August Employment: There is None

Morris Segall      Capital Markets, consumer sentiment, Economic stagnation, economy, employment, employment report, future trends, government, government stimulus, manufacturing, private sector investment, recession, slowdown, unemployment

Today’s employment report for August continued a worsening trend in the job market we have noted in our blog and website articles since June. Rather than another month of paltry job growth seen since May, job creation in August was zero. The last time the monthly employment report recorded an absence of job creation was last September. In addition, job creation for the months of June and July were revised downward a combined 58,000 jobs. Thus, over the last three months, job creation has averaged 35,000 jobs versus an average of 153,000 over the first five months of this year. Even the private sector, which has been creating a moderate level of jobs so far this year, dropped to nearly zero in job creation in August. More distressing is the event we have feared since the economy and employment faded through the second quarter. That is the shift by employers from reduced job hiring to job layoffs. In the August report, a number of industries recorded job losses including: manufacturing; construction; retail trade; transportation and information technology. The latter includes striking Verizon employees but that does not account for all of the job loss in this sector. The government sector also shed another 17,000 jobs in August. Year to date, the government sector has reduced employment by over 260,000 jobs.

As bad as these numbers are, other data in the employment report for August are even more negative. The already weak average workweek declined to 34.2 hours from 34.3 hours in June and July and is at the low level of last August. Average hourly earnings declined from July levels and are less that 2% above year ago levels, well below nominal inflation. The number of involuntary part time workers increased by approximately 400,000 to over 8.8 million workers from July and is at the highest level since last August. As we reported in prior employment report articles, the number of unemployed 5-14 weeks had been expanding in recent months. Now those people are unemployed over 15 weeks and that category has expanded to almost 59% of the number of unemployed persons.

Combined with the very weak manufacturing data reported yesterday showing major declines in orders, shipments, backlogs and employment and the plummeting levels of consumer confidence in recent surveys, and we have an economy that is “stalled out” and on the verge of sliding back into recession. We have previously cautioned about such a prospect in previous blog articles if economic data over the summer did not improve materially and fast. It hasn’t.

The private sector is doing what we expected in a weakening economic environment-cutting back. The President is expected to announce new economic stimulus measures next week to help create jobs. They will not turn the economy around. The Fed will inaugurate a QE3 program to add more liquidity if recession is imminent. The impact will be similar to that of QE2- a temporary respite but damaging to the bond market and the value of the U.S. Dollar. Without the full participation of the private sector to invest heavily into the economy and hire workers, the current economic trends and pessimistic outlook will not change. This also does not augur well for U.S. and overseas capital markets.

Morris R. Segall

May Manufacturing: Pause or Peak

Morris Segall      consumer spending, Economic Growth, economic recovery, economy, manufacturing, slowdown, stock market, trends

The ISM national manufacturing survey for May fell precipitously from April levels, confirming the trend seen in regional manufacturing surveys released over the past two weeks. For a number of reasons, the economy, including manufacturing, is slowing as we proceed into the second quarter. This looks very much like the pattern in economic activity we experienced last year as economic growth peaked last March-April and receded over the summer before reviving in the fall and winter. The reasons for the slowdown this year are primarily related to the surge in inflation since last summer, led by huge jumps in food and energy prices. This has been a restraining factor on consumer discretionary spending and has put pressure on corporate profit margins. It appears the rising level of prices is causing businesses to reduce spending to a greater extent than consumers as the experience of the recent recession has taught businesses to move quickly to cut spending to protect profitability.

Another factor hurting manufacturing currently is the dislocation of orders and shipments from and to Japan as a result of the earthquake and tsunami that has devastated that nation and created havoc with its industrial production and shipments.

In addition, the contraction in economic growth in Europe and ongoing sovereign debt issues are suppressing exports to the weaker economies in the Euro zone.

The unrest in the Middle East and North Africa has dislocated business orders and shipments from that region.

Lastly, the huge decline in shipments reported in the regional and national manufacturing surveys in May, reinforce our belief that a significant factor in May’s manufacturing weakness is due to the severe storms experienced in April and May in the Eastern U.S. and particularly the Midwest. In all of the manufacturing surveys production measures experience some of the biggest declines in the month of May.

It is noteworthy that the category of “No Change” increased significantly in many of the regional and national surveys in May. The increase in this category in May raised the absolute readings in this category to levels that far overshadowed the levels of weakening responses in the surveys. We interpret this that more of the weakness in these manufacturing diffusion indices is due to a “flattening” in the key metrics rather than massive deterioration. In addition, employment in virtually all of the manufacturing surveys remained positive. We acknowledge that employment is a lagging indicator and further weakening in orders, shipments and backlogs will result in weakening trends in employment going forward. Surprisingly, in many of the manufacturing surveys, including the national, respondents were generally positive regarding the future and expected key trends in orders and shipments to improve from May levels. If we are correct in our assessment of the impact of weather on the May surveys, we would concur. Finally, it should be noted that in the national survey, 14 of 18 industries reported growth in May with only 3 industries reporting contraction and those three industries were not major capital goods sectors.

It remains to be seen if the manufacturing growth trends rebound in June and beyond. If so, the capital investment cycle that has led the economic recovery will remain intact. If not, and the May surveys are signaling a weakening trend, then we will have to face the possibility this cycle may have peaked.

We are not optimistic that if such is the case, the federal government will resuscitate it with further stimulus as it did last year. The absence of further strong growth in manufacturing will lead to reduced overall economic growth this year and into next. Because of the flagging growth in manufacturing and net exports so far this quarter, we will be re-evaluating our economic growth projections for the second quarter and the rest of this year. We will evaluate the May employment report before we make our revisions.

The weakness in the May manufacturing report along with a forecast of weak employment growth by the independent payroll processing firm, ADP, caused a major sell-off in the U.S. equity markets on Wednesday that is being replicated by Asian markets Thursday morning and likely will spread to Europe. The world capital markets are nervous about the outlook for world economic growth and financial stability and have become very volatile. Those outlooks will dim further if the U.S. economic recovery stalls out. This is why we have emphasized private equity and the investment themes of merger and acquisition, infrastructure investment and business growth financing in our capital market strategy for the intermediate and longer term (See our website article of January 6, 2011 and our website Economic and Capital Market Presentation of February 2, 2011). Recent events overseas and the fragility of our own economic recovery plus our long term financial difficulties, reinforce this strategy.

Morris R. Segall

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

Morris Segall      2009 economy, business, business landscape, climate, crisis, debt, economic, future trends, globalization, recession, slowdown, strategy, trends, 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:

Third Quarter — Still at the Bottom of the “L”

Morris Segall      2009 economy, business landscape, consumers, economy, government, slowdown

I continue to be surprised at the over-optimism of the mainstream financial press and government spokespeople on the current economic environment which is leading to increased forecasts of economic recovery beginning as early as this year’s third quarter.

Headlines indicating some economic improvement from higher consumer sentiment readings, a guarded optimistic reading on the economy from the Federal Reserve Open Market Committee this past week, a marginal improvement in the rate of economic decline in this year’s first quarter GDP and an impressive growth in the Advance report on Manufacturers Factory Orders for May were used as the basis for this continued optimism and a reversal in the stock market slide of the week before.

So once again I must put the facts on the table:

1. The fractional improvement in first quarter from -5.7% to -5.5% was entirely due to a smaller reduction in business inventories. In fact, consumer spending was actually reduced from a 1.3% gain to .95% thus shading the contribution from consumer improvement.

2. The strong improvement in Manufacturers Factory Orders in May is up only 1.5%, excluding transportation (primarily commercial aircraft), from the severely depressed level of March and is down 23% from May, 2008 levels. More importantly, the book/bill ratio of orders versus shipments in May was 95% versus approximately 96% in March and April. Thus non-transportation factory orders are no better and in some respects worse than they were at the end of depressed first quarter levels.

3. The Federal Reserve statement, while expressing guarded optimism that the worst of the economic contraction was behind us, kept interest rates at essentially 0% because the economy is still functioning at a depressed level.

4. On Friday, the government reported a surge in consumer incomes in May of 1.4% fed largely by government social security stimulus checks. On the other hand, consumer spending in May increased only .3% and the personal savings rate increased to 6.9%, a 15 year high. This low level of spending and the further increase in consumer savings on top of already historically high levels tells us the consumer is still very much concerned about the current economic environment, refuting his statements on consumer surveys, and is not ready to start pulling us out of recession by a surge in spending.

In our blog posting, “Beware Over-Exuberant Reactions to this Week’s Economic News,” (May 28, 2009), we stated “the second and third quarters of this year will be “less worse” than the first quarter but not an end to the recession”. We characterize the current economic environment as the bottom of an “L”. We have been projecting second quarter GDP to contract 2%-3% but with the continued weakness in consumer spending through May, GDP contraction in Q2 could reach 4%. Furthermore, we see little evidence that consumer spending will miraculously turn higher in Q3, particularly with continued high levels of unemployment which we expect will go higher over the summer spurred by layoffs from GM and Chrysler. Thus at this juncture, we expect Q3 GDP to be in a range of 0% to down 2%-3% depending on the level of U.S. government spending in the quarter. This is well below the 1%-3% growth in third quarter GDP many economists are currently projecting. If we are right, stock markets here and around the world are setting themselves up for a material correction from the elevated levels achieved this week.

An economic recovery will occur and we still believe it is largely a 2010 event but the continuation of the current economic torpor is pushing the recovery further into next year. We continue to be vigilant for real indications of a sustainable improvement in consumer spending which is a prerequisite to any recovery from this recession.

Morris R. Segall, CFA, CIC

The Economy: Getting Through The Recession (updated)

Morris Segall      climate, depression, economic, economy, global, government, international, recession, slowdown, strategy, survival, trends