much as 20% of economic data series have discontinuities in them. Because the series tend to correlate, discontinuities will propagate if ignored. So I tend to "skip" periods of discontinuity. I mark them down in a big table as they appear, and then the next year when it comes around I know that such-and-such a stat will not be reliable as to underlying trend. This includes everything from hurricanes and storms around the world to things like a coordinated wave of school closings and layoffs. A one-off is just a one-off.
The consumer credit survey is due from the Fed at about 3:00 PM today, and you can get it here once it is published. It's G.19. Credit card consolidations may be shifting some debt from the revolving to non-revolving categories round about now. I am also watching for Q3 bank delinquency and chargeoff data. The next Terms of Business Lending survey is due soon and should also be interesting.
Oh, and about services? Clearwire, baby. And Dish lost a lot of subscribers this quarter - they are offering more services to subscribers to try to bulk revenue, and right now it is working. Whether it lasts will depend upon the fundamental economic trajectory. Brian sent me a link to the Time Warner Cablevision call yesterday, in which they were discussing the downward pressure from the lagging consumer economy. Here's a brief summary of trends. I don't usually track this stuff, and I was happy to get Brian's commentary. It's an issue right now because this is one area that could be a real weakness in private employment over the next three quarters.
The distress indicators I am seeing in mass-market retail tell me that a lot of families must be on the edge of cutting spending in services.
Thursday, November 04, 2010
First, The Scaling
That's $600B dribbled out over the next 8 or 9 months, which will probably go straight into commodities, like you say. I understand how energy would be a problem, but it seems more likely that the flows would be concentrated in the precious metals complex, given the way that market looks. If the asset inflation is concentrated in PM's, will this QE actually be a big enough to raise the price of consumer staples appreciably?Objectively, this is a huge number. The Fed is planning to buy at a rate of about 75 billion a month, and of course they are still reinvesting the payouts from their vast hoard of MBS. That's been over 30 billion a month.
For scaling purposes, working from the October Monthly Treasury Statement and the September retail sales report.
- All federal tax receipts in October were about 135 billion.
- All Social Security/Medicare receipts plus RR inflow was about 63 billion.
- Social Security payouts were 65 billion.
- TOTAL retail and food services September sales were about 356 billion.
- Gas plus grocery September sales were about 79 billion.
- Total motor vehicle sales were about 65.6 billion.
Another way to scale this is to consider that on a month-by-month basis, the Fed is injecting far more money into the economy with these purchases than the 2009 stimulus bill ever did.
From the consumer's point of view, personal incomes are not increasing very rapidly at all. (I covered personal income trends with the Q3 advance GDP post and in this post.) Over time, the increase in consumer spending is going to be mostly limited to the increase in personal disposable income. Last quarter's annualized real increase was 13.5 billion. That's why prices have been coming down.
Thus the consumer will spend more on basics and less on discretionary.
This amounts to a significant dollar devaluation, and retailers are at their high-flow season. They have been pretty aggressive with the prices so far in order to get market share. However they now have to wonder about restocking prices.
Basically the Fed is forcing a lot of sellers to raise their prices, but it does not control the ability of the average person to pay those prices. Over the short term, people will probably spend more to get buy without constricting total spending, unless they are going week-by-week. Over the longer term, people will just buy way less discretionary goods. To put it starkly, if the average consumer is covering inflation in living costs by borrowing these days, that consumer is headed to BK court.
The expected effect on prices depends on whether the goods are substantially imported or internally generated, any replacement effects possible, and degree of flexibility. Consumers do not have to buy gold and silver jewelry - they do have to buy food, utilities and transportation.
One of the most vicious expected effects of this move will be in services. Services are where we have been seeing most of our employment gains. Services such as insurance and phone/internet/cable should see increased competition and lower market penetration. That will have a detectable effect on employment, wages and consumption.
In the US, jobs and thus wages are dependent on volume of transactions rather than pricing. Failure to understand this basic fact is what led the Fed not to predict this recession and apparently to plan this Triple Lindy. Unfortunately, it's the working and middle class that get to take the leap.
Also China and India are getting pushed out onto the diving board. They have got to be extremely unhappy about this.
Wednesday, November 03, 2010
Six Hundred Billion!!!
"...then let those who are in Judea flee to the mountains. Let no one on the housetop go down to take anything out of the house. Let no one in the field go back to get their cloak. How dreadful it will be in those days for pregnant women and nursing mothers! Pray that your flight will not take place in winter or on the Sabbath."This is gonna HURT.
There is virtually no place for the money to go except into commodities, and the effects will tend to cut employment rather than stimulate it. In the "test" - the run-up to the election as the Fed has discussed it - the price effect in stores has been noticeably negative on discretionary goods. That means a channel tightening, and that means profits go down, wages are constrained, hiring is constrained, and some employers cut further.
If they had done this next summer, we might have been strong enough to withstand the shock. This policy, if executed, is likely to induce a new contraction.
Unemployment could easily go over 12%.
Well, Snarky Mark can probably find some clever way to discuss this, but I have a cold, and now I have a bad headache and a desire to cry on top. I'm going to bed. The next election will be positively Jacksonian.
The worst part of this is heating oil and gas. It will have a very immediate effect.
And Now Bayh
This is an op-ed in the NY Times by Evan Bayh, who has had a long Democratic career. One notable difference between Bayh and many other congressional politicians is that he was governor of Indiana for two terms. Few state governors can escape a more focused perspective on fiscal problems.
Keep in mind the polling - voters are not fond of the GOP, for obvious reasons. Many of Bayh's suggestions sound very similar to TEA party rallies:
An electorate that is 76 percent moderate to conservative was not crying out for a move to the left.Of course he ends with a whack at the TEA party as being extreme, but this is mostly stuff the average TEA partier would support. If this election produces a Democratic party competing with a Republican party to figure out how to improve our fiscal and economic position, it will end up being a win for the voters, at least.
We also overreached by focusing on health care rather than job creation during a severe recession. It was a noble aspiration, but $1 trillion in new spending and a major entitlement expansion are best attempted when the Treasury is flush and the economy strong, hardly our situation today.
So, in the near term, every policy must be viewed through a single prism: does it help the economy grow?
A good place to start would be tax reform. Get rates down to make American businesses globally competitive. Reward savings and investment. Simplify the code to reduce compliance costs and broaden the base.
Democrats should support a freeze on federal hiring and pay increases. Government isn’t a privileged class and cannot be immune to the times.
The most important area for spending restraint is entitlement reform. Democrats should offer changes to the system that would save hundreds of billions of dollars while preserving the safety net for our neediest.
Before the election Obama was taking positions that sounded very similar to Republican-type economic prescriptions.
I think the emergence of the TEA party has changed the political landscape. Whichever party caters to its inner moderate accountant will end up being the winner in the long term.
Right now, the economy is stronger than most non-Wall Street economists think, IMO. ADP came out well today with further private industry gains. NACM was really good. Really, really good. Banking data has continued to firm. (There was a dip in C&I loans, but that seems to have been due to paybacks and it is probably picking up again.) Commercial paper dipped but has been picking up, which is a very good sign (mostly related to autos, I believe). We've hit the trough on housing and are moving out of it, and we probably are going to start adding private sector jobs at a more rapid pace. The ISM surveys and Chicago PMI support a growth thesis. Judging from rail, although intermodal has probably peaked the production-related freight is still growing. Federal tax deposits for October were highly encouraging. There was a drop off in the WIET growth rate this fall, as I expected from the disproportionate impact of education layoffs. But still both WIET and CIT tax receipts were substantially up from last year.
This is growth across the board, and all of these indicators can't be wrong.
Where we're weak is in consumer demand, but that isn't a stopping blow yet due to the build in Other Deposits. You can't depend on consumer credit to drag us out, but that money in deposits is real and can be spent.
This is why I believe the Fed is going to make a terrible mistake and throw away low-level but real growth in favor of a short-term spike in stats that will impair real growth. And it's a very bad mistake indeed when you look at Europe, which is about to allow the PIIGS to devalue their debt and hand the loss to investors rather than impair their growth potential. Germany is winning this argument hands-down. That will tend to promote shift investment to Europe.
So the American consumer is almost certainly going to get a ten-day dead trout in the face from the Fed, and they are not going to be in a spending mood after that.
Tuesday, November 02, 2010
The Fat Man's Got Coattails
The governorships are way more important than people think, and they are rolling hard GOP.
But looking at some of these crossover (suburban/urban) districts in places like NJ, I'd say this is a major and persistent turn. MSNBC has the best map.
When the rustbelt goes red, the Dems are in trouble. Major trouble. Michigan opted for a Republican governor and a bunch of the House seems to be turning red.
This isn't a temporary thing. There's not much that will do this except property and state taxes which just flip the electorate in some places. And what's going to change by 2012? See, once the stable center starts to feel economically threatened by taxation from any level, they flip tax-averse local, state and federal. It's a correlator.
That's the Reagan Democrats, resurrected.
As for the South - well, I guess DU is going to have to start cussing and demanding secession again, but this time they'll have to pack up Illinois, Michigan, Ohio and probably PA to send off with the TEAFederacy. There won't be much left of the progressive bloc.
This reprise of the War Between The States appears to be likely to have a very different ending.
In 2008, thin, stylish, glib and gloriously innumerate was in. In 2010 and 2012, apparently out-of-shape, blunt, aggressive nerds are in. Snyder in MI literally ran a nerd campaign.
Maureen Dowd will never, ever figure this one out. Because she'd have to date Chris Christie to catch a clue, and he's married, and I think he and his wife are quite close. So no dice.
PS: The underlying election was much more red than shows in the national numbers. See, for example, this DU thread.
There was never any way I could see that the GOP could take the Senate. Mostly it was Republican seats up for re-election in the Senate, because the Dems gained over the last two election cycles so there were far more Republican seats up for reelection than Dems even with the lopsided Dem Senate majority.
There were 40 Dem residual Senate seats to 23 residual Senate seats. This should have meant that Republicans would lose an additional seat or two, but given the wave they gained big. Currently it's 51-46 with three open. I figured the Rs would be lucky indeed to come out with 47 and they may get that. With bloc union voting for the Dems, it is very difficult to unseat many Democratic senators.
And how could Reid possibly lose? Because the unions are all looking for federal bailouts to preserve jobs and pensions, they will be a powerful force in the next three elections. And they'll be a powerful Democratic force. Unfortunately for the Dems, the rest of the population is going to be frantic to avoid losing their Social Security by shifting federal funding toward state, local and private unions, so this will be a brawl to the death.
However in 2012, the math will shift favorably toward GOP gains in the Senate.
PPS: I forgot by far the best election story. Reversing the "better red than dead" motto of their youths, the CA liberal electorate chose a dead Dem over a live Republican.
Still Slaving Over A Hot Spreadsheet
But forget that. No, let us turn to AWI data from Social Security. Social Security gets data from the IRS each year and uses it to compile the Average Wage Index, which is used to figure benefits.
In the process, Social Security publishes wage data by 5K increments each year. The data for 2009 just came out in its corrected version. This is basically W2s compiled by earner. If you go to the above link you can pull it for most recent years.
Here are some tabulated multi-year stats for the average wage index, but that is a "futzed" number. It is not the same as real wages. You will note, however, that Social Security shows that total workers dropped from a height of 155,570,000 in 2007 to 150,918,000 in 2009. That is a huge drop. Even if you worked part-time you would be included in these stats.
What I have done is to compile four years of the detailed data (2006-2009) in larger bracket groups. I wanted to show you some of it.
This graph shows the percentage of earners in each bracket over the four years. The number of earners in the 1 million and over bracket is 0.1 for each year.
There are several interesting things about this data. You note that the biggest percentage drops come in the 30K and under bracket. This is not due to travel up the brackets but rather due to lost jobs.
More interesting are the relatively steady ladders up in the 55K-200K groups. This is one of the reasons I was so curious about September and October income trends. A good percentage of the increase in these brackets are government jobs, and that is where the scythe of economic correction will be concentrated until another downturn.
Looking at this data, I am struck by the disparate impact of this recession on the private sector and on lower income workers. It's remarkable. You probably don't see it in this graph, but stick with me.
Here are aggregate earnings by bracket as a percentage of total SS earnings:
I think this graph makes it obvious unless you are determined not to see it.
Despite all the talk about income inequality, the top bracket is dropping income hard. This is just wage data, but investment income changes should accentuate the difference you see here.
What's so notable is the growth in percentage share in the 55K-200K group, and that is concentrated at the upper levels.
Federal hiring and federal money passed out, which accounts for a lot of government-sourced jobs, has only increased. So you see that it is not really a recession for these folks.
The second graph is really the story behind this election, and it's why pundits are so confused. On the lower end and median, people are getting clobbered. At the top, people are getting clobbered.
The median wage in this country is around 36K. In 2009, almost 55% of the workers earned less than 30K and over 75% of the workers earned less than 50K. Over 25% of the workers earned less than 10K (students, casual and working retirees, plus unemployed). For comparison, in 2007, 25.6% of workers earned less than 10K. The reason why the percentage has dropped is that there are less jobs. Youth unemployment is very high.
In a nation in which the proceeds of taxation disproportionately benefit a relatively small group of workers (about 20 million, or about 14% of all workers), the electorate is forced anti-taxation - basically because they can no longer afford to pay for it.
The "wave" we are seeing is not really a wave for the Republicans. It is a wave against special interests and profiteering at the public's expense. The public is mad at both parties, and this anger will not fade in the next two years, because not much is going to change in the next few years.
In 2012, there could really be a third party. And then the axe will fall.
Monday, November 01, 2010
More On Personal Incomes
As I mentioned in Friday's post on GDP, GDP growth in the third quarter was extremely dependent on consumption spending, but the weakness in personal income growth implies that growth will decline.
I also pointed out that the third quarter got a boost from the last extension of unemployment benefits. This boost is due to rapidly slide out of the economy.
Today BEA released September's personal income and outlays report. I have been extremely curious about this one, because here is where the effect of state and local layoffs are going to begin to register. The next few months are going to be governed by prices (already rising for necessities, but collapsing for mass market non-necessities), the state and local layoff effect, and the slow drop off of persons receiving unemployment benefits. It is not going to be assisted by the fact that Social Security recipients get no COLA. The majority of them are going to see their real incomes drop, because many older people concentrate their spending on needs categories, and needs categories are generally rising a bit.
Although the private sector is slowly generating jobs, it is not doing so quickly enough to generate any kind of employment for the majority of the millions who are going to lose benefits. That is going to cause a downward "bump" in the economy. I spent a few more days roaming retail, and you can see the prices ratcheting down in the quick feedback categories. Personal income in October ex-needs is still dropping.
Back to the BEA release:
Personal income in current dollars (i.e. not adjusted for prices):As my niece would say, "Uh-oh".
Personal disposable income (after tax) in chained dollars (adjusted for price changes):
- June: +0.0
- July: +0.2
- Aug: +0.4
- Sept: -0.1
- June: +0.2
- July: -0.2
- Aug: +0.2
- Sept: -0.3
What exactly the Fed thinks it can change about this by dumping money into the marketplace which will only be used to buy up commodities is beyond me. They'll cause deflation rather than prevent it.
To explain why, we go back to the moving parts of income:
Private wage and salary disbursements increased $3.3 billion in September, compared with an increase of $23.6 billion in August. Goods-producing industries' payrolls decreased $1.6 billion, in contrast to an increase of $6.7 billion; manufacturing payrolls decreased $1.0 billion, in contrast to an increase of $2.3 billion. Services-producing industries' payrolls increased $5.0 billion, compared with an increase of $16.8 billion. Government wage and salary disbursements decreased $4.8 billion, compared with a decrease of $8.2 billion.This gives us the means to decompose the rather large swing.
Personal current transfer receipts decreased $21.5 billion in September, in contrast to an increase of $35.1 billion in August. The September change reflected the effects of unemployment compensation legislation, which reduced emergency unemployment insurance benefits by $25.5 billion at an annual rate in September, after boosting benefits by $20.5 billion in August.
Contributions for government social insurance -- a subtraction in calculating personal income -- decreased $0.1 billion in September, in contrast to an increase of $3.0 billion in August.
1) The private sector is still growing, although it is growing slowly.
2) The government sector contracted. A great deal of this was education layoffs.
3) Monies the government gives to individuals to spend swung negatively around 50 billion annualized between the two months, and the majority of that derived from the sudden surge in unemployment and now the slow draining losses.
4) The net employment effect was negative, because FICA receipts fell and both government and private employees pay them. But it was only slightly negative.
Going forward, we should see slightly larger month-to-month gains in private employment, some slow continuing drop in government employment, and a continuing fall in unemployment benefits. The fall in unemployment benefits will be minimally offset by more people going on Social Security, but it will probably take several years for enough retirees to qualify to full offset the loss. Government raises will kick in substantially in January to give us a few months of net increases. But still state and locals have to pare, and I see no end in sight for that.
If you want graphs, there are some pretty nice ones at Bloomberg's Econoday report on this release.
But now we also have to account for current tax policy. Under current law, taxes are going to increase substantially in January for virtually everyone. A lot of families with children and median-level incomes could see their annual tax bill increase over 1K. Some over 2K.
This has a lot of economists screaming, drinking, and curling up in fetal balls. It's not clear that we can avoid a new contraction even if the Fed backs off and Congress manages to get itself in gear and pass tax legislation preventing at least the huge majority of the tax increase by the middle of November.
If we go into a second contraction, matters could get brutal. Even if we get action on tax cuts, the Fed action could push us into recession. Our best hope is probably for just a few negative months.
If the Fed backs off and Congress gets itself in gear, we could avoid one but we might not avoid a second contraction.
If both the Fed and Congress act sanely and we just hit a negative two months or so, by the second half of next year we could roll back to somewhat above trend, in the mid twos.
The drawdown from the unemployment expiration is pretty significant, and it is hitting the economy right now. Last week's claims release showed 4.6 million people receiving extended or EUC benefits. We began July at about 3.9 million. We peaked in August at over 5.8 million. A lot of people got lump-sum payments, which accounts for some of the spending. If you figure the average weekly benefit net taxes at $280 X 4.2, that's 2 million people losing about $1,176 dollars in income a month or a total 2.35 billion a month so far. By the end, we'd expect the net effect (some will take jobs) to be about 7 billion negative a month.
Many working people are still seeing their actual paychecks drop due to benefit increases, or most of their nominal raises eaten up by benefit increases. It's really government retirees and government employees who are seeing most of the increases, plus rehires. Well, rehires are occurring, but not fast enough to completely offset this swing.
Another way to look at it was that in Q3, personal real disposable income only increased an annualized 13.5 billion dollars, and the expected effect next quarter of just the loss of unemployment benefits is going to be a minimum of around 11 billion annualized. So we'd better hope the retail hiring intentions surveys hold!