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Thursday, January 17, 2013

Seasonal Adjustment!!!

The initial unemployment claims report looked a little odd this morning. The headline is great - 335K. But actual claims are almost unchanged from the prior week at 555K, and are 30K more than last year's comparable week's 525K. But last year's SA number was 364K, and this year, with a 30K increase in claims, somehow that magically turns into a decrease of 30K. 

So don't take this one to the bank! Seasonal adjustments sometimes bonk these numbers around.

I have been watching continuing claims most of all, and while the YoY improvement in continuing claims is slack, at almost 260K, it is still there. The next month's worth will tell the tale. There is always a lot of employment churn at this time of the year, and the continuing claims hint at whether it's normal or a depressing factor. So far continuing claims have held in a favorable range. Both SA and NSA insured unemployment (continuing claims) rose one-tenth of a percentage point this week, but that too is well within the normal range.

One of two things is going to happen by early February. Either continuing claims are going to start to ratchet up, which would be a sign that the economy is in trouble, or they will not. If they do not, then my base forecast is for slow growth over the first six months. I now have Sandy as a distinctly favorable factor for growth in the first and early second quarters, because of where the damage occurred. I do seem to see confirmation of that theory in the trucking numbers, in rail, and in a couple of other early stats. 

Now, if I'm wrong, things may get rough in the second half, because my forecast diverges rather dramatically from CBO's and the Fed's. 

What I had was a close-to-skipping recession waning in the first half of 2013 as the inventory control kind of evened out, and very slow growth thereafter. But the payroll tax increase is going to have a negative effect, and if not offset by wage gains, it will be cumulative over this year. The effect will build and be quite evident by August. 

The other factor that could offset some of the payroll tax increase would be a drop in prices, but the Fed is trying to ensure that it doesn't occur. 

The other negative effect pulling down growth in the second half of 2013 is Obamacare implementation. Right now a range of lower-paying retail, restaurant and other service establishments are cutting hours of employees to limit their costs under Obamacare in 2014. They have to do it now, because the way you figure out whether the employee is "full-time" is retrospective to 2013. You don't have to use a full-year period, but establishments with seasonal hour variations might really want to do so. If businesses wait to cut hours until next year, they would be in the bag for fines for their part-time employees if they had averaged 30 hours this year. 

So what I am forecasting is that many working people with low-to-moderate incomes will see a drop of 40-60% in their actual discretionary incomes, and the effect on their pocketbooks is accumulative over the year. This is between 20-30% of the population, and it is the lower-spending part of the population, In the first two to three months, they'll just be behind a utility bill or two. By the end of the third quarter, they'll be missing a rent or mortgage payment.

And that generates the very unpleasant probability that default rates on consumer loans are due to rise throughout the year barring very strong creditor control of risks. 

Right now I think the Fed's actions will keep the flow of subprime auto loans going. Mortgages get a lot dicier toward the end of the year. 

In 2014, we take on an additional load as Obamacare kicks in, and that's where it begins to bite. 

Anyway, by the end of February I'll have a much better feel for our potential this year. 

However by the end of 2015, the federal deficit is going to start going through the roof. The costs of Obamacare are going to be much higher than predicted, and raising taxes as high as we just did on capital gains is going to probably generate a net drop in federal capital gains receipts. 

So everything is unstable. I expect the fiscal pressures to force cutting SS and DI benefits in 2015. There are two ways to do this - cut benefits now but in a small way, or cut benefits in the future hugely. If we do that, we are pretty much dooming ourselves to a recession that will look more like a depression in the future. 

The window for holding Treasuries without large capital losses is getting smaller. Sometime this year the future trajectory will shift.

PS: Even the Fed knows it is playing with fire.



Comments:
Looks like the IRS has decided to count up part time employees and use them in the totals of full time employees, link . That would make me think that some of those part time employees will be losing their jobs.
 
MOM,

I don't see that we have a snowman's chance in the desert of avoiding a recession when I add the following up:

1. Increase in tax rates. Not only Federal but also state (I'm looking at you CA).

2. CA tax rate was retroactive to 1/1/12 so a lot of tax was due recently, ie cash came out of the pocket.

3. Health insurance rates are up a breathtaking rate. Our rates went up 17.6% and that was on a $1k deductible with a HSA plan.

4. The high deductible & HSA plans went from 10% to 25% marketshare. Now that the first dollars will be coming out of the consumers HSA account, I look for them to be a lot tighter and examine bills much closer since the money at the end of the year will roll over to them rather than go to zero in the old flexible spending accounts.

5. The 3.8% investment tax courtesy Obamacare. We saw a lot of businesses paying dividends in Dec to capture the lower rates. This also pumped up personal income in Dec and will show badly in Jan.

6. The new 2.3% excise tax on medical devices again, hooray for Obamacare.

7. The big kahuna 2% FICA rate reversion. I have to laugh in that some Democrats that Obama was only going to stick it to the rich.

8. Gasoline has moved from $2.95 to $3.20 since 1/1/13.

9. My favorite. Obamacare thinks they are going to be able to install and implement the market system for the roughly 25 states that didn't set up their own market. When was the last time you saw a computer system go from zero to 150 million customer base in a very short time go without a flaw. It will be more costly, inefficient that anyone can imagine.

When I add the above up, I can't see anything but a huge gash to Disposable Personal Income. If the sequestration cuts kick in this year we could really gain some steam on the downside.

Thanks again for all your insights.

Learner2
 
Learner - the underlying economic conditions are slightly more positive (more healed damage), but that infrastructure is carrying an increasing load.

I can't argue with anything you write.

Teri - there are two decisions points in the law. One is figuring the number of FTEs for the purposes of deciding whether the business is subject to the requirement to provide insurance for full-time workers at a reasonable cost, or pay a fine.

For that purpose, the IRS counts up the number of total hours worked basically.

But part-time employees aren't going to be incurring a fine even if the business doesn't insure them, so I expect worker hours to be cut across a broad range of businesses.

The question is whether this will generate more hires. They may just cut hours/work them a bit harder.

Probably a mix.
 
These numbers are essentially meaningless. Give me a solid number, like food stamp rolls.
 
The window for holding Treasuries without large capital losses is getting smaller.

Ohhhhh Markkkkk!!!! :-)
 

M_O_M,

Ummm, speaking of that aside about taking losses on Treasuries, are you talking about taking a loss on the market value? Or are you talking about the federal government's creditors actually taking a haircut outright?

 
Currently, about market value.

It's too hard to predict what will happen over time.
 
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