The Coming of Real Weak Imperceptible Economic Growth

“....... the resumption of growth in the nation's output of goods and services is encouraging. But far too many people remain unemployed, foreclosures continue at record rates, and bank credit continues to contract. “ Fed Chairman Ben Bernanke's swearing in remarks.

There is no overall resumption of growth, yet unless you consider GDP a the measure of economic expansion. Fed Chairman Ben Bernanke is viewing a technical recovery as a real recovery.

It would not surprise me if February or March 2010 turn out to be the pivotal months for the end of the economic decline. Job losses should reach equilibrium with job creations. Manufacturing is already showing signs of equilibrium in their backlog, and I could build a strong case we are now seeing real growth in manufacturing.

But this week's ISM non-manufacturing survey showed a weakening in the sector that accounts for 90% of jobs. Overall, consumer spending continues to be anemic, and combined with low construction spending – which together accounted for ¾'s of the Old Normal – foretells a very weak economic expansion.

Consumer credit continues to contract. Historically, this has been the driver of recovery. According to the Fed's December 2009 seasonally adjusted data:

Consumer credit decreased at an annual rate of 4-3/4 percent in the fourth quarter of 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit was unchanged on net. In December, consumer credit decreased at an annual rate of 3/4%.

 

Looking at the unadjusted data, it is apparent the increase MoM in December is smaller than the historical increases. Consumer credit always increases MoM in December (recessions or not).

 

There are still too many bits of data showing modest contractions or reversions - not at alarming rates, but enough to question the strength of any recovery.

Any forces for economic expansion now swims against the receding effects of the stimulus and the Fed's incursion into the markets. The government and the Fed sold a “V” recovery as reward for going into debt to pay for the stimulus and interference in the free economy. Now we are left with debt and no “V”. So the little gains we would be seeing right now are being buried by the reversal of the stimulus effect and the Fed's balance sheet.

Now we are seeing bumps in the ISM data and the initial unemployment claims rate. This only reinforces my view that the underlying fundamentals remain weak.

 

Jobs

Overall, the job destruction nosebleed seems to be almost over. This week we have data from ADP, Challenger, and the government. In summary this data tells me the decline in jobs is over. In February, we should begin to see weak expansion in the jobs market.

First the words from ADP on the jobs situation for January 2010:

Nonfarm private employment decreased 22,000 from December 2009 to January 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000. The January employment decline was the smallest since employment began falling in February of 2008.

January’s ADP Report estimates nonfarm private employment in the service-providing sector increased by 38,000, the second consecutive monthly increase. However, this employment growth was not enough to offset continued losses in the goods-producing sector. Employment in the goods-producing sector declined 60,000, with employment in the manufacturing sector dropping 25,000. The employment decline in the manufacturing sector was the lowest since January of 2008.

Large businesses, defined as those with 500 or more workers, saw employment decline by 19,000 while small-size businesses with fewer than 50 workers, declined 12,000. Employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 9,000, the first increase in employment since January of 2008.

In January, construction employment dropped 37,000. This drop marks the third straight year of consecutive monthly employment declines and brings the total decline in construction jobs since the peak in January 2007 to 1,804,000. Employment in the financial services sector dropped 16,000.

       

 

Now the Challenger data on the where and why of the job cuts in January 2010.

Employers last month announced plans to reduce payrolls by 71,482 workers, the highest job-cut tally in five months. The surge was due primarily to heavy downsizing in the retail and telecommunications sectors.

January 2009 marked the peak of downsizing activity in this recession, with job cuts hitting their highest level in seven years.

As was the case in January 2009, last month’s job cuts were led by retail-sector employers, which not only eliminated many of the seasonal positions added between October and December, but also many of the full-time, permanent jobs that existed before the holidays. Retailers announced plans to cut 16,737 jobs last month. That was 69 percent lower than the previous. However, it was the largest monthly total for the sector since last Telecommunications firms were the second-leading job cutter in January, with 14,010 announced layoffs. That was the heaviest downsizing the sector has seen since last July, when 17, 601 job cuts were announced.

Pharmaceutical also experienced its heaviest downsizing in nearly a year, with employers in this sector announcing 8,170 job cuts, the highest total since last March’s 17,796.

“The increase in January is not necessarily a sign of a recession relapse. It is not uncommon to see a surge in job-cut announcements to begin the year. Companies are making adjustments based on the previous year’s results and the outlook for the year ahead. The beginning of the year is particularly rough on retail workers, as these employers enter one of the slower sales periods of the year,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

“Heavy job cuts could continue in retail and other sectors through the first quarter. If the past is any indication, however, layoffs should slow in the spring and summer. We are certainly starting 2010 on better footing than a year ago. The fact that January job cuts did not exceed 100,000 bodes well for much lighter downsizing this year. Of course, any major shock to the economy could set off a surge in job cuts but, at the moment, conditions appear to have

           

 

Please note that there is a seasonal surge in jobs cuts in January due to holiday layoffs. This Challenger report should be viewed as jobs positive as there is always job cuts – and this years contraction is relatively small..

In a preview of their economic survey to be released next week, the National Federation of Independent Business offered the following:

In January, small business owners reported a seasonally adjusted decline in average employment per firm of 52 workers during the prior three months, about the same as October, November and December.  Nine percent of the owners increased employment by an average of 3 workers per firm, but 19 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted).

 

 

New firms being started may add some to the job numbers, but firms already in existence are not creating jobs.   Employment reductions have proceeded faster than the decline in GDP (thus producing strong productivity numbers), creating the possibility that employment could respond faster in the early part of the recovery than many expect, once owners find a reason to hire.  However, there is no indication that job growth will be strong enough to dramatically reduce the unemployment rate.  Bottom line, the unemployment won’t change much, and net new jobs will be negative or negligibly positive.

 

 

Ten percent (seasonally adjusted) reported unfilled job openings (unchanged from December).  Over the next three months, 10 percent plan to reduce employment (down 5 points), and 10 percent plan to create new jobs (up 2 points), yielding a seasonally adjusted net-negative 1 percent of owners planning to create new jobs, a 1-point improvement but still more firms planning to cut jobs than planning to add.  Plans to create jobs have become less negative over the past year, but have yet to reach positive territory where more owners plan to increase total employment than reduce it.

 

 

 

The NFIB economic report is a subjective survey of small business owners. We need to be careful how we use this information as it cannot be properly validated by hard data. On the other hand, this survey should be held in higher esteem than consumer confidence surveys. Small business is the real generator of jobs, and what this survey is saying is that small business does not believe it will be generating jobs in the short term.

In news that should make an economist cry tears of joy, the New York Fed announced that business productivity increased over 5% YoY. I guess this means all the job losses are permanent. Seriously, these bean counters have no clue that there is a difference between outsourcing tasks and doing the exact same task with fewer hours. Economists need to take Industrial Engineering 101.

Initial unemployment claims took a modest jump up this week. This must have the economists in the Fed and the government scratching their heads as they are not accustomed to recessions that do not cure after a massive stimulus hit. Look for more populist rhetoric and claims unemployment is the governments number one concern.

 

One year ago the sheep were being slaughtered at 581,000 per week. What a difference a year makes – and now our economy has “improved” to the point we are now slaughtering “only” 468,750 per week. These continuing initial unemployment claims high numbers and resistance to improve two years after the beginning of the Great Recession demonstrates the recessionary effects have not passed.

I reject arguments which say initial unemployment claims are a lagging indicator. Initial unemployment claims are saying we are still in the grip of the Great Depression V2.0.

I need to pre-apologize at this point because my disdain for the overly manipulated and suspect monthly jobs report spills over into my analysis. I could dazzle with analysis, but I know I am analyzing crap – you cannot rely on the underlying data being correct. Here is what the government says about the January 2010 data:

The unemployment rate fell from 10.0 to 9.7% in January, and nonfarm payroll employment was essentially unchanged (-20,000). Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs.

 

 

Consider the logic that there are less people employed and at the same time the unemployment rate declines. Remember my prediction that the government will get their distorted unemployment rate below 9% by election day this year. If the unemployment rate methodology was correct, the unemployment rate would continue to rise until jobs growth percent rise equaled population growth percent rise.

This month the government has massaged the historical data to fix the compounding error introduced by their continuing erroneous Birth death adjustments. The above graph shows the government's revised view of employment.

We do not need the government's distorted data to understand what is happening. Next month most likely we will see real jobs growth – and in my opinion, the technical end of the Great Recession. There are no disturbances in the coincident data which suggests further economic contraction for the next few months.

Now we can look forward to continuing our journey through the Great Depression V2.0.

 

Manufacturing and Business

The ISM purchasing managers report on Manufacturing and non-manufacturing has been released for January 2010.

Here is the ISM statement on non-manufacturing:

The NMI (Non-Manufacturing Index) registered 50.5 percent in January, 0.7% higher than the seasonally adjusted 49.8% registered in December, indicating growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 1% to 52.2%, reflecting growth for the second consecutive month. The New Orders Index increased 2.7% to 54.7% and the Employment Index increased 1% to 44.6%. The Prices Index increased 1.6% to 61.2 percent in January, indicating an increase in prices paid from December. According to the NMI, four non-manufacturing industries reported growth in January. Respondents' comments overall are cautiously optimistic about business conditions.

 

And their statement on manufacturing:

Economic activity in the manufacturing sector expanded in January for the sixth consecutive month, and the overall economy grew for the ninth consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The manufacturing sector grew for the sixth consecutive month in January as the PMI rose to 58.4%, its highest reading since August 2004 when it registered 58.5%. This month's report provides significant assurance that the manufacturing sector is in recovery. Both the New Orders and Production Indexes are above 60%, indicating strong current and future performance for manufacturing. This month, 13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding.

   

 

My take is that the ISM manufacturing survey is consistent with other surveys and the quantitative data trends we have seen to date. This is economically positive.

An interesting graphic produced by Bank of Tokyo – Mitsubishi overlays the ISM manufacturing survey over the government's jobs report. I look for data correlations, and this bit of data demonstrates that a real recovery is underway in manufacturing.

 

The analytical hocus pocus the ISM uses to quantify opinion hides the important detail – namely sales and order backlogs have a negative bias for non-manufacturing. The only definitive assessment I can make is that there is definitely no perception of expansion occurring in the portion of our economy which employs over 90% of the population.

It should come as no surprise that governments data for December 2009 for construction put in place is down 1.2% MoM and 9.9% YoY for both private and government. The only real positive section in the data was for government construction with is down 1.2% MoM but up 1.3% YoY.

The government released their December 2009 data on Shipments, Inventories, and Orders. They said:

New orders for manufactured goods in December, up eight of the last nine months, increased $3.7 billion or 1.0% to $370.4 billion. This followed a 1.05 November increase. Excluding transportation, new orders increased 1.2 percent. Shipments, up six of the last seven months, increased $7.0 billion or 1.9% to $383.1 billion. This followed a 1.6% November increase. Unfilled orders, down fifteen consecutive months, decreased $7.4 billion or 1.0% to $716.7 billion. This was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992. This followed a 0.7% November decrease. The unfilled orders-to-shipments ratio was 5.46, down from 5.65 in November. Inventories, down following two consecutive monthly increases, decreased $0.3 billion or 0.1% to $495.0 billion. This followed a 0.2% November increase. The inventories-to-shipments ratio was 1.29, down from 1.32 in November.

 

My take using unadjusted data is positive. Inventory levels keep falling which is still indicating that manufacturing is still overstocked for the New Normal. Order backlog has shown definite bottoming which is the sign manufacturing is stabilizing (although down YoY). New orders are up MoM and YoY. Definitely a strong data set for manufacturing, and indicative that this sector will see obvious improvement in the short term.

 

The weekly Mortgage Bankers Association new mortgage application data for the week ending 22 Jan 2010 improved slightly but remains about half of the level of earlier this year using seasonally adjusted data. The 30 year fixed mortgage rate increased 2 basis points to 5.02%. The press release included an interesting quote:

Refinance activity fell substantially last week. Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today’s rates.

 

Auto sales were mixed in January 2010. The big winners were GM and Ford. Overall there was a 6.3% gain YoY – but there was a 32% decline MoM. In December 2009, sales were up 15% YoY. Yes, things are getting better, but being up only 6.3% from the dark days of the Great Recession is nothing to break out the champagne.

 

 

Housing

The government released the housing vacancy report for December 2009 (pdf) and stated:

National vacancy rates in the fourth quarter 2009 were 10.7 (+ 0.4) percent for rental housing and 2.7 (+ 0.1) percent for homeowner housing. The rental vacancy rate was higher than the fourth quarter 2008 rate (10.1 percent) and not statistically different from the rate last quarter (11.1 percent). For homeowner vacancies, the current rate was not statistically different from the fourth quarter 2008 rate (2.9 percent) or from the rate last quarter (2.6 percent). The home ownership rate at 67.2 (+ 0.5) percent for the current quarter was not statistically different from the fourth quarter 2008 rate (67.5 percent), but it was lower than last quarter’s rate (67.6 percent).

 

 

The National Association of Realtors released their pending home sales for December 2010:

Pending home sales have leveled from a market swing driven by response to the home buyer tax credit, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, increased 1.0 percent to 96.6 from 95.6 in November, and remains 10.9 percent above December 2008 when it was 87.1. In November, the monthly index had fallen by 16.4 percent from surging activity in preceding months.

Lawrence Yun, NAR chief economist, said it’s important to recognize how the tax credit is skewing market data. “There are easily understood swings in contract activity as buyers respond to a tax credit that was expiring and was then extended and expanded,” he said. “These swings are masking the underlying trend, which is a broad improvement over year-ago levels. December activity was the fifth highest monthly tally in two years.”

     

My take using their unadjusted data is that even though I agree pending home sales are over 10% better YoY, they are down a massive 18% MoM (not up 1% as the adjusted data says). So the bottom line is we are retracing last years terrible start just slightly out of sync because of the housing stimulus.

 

The weekly Mortgage Bankers Association new mortgage application data for the week ending 29 January 2010 improved significantly but remains about 60% of the level of early 2009 using seasonally adjusted data. The 30 year fixed mortgage rate deceased 1 basis point to 5.01%. The press release included this statement:

Mortgage application volume rebounded last week, returning the purchase and refinance indexes to levels from mid-December. Rates continue to hover around 5 percent, quite low by historical standards, but are well above the record lows seen in 2009, and hence are not generating substantial refi volume.  We expect that rates will rise over the next few months as the Federal Reserve winds down its MBS purchase program, and this will likely lead to a decline in refinance volume.

 

 

Other Economic Data

In December 2009 the government provided the following to describe their personal income and outlay's release

Personal income increased $44.5 billion, or 0.4%, and disposable personal income (DPI) increased $45.9 billion, or 0.4%. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2%. In November, personal income increased $61.1 billion, or 0.5%, DPI increased $60.7 billion, or 0.5%, and PCE increased $69.1 billion, or 0.7%, based on revised estimates.Real disposable income increased 0.3% in December, the same increase as in November. Real PCE increased 0.1 percent in December, compared with an increase of 0.4% in November.

 

My take is neither positive or negative. What we are seeing is more of the same in the New Normal. For those expecting a V recovery, the very weak expenditure growth is not a good signal that the recovery is going well.

 

Bankruptcies this week: Cross Canyon Energy, Walking Company Holdings, Neenah Enterprises, Movie Gallery, Spheris, Citadel Broadcasting,

Failed Banks This Week:

 

 

Economic Forecasts Published this Past Week

 

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index again marking the lowest yearly growth reading since the gauge reached a record high in October. The graph included is showing the rate of growth of the WLI – the WLI is growing, but its rate of growth is slowing. Lakshman Achuthan, Managing Director at ECRI added:

The yearly growth measure has drifted from its October all-time high to its lowest reading since a year and a half ago, but trends pointing to a double-dip recession are nowhere in sight. The continued easing in WLI growth indicates that U.S. economic growth will start decelerating in the coming months.

 

And one more bit of news from ECRI on inflation:

The Economic Cycle Research Institute's U.S. Future Inflation Gauge (USFIG), designed to anticipate cyclical swings in the rate of inflation, rose to 102.0 in January from 99.0 in December, which was revised up from an initial reading of 98.2.

"With the USFIG now advancing for ten straight months, underlying inflation pressures are in a sustained cyclical upswing, promising higher inflation in the coming months," said Lakshman Achuthan, managing director at ECRI.

The January USFIG annualized growth rate, which smooths out monthly fluctuations, climbed to 37.6 percent from 33.8 percent, which was revised higher from an original 31.8 percent.