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Sunday, July 06, 2014

Employment - What Does It Really Say?

First, I think that the employment report was so-so. Not great and not terrible. Not a promise of endless prosperity, and not a harbinger of doom.

The claims that the number of jobs are very favorable economic omens generate skepticism. The details of the report make it look like marginal job creation. Because of the end of school, these may be part-time jobs that really are not substitutions for full-time jobs - seasonal adjustment is very tricky in June. 

But even if that is true,  this sort of thing is just BS, cubed:
Job growth blew past expectations and the unemployment rate fell to the lowest level since before the financial crisis peaked six years ago, creating a firm foundation for a stronger U.S. economic expansion.
It really should ping everyone's nonsense meter, too, because this shortly follows:
The 1.39 million increase in employment over the past six months is the biggest over a similar period since early 2006. 
What was happening in 2006? We were slipping into an industrial recession, which was consequently followed by the end of the financial cycle in 2007. We all know the rest of the story. . If we had not been in the middle of a large credit expansion in 2006, with PCE being increasingly fueled by funny money borrowing, we would have seen recession much earlier - although of course it would have been much milder. 

It's better to take honest recessions as they come rather than trying to go postal, monetarily speaking. But the BIS just tried to explain all that, and word has it that Krugman is still frothing at the mouth and leaping at the windows, so perhaps I should drop that topic for this post.

The problem is that job creation, as is also true for asset valuation, does not serve as a good predictor for economic expansion over the next year. There's usually a late spike in employment figures - it's not even a good six month predictor. 

Now one indicator that was favorable until June was the growth of full-time jobs. Unfortunately that did reverse in June, but it may return again in the fall. 

This is YoY percent change in three employment indicators - all, full-time, and part-time. It's a bit busy, so:
This is just all and full-time - the green line is all. But you can't see much detail, so:
Between the two you can get a sense of what's what. In earlier times, the US was a highly industrial economy, and employment was more predictive although the changes were sharper. Nowadays, we are a service-heavy economy, and services don't respond to output as much as consumer spending. 

If you will refer to the long series and the short series, you can see how absolutely odd the employment shift looked in 2006 - but that's because we didn't need to work. We could all just borrow more money on our houses. So it took a long time to sag out, although doom was clear in 2005. 

We do not have the same opportunity this time.

Other things are apparent. There is usually a spike in full-time employment and employment right before the trend shifts. There is often a difference in the initial shift - full-time employment falls whereas that green line (all) hangs in there a bit. I believe that is due to better uptake of part-time jobs rather than better creation of part-time jobs. I do watch for that pattern a bit, although I basically ignore most employment stats when figuring trends. 

There is one employment stat I have found predictive - the YoY change in covered jobs from the initial claims database. This one, in a service economy, does seem to have some predictive value. It at least tells you when to get nervous when the rest of it looks a bit dispirited:
Note that in a manufacturing economy, it doesn't. If you look at the short version so you can see more detail:
You can see that it does seem a bit predictive of when the trend is ending and can generally be used to give about a year's warning.  Again, this is PERCENT CHANGE YOY, not simple levels. 

However I am a bit skeptical of that indicator right now because ACA should be playing a part, and I am not sure how much of a part. The earlier trend in this number you see before downturns is not causative - it's a result of the factors causing the slackening of growth. So my reasoning right now is that this may be showing the result of ACA, and should be less reliable this time.ACA should distort this UP, so it may be more predictive!

What is strongly predictive? Causative factors, such as percent change in real personal disposable income, PCE (we generally consume less if we don't have money), and gross private domestic investment. There are two types of slumps  - business-led and consumer-led. Once one half of the slump really gets going it generally will draw in the other.

Now, should I do this? On July 4th weekend? Well, I'm going to, because I have a busy week ahead and I probably won't get to it otherwise, but I'm sorry. 

I know this is busy, but basically when these all start to correlate, ya gotta problem. We've had this problem for over a year. GPDI joined the party last quarter. 

The reason why we had low inflation was basically that we at a level of economic activity associated with recession. It's one of those economic factors that gets you out of recession, or prevents you from really falling into it, because it increases real disposable personal income. Note that a lot of the spikiness in real disposable personal income has been due to tax changes - timing of dividends and payouts, plus FICA. But the FICA effect has fallen out. Now it's just going to be whatever's going on in the economy - and the employment report did not support any theory that we are all suddenly going to be earning more in a real sense. 

GPDI is on the right side of the graph and it's just percent change. It's naturally pretty spiky. Still, aside from fracking, it's hard to figure out how many companies are going to be spending more. Profits aren't good, the money really isn't circulating on the consumer side, export orders are a bit light in many industries, and the business climate can best be described as BOHICA. 

I know we are not in an active recession now (in which a majority of these factors knot up around each other and start pulling each other down), because if we were freight would show it, and it doesn't (it did show the decline in the first quarter and then the resurgence). Q1 was just the combination of bad factors in a structurally weak economy. The inventory cycle rolled through, and we got a couple of better months. 

But ACA has got to be an additional negative correlating factor, because ACA affects most people who got insurance through their employer, and the changes now afoot pretty much require individuals to pay more for less. This means that statistical real disposable personal income is significantly overstated, and that we are heading into a sustained Keynesian spending tunnel.

The green line (GDPDI) is going to come back up. But I don't expect it to come up that far. 

The bottom line is that this expansion is getting old, and without a real surge in income, it sags out and then collapses:
The reason you could have such a big hit in the first quarter was just that growth is minimal, so we are always kind of rotating around the axis of recession.

Another sign we are getting into the later innings:

Comments from Lumber Liquidators on their earnings preannouncement (sounds like discretionary cash is getting harder to come by):

LL: Lumber Liquidators CEO says traffic 'significantly weaker th
2014-07-09 20:32:25.890 GMT

Lumber Liquidators CEO says traffic 'significantly weaker than expected'
Robert M. Lynch, President and CEO, commented, "Customer traffic to our stores was significantly weaker than we expected, particularly in geographic areas severely impacted by the unusually harsh weather in the first quarter. The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in
2014 than the corresponding periods in 2013. We now believe the prolonged purchase cycle associated with our customers' discretionary, large-ticket home improvement projects is likely to be delayed for some customers into the fall flooring season, and for others, into spring of 2015.

There has been a rash of housing related preannouncements in the last few weeks: See PIR, LZB, BBBY, HVT and TSCO
But isn't that exactly what one would expect?

Fixing the roof is not discretionary, but remodeling the bathroom or kitchen or adding the porch is. It's likely that households are reserving cash for necessities rather than discretionary purchases.

So - BTS for kids will get cash, heating will get cash, etc. But I don't see the other stuff that adds a lot of baseline to GDP really pushing along.

Seems to me that we are seeing the deceleration phase strongly linked to inventory clearance, in which the economy pushes forward decently for a few months, then pulls back.

I see this across the board in CMI and so forth. And at this time rail freight looks a little too hot for what consumers can spend, so I am expecting a downshift later. Not severe, just a pull down.
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