The Division of Current Employment Statistics within the Dept. of Labor released their Birth/Death model adjustment for August, adding 6,000 fictitious jobs to the numbers. Notable in the adjustment was the removal of 32,000 manufacturing jobs. I wonder if the Politburo still thinks manufacturing is going to lead us to economic might?
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Andy Sutton & Chris Wilson from yourcontrarian.com discuss the markets, the broader economy, and where things are headed over the coming weeks and months. Don’t miss this informative session! Listen Here
Andy Sutton was interviewed by Chris Wilson of www.yourcontrarian.com on November’s jobs report, the deindustrialization of America, and a myriad of other topics. The audio segment may be listened to by clicking here.
We have updated and released our in-house ‘Distress Index’ for Quarter 3 2009. The new figures and updated chart may be viewed by clicking here.
Below is the chart of manufacturing employment referred to in the 10/4/2009 episode:
The much-anticipated employment situation report for February 2009 has now been released. Markets breathed a sigh of relief, following recent conventional wisdom that things could have been much worse. Clearly they could have been. Clearly they are. December and January’s numbers were both revised much higher (577,000 to 681,000 and 589,000 to 655,000 respectively). There is little doubt that when next month’s report rolls around that the current stated loss of 651,000 will be revised much higher as well; likely to the 700,000 area.
What is even more alarming is that these numbers don’t include what could be called partially discouraged workers. These are the folks who are working part-time, but not by choice. They’d like to work full-time, but have either had their hours cut or are unable to find full-time employment. There are now over 9 million of these folks in the United States according to Bureau of Labor Statistics (BLS). We’ll take a closer look at this segment of the labor force later in the article. While it is understood that the methodologies of BLS are largely political and are compromised in terms of relevance, the trends are still helpful in terms of extracting clues about where things are headed, and getting an idea of exactly how many folks are under job-related duress.
Looking at the aggregate numbers – in what has become a recurring theme – government, education, and healthcare were the only three areas in which there was growth in February. These three areas added 35,000 jobs during that time. Here is a brief summary of some of the more notable industries:
• Goods-producing industries lost another 276,000 jobs in February for a grand total of 1.456 million just since September 2008.
• Manufacturing lost 168,000 jobs in February for a total of 891,000 since September 2008. Most of these losses were concentrated in the durable goods, tool, and machinery sub-sectors.
• Construction lost 104,000 jobs and the once-venerable sector has shed a total of 551,000 jobs since September 2008. The industry has lost 1.1 million jobs since peaking out in January 2007.
• The service sector has been hit particularly hard, losing 375,000 jobs in February and a grand total of 1.77 million just since September of last year. A healthy portion of these losses have occurred in the financial arena including investments, credit intermediation, real estate, mortgages, and banking.
One area that has held up reasonably well so far is leisure and hospitality. This industry is ripe for a pullback, however, as Americans continue to cut back on discretionary purchases. Stories of free hotel rooms in Las Vegas and other trendy tourist spots are becoming more and more commonplace as firms in the sector engage in a frantic race to capture waning consumer dollars and cover their fixed costs.
Compromised workers – a more accurate measurement?
Perhaps a more useful measure is the degree to which incomes and earnings have been compromised. To get a reasonable representation of this, we can take the total amount of individuals on unemployment and add to that the number of individuals who are working part-time for economic reasons. This does not include people who choose to work part-time, but have to. When you add these two groups together, you come up with almost 23 million Americans or nearly 15% of the workforce. Compare this with the BLS advertised 8.1% rate and you see a very different picture.
To get a better idea of the scope of the ‘unemployment’ problem, add in the people who are given the choice of taking a pay cut or losing their job plus those who have fallen off the unemployment rolls. Let’s mention one more group in here too. What about the people who retired over the past few years only to find their retirement accounts wiped out and who are now in need of work? While there is no way to easily track these folks, the anecdotal evidence suggests that this group is much larger than most policymakers and pundits would care to admit.
Like it or not, to one degree or another, all the aforementioned folks are unemployed, even if only partially, in that they’ve lost a portion of their income. Compromised incomes translate directly to lost consumer spending, which translates directly to lost GDP. The bottom line is that these folks don’t spend much money. Nor can they easily be induced to borrow especially to purchase discretionary items.
MTC Economic Distress Index
Confusing isn’t it? So many numbers lead to even more interpretations, so we’ve tried to make this a bit simpler for folks. To do this, we created a weighted index which takes into account compromised workers (from the data in the chart above), consumer prices (domestic purchasing power), the trade-weighted Dollar (purchasing power abroad), and the burden of consumer credit. We update the numbers each month and the chart (seen below) each quarter. Due to the lag involved in gathering credit numbers, the current index is for January 2009. To give a better graphical representation of the impact over time, we ran the data series back to January 2000. Further explanation of the chart and data as well as updates may be found at:
http://www.my2centsonline.com/edi.php
12/08 = 160.93; 01/09 = 163.37 (1.52% – 18.19% Annualized)
All of the data listed herein only serve to illustrate and underscore the need for America to focus on productive employment. Emphasis on productive. Government attempts to spur employment by increasing the hiring rate of paper-pushers, government bureaucrats, and regulators produces nothing and in fact constitutes a further drag on economic growth. Private sector investment at this time is key to reviving America. What we need in this country is another industrial revolution. ‘Free trade’ agreements need to be recognized as being unfriendly to American prosperity and summarily fed to the shredder. The sooner the better. Otherwise, there will be little in the way of prospects for future employment reports and our economy will be further devastated.
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Disclosures: N/A
Protectionism has clearly become a dirty word. Unfortunately, those in the position of dispensing awareness and perspective obviously have no idea what true protectionism is. If it were explained properly, I would venture to imagine that most here in America would be in favor of it. After all, it applies directly to us and our standard of living.
In the 1990s globalization was presented to the nations of the world. Terms like competitive and comparative advantage became part of business lore. Americans, already punch drunk from a 25-year assault on the purchasing power of their currency, were sold on the promise of inexpensive imported goods. These goods would be made elsewhere and moved on barges powered by oil that would be cheap forever. While the former was certainly true, the costs of such shortsighted thinking were largely ignored by those in Washington. We are now witnessing the effects of those costs firsthand.
“We cannot afford a trade war”
This week, Senator John McCain proposed an amendment to the pork-laden ‘stimulus’ package that would have effectively wiped out the ‘Buy American’ clause in the package. Essentially this clause stated that any government or public building projects had to use steel that was produced in the United States. Having already lived through the obliteration of this iconic industry once, the ‘Buy American’ clause was very encouraging. However, it appears that in this regard, it will be business as usual, maybe not because we want to, but now because we have to.
To put it simply, America can no longer live on its own production. This is no surprise and has been the case for quite some time. However, we are in a position now where a little leverage might come in handy. Our economy is bleeding jobs and we need to be able to maintain and promote American manufacturing. And contrary to the tenets of globalization, there is absolutely nothing wrong with producing our own goods and services and we should be doing exactly that.
While the argument will be made that our trade partners cannot afford not to trade with us, it is much more likely that they can remain solvent far in excess of our ability to sustain ourselves. This is particularly true in the case of energy, the ultimate staple good. Despite the claims of many that we have enough oil right here in the US to last us umpteen years, even if that were true, you don’t just flip a switch and have oil flowing. History should have taught us that much. It takes years in many cases to raise these products, build a transport and distribution network and get them into the economy. Again, we have no leverage.
And in reality, why do these countries need to trade with us anyway? Much of what they get in return is nothing more than IOU’s on fancy paper.
The chart below illustrates our trade gap in terms of actual goods – goods we either aren’t able to or currently do not produce ourselves.
US Trade Statistics (Goods only – in Billions of Dollars)
|
Year*
|
Exports
|
Imports
|
Balance
|
|
2007
|
1,148,481
|
1,967,853
|
(819,373)
|
|
2006
|
1,023,109
|
1,861,380
|
(838,270)
|
|
2005
|
894,631
|
1,681,780
|
(787,149)
|
|
2004
|
807,516
|
1,477,094
|
(669,578)
|
*2008 Final Data Available on 2/11/2009
In typical lukewarm fashion, the US Senate shot down McCain’s amendment in it’s version of what is likely to become a $3 trillion pork-barrel spending package in the coming weeks. For those who are counting, that is $3,000,000,000,000. However, what was most telling is that the balance of the Senate has no respect for American jobs or industry either. This was evidenced by the addition of a proviso that no existing trade agreements be violated by the bill.
This is what happens when you’re behind the eight ball. You have no leverage and little flexibility. In the case of trade, it is doubtful that we can even talk tough let alone back it up with substantial action.
‘Free Trade’ agreements and the Lowest Common Denominator
Another spin off of free trade agreements such as NAFTA is that in addition to driving our jobs overseas, they created a lowest common denominator situation where wages in developed nations came under downward pressure. The causal relationship is simple to illustrate. If a company can make something in Taiwan for example where GDP per capita is about 1/3 that of the US (Economist World in Figures 2007), then import the goods back into the US, the consumer will benefit from the cheaper good. Unfortunately, for every benefit, there is an equal and opposite detriment, and in this case, the jobs in the US which used to produce that good no longer exist. This is what has happened over the past 25 years or so. We chose instead to focus on a service economy where we basically shuffled papers and intangible goods amongst ourselves and called it an economy. All the while, we racked up massive external debts to buy the real goods we needed to survive.
I will allow that obviously this transformation has not been total. There are still some thriving industries in the US, but rather, I am referring to the net effect of the past 2 and one half decades. Much of the wage gap has been filled with various types of consumer credit whether it is credit cards or, more recently mortgage equity withdrawals. Obviously, as we have seen in dramatic fashion, these levels of debt accumulation proved to be as unsustainable as the dynamics that necessitated the accumulation in the first place.
The Solution?
While we have been showered with announcements that our trade deficit is improving, it must be noted that this is almost entirely due to the liquidation of 2008 (which crashed commodity prices) and the US-led global recession. Were growth to return to normal levels, we would immediately observe the trade deficit returning to its prior trajectory. By way of extension, the same situation exists in the case of the US Dollar. Fundamentally, nothing has changed. Media outlets and pundits alike are reading false signals created by the distortions of a debt-laden, fiat monetary system. It is something along the lines of going to an 80s movie where 3D glasses were necessary to make sense of anything. Only the guy at the door forgot to give them a pair.
For quite some time now this commentary has been a soapbox for the idea that we need to rekindle our productive economy. Never has that been truer than right now. We tried the globalization experiment, and in my opinion, it has been a dismal failure. Sure we got some cheap goods, but as a country, we’ve become dependent on others for our very sustenance. This is not an enviable position for anyone to be in, especially not for a country that wants to call itself an economic superpower.
That said the upcoming stimulus package could be used help return America to her pre-1980s position of industrial superiority. During the late 1800s and early 1900s, we ran large trade deficits and put them to work building an industrial base that was second to none. We have a chance to use the debt that will be incurred regardless for something productive. Simply handing people checks so they can go buy television sets (thereby sending the money to Asia) is not going to help anything. Rewarding zombie banks for past financial transgressions will not help anything. Taking the ‘stimulus’ and building industrial capacity, creating real jobs, and producing high quality products, however, would be a nice start.
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The happy rhetoric of earlier this year has faded. The Treasury Secretary and Fed Chairman are no longer extolling America’s strong economic fundamentals. The media is no longer talking about a soft landing and I haven’t heard the term ‘Goldilocks’ mentioned in what feels like a dog’s age. While our leaders have referred to the ‘challenges’ that we face and the very real possibility of a ‘downturn’, it is very obviously out of vogue to call this reality what it is – a recession. However, history has left us with some pretty good indicators that may be used to either confirm or deny a recession and along with it give us one of the many answers to what is bothering Wall Street these days.
In fact, as recently as yesterday, mainstream financial websites were still entertaining debate as to whether or not the economy is in recession. While it is important to debunk a common misconception that the health of the stock market equals the state of the economy, there are plenty of other dead canaries in the coal mine. So for the benefit of the mainstream press and others still unconvinced, here goes.
Overall Business Conditions
One of the more accurate indicators of recession is the Philadelphia Fed Survey of business conditions. While this survey is generally limited to the Northeast portion of the country, and data is only available from 1968, it has done a marvelous job of nailing recessions (see chart below). Note how each recession since 1968 was preceded by a significant drop in business activity in the Philadelphia District. Despite the serious nature of the current downturn, it is easy to see that things were much worse in the 1975 and 1980 recessions. It is also noteworthy to comment that business conditions have never been this poor as measured by the survey without an official recession. 1996 was the lone period where the measure was significantly below zero without an official recession being declared. The take-home point here is that precipitous drops in the survey have acted as a reliable leading indicator in terms of forecasting recessions. What the survey lacks is the ability to forecast the magnitude of any such recession. The depth and acceleration in the drops in the 1970’s would have portended much more severe economic downturns – even worse than what was experienced – but that proved not to be the case.
Manufacturing Sector Employment
Another excellent measure of recessions is employment within the goods-producing sector. By way of inference, the below chart also proves one of the tenets of Austrian economic theory – in order to prosper, a nation must first produce. This nagging reality is something that American policymakers would much prefer to forget in favor of building an economy on cheap imported goods then borrowing the money to do so.
In looking at the data from 1939, it is noted that every major drop in manufacturing employment either preceded or corresponded with a recession. What is particularly noteworthy in the above chart is the fact that bottoms in manufacturing employment almost always marked the END of recessions EXCEPT once we got to 1991 and moving forward. This is the same period in time when the inflation metrics started to see major changes and substitution effect and other hedonic adjustments began to emerge. It should also be noted that since 1939 we have never seen a prolonged period of contraction in manufacturing employment without a corresponding recession – until now. In fact, since 2001, we have lost nearly 20% of our manufacturing jobs with only a very minor recession in 2001 being admitted.
Unemployment (Total)
Closely related to manufacturing sector employment, but worthy of its own analysis is the overall unemployment rate. The linkage between unemployment and economic growth is clear, however, the main reason I chose to include this chart is the disconnects in latter recessions between peaks in unemployment and the duration of the concomitant recessions. Ironically, this dislocation started around the same period during which inflation metrics were changed in favor of more hedonic methodologies. However, unemployment is not adjusted for inflation. Instead, BLS uses a ‘birth-death’ model to predict the number of jobs either created or lost in terms of the startup-shutdown of businesses. Also, drop-offs are no longer calculated in the unemployment rate. If an individual collects for the maximum time allotted and drops off the unemployment rolls it is assumed that they found a job. The measures also fail to properly quantify discouraged workers. Looking at the chart, it is easy to see how significant peaks always corresponded with recessions going back to 1948. In fact, until 2006, the largest prior increase in unemployment without a declared recession was in 1963 when unemployment went from 5.7% to 5.9%. However, during the last 2 years, the unemployment rate has gone from 4.7% to 6.5% and up until recently, we were still hearing about strong fundamentals. A similar occurrence of a jump of this magnitude without a recession simply cannot be found in the data.
Consumers – The little engine that can’t
Consumers are responsible for upwards of 70% of GDP in America, so it is very logical to expect that how their fiscal health goes, so goes the economy. It is undisputable that this economy cannot prosper or grow in the absence of consumer participation, and I’ll take that one step further and include the consumer’s willingness to take on debt. We have previously demonstrated the high level of correlation between consumer debt and GDP growth.
While the Personal Consumption Expenditures (PCE) graphing doesn’t jump out like some of the other indicators, it becomes very obvious upon closer examination of the areas inside the circles that almost any type of disruption in consumption corresponds with a recession. 1988 and the current period would be two possible examples where this observation failed to play out. However, in the case of the current period, we can observe a period of relative stagnation and then a subsequent DROP in consumption. These observations highlight the fragile relationship between consumption and economic health. Similar to the human body, once homeostasis is disrupted, bad things happen.
It is more and more obvious that as we entered the new century that something changed at a very fundamental level. Since the beginning of the 21st century, America has now undergone 3 major economic dislocations, each one larger than the last. During the majority of this period, the assertions have been that America’s economic fundamentals are strong and that the future is bright. These assertions, more ridiculous by the day, continued until just recently. Whether it is the end of the state of denial or recognition of the fact that we have reached the point of unsustainability remains unclear. What is clear is that the recession is here. The talk should no longer focus on how to prevent it, but on how to get through it without doing any more damage. We are living in a dangerous time. Historically, depressions have ensued not because of inaction, but as the result of too much misguided action. The free market would actually prefer if nothing were done. The free market does not need to be massaged and managed. It is this misunderstanding that has led to the growing cacophony of policy mistakes over the past 75 years. Our economy needs to be cleansed of greed and malinvestment by the free market. Bailouts and other palliative political pandering will only serve to make matters worse.