Today’s Economic Landscape and What’s on the Other Side

Morris Segall      2009 economy, Add new tag, business landscape, Capital Markets, consumers, crisis, debt, economic, economics, employment report, future trends, GDP, government, recession, unemployment

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Ben Bernanke: Hero or Goat

Morris Segall      Ben Bernanke, business landscape, Capital Markets, credit crisis, economics, economy, government, obama, treasury, trends, unemployment

Ben Bernanke appears to be fighting for his life before Congress where several members from both major parties and one of the independents in the Senate are rejecting his reappointment as Chairman of the Federal Reserve Board for a second four year term.  The opponents of his reappointment blame Mr. Bernanke for aiding and abetting the excesses in the financial system that resulted in its meltdown and taxpayer bailouts of many of its institutions. In their zeal to lash out at the stewards of fiscal and monetary policy during the financial crisis of the past two years, the critics of Ben Bernanke fail to include one of the most culpable parties to the worst financial crisis since the Great Depression and that is Congress itself. From the enactment of the Bank Holding Company Act in 1956 and its subsequent amendments which allowed banks to buy non bank financial entities outside of the supervision of the Federal Reserve System, to the repeal of the Glass Steagall Act which had separated the commercial and non-commercial banking activities of banks in 1999, to the lax oversight of Fannie Mae and Freddie Mac, federally chartered institutions that were the backbone of mortgage securitizations and transactions which fed the lending bubble. For over 40 years the Congress has consistently enacted legislation that enabled banks and other lenders to engage in high risk activities OUTSIDE of the supervision of the Federal Reserve Board. So when the Fed complained that it was losing control of the financial system, Congress did nothing.

In our website article of December 7, 2007, “The Treasury Plan: Is This the Solution?“  we outlined our skepticism of the success of the Treasury plan of then Treasury Secretary, Henry Paulson, to effectively “dance around” the mortgage crisis by adjusting mortgage rates and terms in the hope of forestalling the inevitable losses from mortgage defaults. It was not until March, 2008 that the Federal Reserve forcefully attacked the loan loss problem by swapping Treasury paper for the problem debt held by mortgage lenders. The Fed subsequently expanded Discount Window facilities to both commercial and for the fist time, non-commercial banks like investment banks and brokerage firms so these firms could have liquidity. In fact in our ongoing economic presentations such as the ones  posted on our blog and website,  there is an entire section of slides and commentary entitled “The Government”s Response” to the severe credit crisis. It shows the leadership of the Fed in increasing the money supply, reducing interest rates and expanding its own balance sheet by purchasing the “toxic” assets of the banking system to provide it with liquidity necessary to keep the system afloat.  By most objective scutiny of the Federal Government’s handling of the credit crisis, including our own jaundiced view, if there is a hero in this debacle, it is Ben Bernanke who literally pulled out all the stops to keep the financial system in this country from totally collapsing, particularly after Henry Paulson triggered a system panic by allowing Lehman Bros. to fail. We may not have liked the bailouts of many of these instituions but as we have stated in prior commentaries, the country runs on credit and letting the banking system fail was just not an option.

If one wants to point a finger at the Fed for allowing the credit bubble to build, it needs to be pointed at Alan Greenspan who instead of musing on the illogical low level of interest rates in 2004-05 in the face of the real estate boom should have raised interest rates and loan reserve and capital requirements to slow the creation of credit. Upon succeeding Greenspan in January, 2006 Ben Bernanke’ s Fed started raising interest rates through the spring and into the summer of that year and held those higher rates until the recession began in late 2007.

We and other observers believe Ben Bernanke will be reappointed to another term after this current thrashing. He better be. A rejection of Ben Bernanke AND an ill advised replacing of the Federal Reserve as the nation’s principal regulator of monetary policy and the financial system, would create a loss of confidence in foreign bankers, creditors and traders and would depress our bond markets and exacerbate an already “free falling” U.S. dollar. The President needs to show leadership on this issue and strongly reaffirm his support for the reappointment of Ben Bernanke and not let Congress make him the “goat” of the recession. If Congress wants to assess blame for the financial mess, they should begin by looking in the mirror.

Morris R. Segall, CFA, CIC

November Unemployment: Is this the Peak?

Morris Segall      consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, unemployment

Today’s unemployment data for November was a surprising loss of only 11,000 jobs, well below economists’ expectations of 100,000-150,000 jobs lost in the month. In addition, the unemployment rate for November declined unexpectedly to 10% from October’s 10.2%. Consensus expectations were for the unemployment rate in November to be flat at best with October’s cycle high. The Labor Dept. also revised downward previously reported job losses in September and October. Monthly job losses have been revised downward for each month since August by a total of over 200,000 jobs. Since August, monthly job losses have averaged below 200,000 versus over 300,000 average monthly losses in the May-July period. The decline in monthly job losses parallels the strong improvement in first time unemployment claims reported weekly. Since mid September, first time unemployment claims have fallen approximately 100,000 and are now running at approximately 450,000 for the last two weeks in November.

In isolating the areas of reduced job losses we note that healthcare continues to be the area of the economy that has consistently added workers during the recession. Since September, healthcare has added an additional 100,000 workers and nearly 900,000 workers since the recession began in December of 2007. Other areas of job improvement since September are: the federal government and state government education accounting for an increase in approximately 50,000 jobs; and professional and business services adding over 100,000 jobs largely in temporary help services.  Importantly, for the first time this year, the average workweek increased to 33.2 hours from a cycle low of 33.0 hours in October.  The average workweek improved more in the manufacturing sector expanding to 40.4 hours from 40.0 hours in September. This reflects the recurring order and shipment strength in the manufacturing sector since last summer.

Conversely, most other areas of the economy continued to record job losses including manufacturing, finance, construction, retail and wholesale trade and information services. While the Labor Dept. reports almost 41% of reporting industries are now hiring, a cycle high, that leaves nearly 60% that are not. The surge in temporary help jobs indicates businesses are wary of the economic recovery and are reticent to add to payrolls. Furthermore, the labor force has declined by over 100,000 workers since September indicating an increase in discouraged workers despite the improvement in the economy. The decline in the civilian labor force would also partly explain the decline in the unemployment rate in November. Another benchmark of employment in the weekly and monthly reports indicate no improvement in the numbers of long term unemployed and under-employed workers. In fact, the numbers of long term unemployed increased to over 9 million or 38% of total unemployed at the end of November, a record level.  In addition, while first time unemployment claims have declined sharply, they are still recording well above 400,000 claims per week. Finally, the response from consumers in recent surveys indicate jobs are hard to get by an overwhelming margin despite the economic improvement in the third and fourth quarters. These measures do not support the monthly improvement in employment reported by the Labor Dept. since August and we have repeatedly said so in our blog articles on the monthly employment reports going back to last July.

Nonetheless, if the monthly employment report from the Labor Dept. is indeed true and not distorted by seasonal adjustments and faulty assumptions that are part of this survey’s results, then  it would appear that unemployment in this cycle is peaking and job creation is virtually around the corner early next year. This would be well ahead of consensus expectations, including our own, in projecting a peak in unemployment and the transition to job creation in the middle and latter part of 2010, respectively. It is important to note that the Labor Dept. will be making final revisions to its 2009 monthly employment data in March of 2010. In its initial revision to 2009 monthly employment data in August, the Labor Dept. revealed that unemployment this year was actually almost 900,000 workers higher than originally reported. Similar revisions were made to monthly data in 2007 and 2008. With that as a background and the contradictory results of other unemployment data and surveys, we are skeptical the employment cycle is turning this strongly and this fast.

Morris R. Segall, CFA, CIC