Had dinner last night with an old family friend at a fancy restaurant. One of the topics that came up for discussion was the stock market and whether the recent rally was sustainable. While I didn’t have any concrete information about the numbers, I felt that the rally in the face of declining quarterly revenues, growing unemployment, increased savings and what could be a permanent drop in consumption didn’t make any sense to me.
But today I read an email from Joan Mauldin. He always provides great information and sure enough, he had the very data I was looking for. I’ve omitted some of the information for the sake of brevity (and its still pretty long!).
Rising Unemployment and Inflation
When the employment numbers come out, my usual routine is to go the Bureau of Labor Statistics website and peruse the actual tables (www.bls.gov). I was rather surprised to see that the actual number of people employed in the US rose by 120,000. That has certainly not been the trend for a rather long time.
So, are things back on track? Is the recession just about over? Is that a green shoot? I don’t think so.
First, there are actually two surveys done by the BLS. One is the household survey, where they call up a fixed number of homes each month and ask about the employment situation in the household and then take that data and extrapolate it for the economy as a whole. So, while the number of employed rose, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. In addition, there are 2.1 million who are “marginally attached” to the workforce. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
According to the survey, headline unemployment rose 0.4% to 8.9%, the highest level since 1983. But if you count those who are working part-time but want full-time work, as well as the “marginally attached,” the unemployment rate (called the U-6 rate) is an ugly 15.8%.
For whatever reason, the markets were happy that the headline number of the other BLS survey, the establishment survey of lost jobs, was “only” 539,000, down from a negatively revised 699,000 in March. At least, the thinking was, the numbers were not getting worse, though it is hard for me to be encouraged by half a million lost jobs. That may not be the worst of it, however, since 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 226,000 jobs as a result of new business creation. Really? This will mean that there will likely be a major revision downward at some future point. The number will likely be well over 600,000 in the final analysis.
Further, it is likely that we will see at least another 1.0-1.5 million lost jobs over the rest of the year, taking unemployment very close to 10%. As an aside, the Treasury used an unemployment rate of 9.5% in their stress test of the banks, which suggests the test was not all that stressful. And, showing further weakness, there were 66,000 fewer temporary jobs. If there was really a nascent recovery, you would see a rise in temporary workers.
Average wages rose by a mere 3.2% on an annual basis, and by just 0.1% for the month, and the average work week was at an all-time record low of 33.2 hours. In nearly any inflation scenario, rising wages play an important part. This suggests that inflation is not in our near future.
I kind of agree on the inflation part. It may not be in our near future. But it is definitely on the horizon. The Federal Reserve has expanded the base money in existence 100% in the past year by lending it to banks. Right now the banks are keeping it as their reserves in the Fed and the Fed is encouraging this by paying them interest on it. But they will slowly lower the interest rate paid to banks to encourage them to lend this money out. Due to fractional reserve lending, this money lent out will be several times more than the money the Fed gave the banks and the money supply will probably increase 100% too. This has to cause inflation, but it will hopefully be controlled and not like Zimbabwe’s 100,000% inflation per year! Although, one of the reasons the US can get away with this is the Dollar’s status as the world’s reserve currency. Still, I’m bullish on the long-term prices of gold.
While Wal-Mart and other low-cost retailer sales are up, Saks and other high-end retailers are down by as much as 30%. There is a new frugality in vogue. Consumer spending is going to fall, and when it does find that new level it is going to grow more slowly than in the past.
That is why the recovery is going to be a long slow Muddle Through. This recession will end, as all recessions eventually do. We will see a positive number, maybe as early as the 4th quarter. Employment should turn back up, albeit slowly, after that.
Typically, in a recession jobs are lost because sales slow and production is not needed. When sales recover, so do jobs.
But we are permanently destroying jobs in this recession, all up and down the food chain and in numerous industries. There will be fewer cars made, for a long time. Less demand for financial service jobs. Housing construction will be a long time recovering, well into 2011 or 2012. And less construction means fewer jobs.
Where Will the Jobs Come From?
Going forward, there are simply going to be fewer jobs to make “stuff,” as we consume less. We can’t rely on many of the old jobs and industries to come back in short order, as has been the case in the past. In order for new jobs to be created, we are going to have to create new businesses and expand current ones.
The vast majority of new job creation in the US is by small businesses and entrepreneurs. Yet today small business faces a tough environment. Banks have tighter lending policies. Venture capital is tough to find. Competition in a shrinking economy is brutal.
And the Obama administration wants to raise taxes on small businesses by raising taxes on the “rich.” 75% of those rich he targets are small businesses who need capital in order to grow, but are having trouble getting it from banks.
Sure, entrepreneurs will do what they have to do, and higher marginal tax rates will typically not keep them from working as hard as possible to make their businesses successful. If the tax rates of the large majority of businessmen and women go back to the pre-Bush level, it will not make us close our businesses, but it will cut down on the capital we have available to expand. It will slow down economic growth and hinder job creation. There is just no getting around that fact.
There is a reason that high-tax states have higher unemployment rates and lower job growth. Taxes have consequences for economic growth.
The sad reality is that it is going to take a long time to get back to acceptable employment levels in the US. It now takes an average of over 21 weeks to find a new job, a new record. Stories from friends in the financial services business are particularly difficult, as there are many very highly qualified people for every job that comes available. And it is not going to get better any time soon.
How could we add 120,000 new jobs while unemployment is going up? Because the number of people looking for jobs is growing far faster, as more and more young people come into the market place and couples now find they both must look for a job. And that is a trend that is going to continue.
So many bullish analysts talk about the second derivative of growth, by which they mean that we are slowing our descent into recession. But it is not the second derivative that is important. What is important is that the first derivative, actual growth, return. Until that time, unemployment will continue to rise, which is going to put pressure on incomes and consumer spending, and thus corporate profits.
Profits in the first quarter, with nearly 90% of companies reporting, are down over 50% from last year and are 18% less than estimates. Yes, inventories are down, but so is final demand from consumers and businesses. There is a reason that GM and Chrysler are shutting down for two months this summer. That will percolate throughout the economy.
As the realization that the economy is not due for a robust recovery sinks in, I think the chances for another serious bear market test of the stock market lows will become increasingly high. As David Rosenberg said in his final memo from Merrill Lynch (and good luck to him in his new position, where I hope we all still get to read his very solid analysis!), if a few weeks ago someone had said you could sell all your stocks 40% higher, most of you would have hit that bid.
Now that price has in fact been bid. Do you want to gamble on a renewed bull run in the face of a continually shrinking economy? I suggest you give it some serious thought, or at least put in some very real stop-loss protection.
Whether or not you believe that the rally is short-lived, definitely check out a restaurant in the Century City Mall called RockSugar. I highly recommend it.