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

July Employment: Not Good Enough

Morris Segall      business retrenchment, Capital Markets, Economic Growth, economic recovery, employment report, GDP, job creation, recession, unemployment

July’s employment report was hailed with a sigh of relief. Total new job creation was over 100,000 with private sector job creation in excess of 150,000. This was the highest level of private sector job creation since 241,000 jobs were created in April. In addition, May and June employment was revised upward by a total of 56,000 jobs. Revised job creation for the two months amounted to 99,000 rather than the 43,000 previously reported. These numbers were interpreted to allay fears the economy was about to recede into recession.

While the July employment gain and previous months revisions were encouraging, in our opinion, the gains were not much more than statistical and change little in our view of the weak current employment environment.  In virtually all of the key measures of the job market, the July data continued the picture of a diminishing and discouraged work force, working stagnant hours and suffering from diminished employment.

According to the Household Survey, the civilian labor force contracted by almost 200,000 in the month of July and is 400,000 persons lower than year earlier levels. The employment/population ratio has fallen to 58.1% from 58.4% in July, 2010 and is at a 28 year low. The number of people not in the labor force has risen to 86.4 million, an increase of 374,000 from June and 2.1 million higher than year earlier levels. The unemployment rate for July was 9.1%, virtually unchanged from the May-June levels and only fractionally lower than the 9.5% of July, 2010. In addition, 2.5 million people could find only part time work in July, an increase of 116,000 from June and over 200,000 higher than year earlier levels. The average workweek continued to be an anemic 34.3 hours, virtually unchanged for a year.  The average duration of unemployment in July rose to 40.4 weeks, up from 33.0 weeks in July, 2010. The total number of unemployed plus all persons marginally attached to the labor force and those working part time involuntarily, remained over 16%, virtually unchanged since April of this year and only fractionally lower than the 16.5% of July 2010.

On a more positive note, the important Professional and Business Services segment continued to show important progress with further gains in Computer systems design, Management and technical consulting services and Administrative jobs while temp jobs actually declined from May levels.

In summary, private sector job growth accelerated in July from weak levels of May and June. The job creation in the private sector continued to be offset by large job losses in the government sector, averaging 39,000 over the last three months. In fact, even with the increased job growth in July, net employment growth over the last three months averaged 111,000, down from an average of nearly 180,000 over the first four months of this year. This just isn’t good enough to foster increased economic growth or business expansion. While we do not believe we are currently in recession, an absence of improvement in recent economic data, including employment, will in our opinion, lead to further business retrenchment. This business retrenchment will be intensified by the recent downgrade of the U.S. sovereign debt rating and the resulting deterioration in worldwide capital markets. This has raised the possibility of a recession later this year and next.

Morris R. Segall

In addition

Second Quarter backsliding

Morris Segall      consumer sentiment, consumer spending, Economic Growth, employment report, GDP, industrial production, inflation, retail sales, unemployment

Last week saw a number of important economic reports for the month of June, including wholesale and retail inflation, consumer sentiment from the University of Michigan/Reuters survey. There were no surprises to us in these reports. We expected inflation to recede from the elevated levels of the first five months of this year as energy prices declined in the month of June. We also expected consumer sentiment numbers to decline reflecting the weak stock market in May and most of June and the very weak employment situation in both months (See our blog article of July 8 on June unemployment).  For us however, the two economic reports of most importance were retail sales and industrial production. If there were going to be signs of improvement from the very weak data reported in May, it would be seen in these two reports.

Unfortunately, while retail sales, excluding grocery store and gasoline station sales, increased .3% in June from depressed May levels, June retail sales were essentially flat with the level of April and lower than the peak level of sales in March. So it would appear consumer discretionary spending is down at the end of the second quarter from the peak levels at the end of the first.

We were anxious to see the Fed’s June report on industrial production and capacity utilization to see again if our expectations of a June rebound in industrial activity would be fulfilled. Here too we were disappointed with the results. Similar to the retail sales report, June industrial production did improve from weak May data but only by a slim .2% and all of the increase came in mining and primarily from utilities. The latter benefitting from increased usuage of power for cooling in the extended and massive heat waves last month. Given the continuation of hot weather in July, utility consumption is expected to be high again this month. More importantly, industrial production in manufacturing showed no increase in June from May and prior months industrial production in April and May were revised downward to negative readings. Indeed the revised numbers indicate overall industrial production in the second quarter showed no improvement from the first quarter. In addition, total industry capacity utilization declined in June from March levels. Manufacturing capacity utilization is also down in June from March levels and has not increased above the 74.4% level since April. As a point of comparison, this level of capacity utilization is well below the 79% long term average utilization rate of 1972-2010 .

Concurrent with the weak employment numbers already reported and the increase in the trade deficit reported for May, the weak retail sales and manufacturing data for June point to GDP growth in the second quarter lower than the 2% growth recorded in the first quarter. We raised concerns about this in our July 8th blog article. It now appears second quarter GDP growth will be in the 1.5%-2% range. Furthermore, we are increasingly pessimistic about a catlyst in the private sector that would rejuvenate the economy in the second half. Given the pessimism amongst consumers, and the retrenchment we have seen in the business sector, we are hard pressed to see what will “jump start” this economy in the absence of another Federal stimulus program which is not expected.

Morris R. Segall

Is There a Silver Lining in May’s Unemployment Numbers?

Morris Segall      distribution, employment, production, recession, unemployment

The May unemployment numbers were nothing short of disappointing. But do they mark the beginning of a double-dip recession, as many economists have predicted? Morris Segall, President of SPG Trend Advisors, suggests things might not be quite as bad as they seem, with weather the primary culprit for the sharp drop in production and distribution. Segall also cites an uptick in professional and business services employment and a shift from temporary to permanent hiring as encouraging. See Segall’s oped in the Baltimore Business Journal at http://www.bizjournals.com/baltimore/print-edition/2011/06/17/bleak-economic-numbers-dont-disclose.html

Economic Update

Morris Segall      April job growth, consumer credit, consumer spending, corporate profits, Economic Growth, future trends, GDP, inflation, manufacturing orders and shipments, non-manufacturing orders and production, personal income, unemployment

There has been a large amount of important economic data and news over the past week that is shaping the outlook for the U.S. economy as we proceed through the second quarter.

First, preliminary GDP growth for the first quarter was reported in line with our expectations (See our blog article of April 24, “First Quarter GDP will be a Slowdown”) of just below 2% higlighted by reduced consumer spending, reduced business capital investment, negative net exports and a surprising cutback in Federal government spending in defense. Our expectations of a beginning reorder cycle in inventory accumulation is also apparent in the report. We expect the second and third revisions to the GDP report will be upward based on stronger consumer spending numbers in the Personal Income and Spending report for March and strong capital goods orders for February and March.

Consumer income and spending data released after the preliminary GDP report reveals significantly stronger growth in both in the first quarter, particularly in February and March, aggregating a total increase of 1.5% for the two months. Spending was widespread among durable and nondurable goods and services over the two month period. Savings helped fuel the spending as the savings rate dropped to 5.5% from nearly 6% in January.

Orders, shipments and backlogs of manufactured goods increased at accelerated rates in February and March with orders and shipments in March growing at an outsized rate of growth approximating 3%. Order and shipments strength continued the recovery pattern of growth in both durable and nondurable industries. Manufacturing backlogs, on a non seasonally adjusted basis, are up over 13% year over year in March.

Purchasing managers indices for manufacturing and non-manufacturing receded in April from record levels in February causing concern about an economic slowdown but examination of the subsets of the indices reveal continued strong levels from respondents regarding orders, shipments, backlogs and employment. However, respondents in both surveys noted a continuation of price increases from suppliers.

Employment growth continued in April by a stronger than expected 244,000 jobs with private sector hiring accelerating to 268,000 from upwardly revised levels of 261,000 and 231,000 in January and February, respectively. However, the unemployment rate increased to 9% in the Household survey due to a calculation of fewer jobs created versus the Business establishment survey. The increase in job creation was broad and included manufacturing, retail trade, professional and business services, healthcare and leisure and hospitality sectors. Within professional and business services, the recent improvement in management and technical consulting services and computer systems services continued and provided much of this important sector’s monthly growth. This confirms anecdotal evidence we have been gleaning for much of the February-March period. Unfortunately, the labor force participation rate has not improved from a mediocre 64.2% and the number of people working part time for economic reasons and marginally attached to the labor force increased further. In addition, wages have not increased during the first quarter and have increased less than 2%, year over year, in April, less than the rate of inflation.

Consumer credit expanded again in March for the third consecutive month in both revolving and nonrevolving credit. Most of the increase in consumer credit continues to be led by nonrevolving credit such as auto and student loans. The small increase in revolving credit in March does not bring it back to fourth quarter 2010 levels.

Finally, commodity prices declined substantially led by a collapse in silver prices. We had felt commodity prices were building a bubble similar to the price action in the summer of 2008 and we expected a similar result when they broke down in the fall of that year.

Our conclusions from all of this data is that the first quarter ended on a stronger note than expected given the rapid rise in inflation during the quarter. Demand from consumers and businesses were remarkably resilient. With the recent decline in commodity prices, even temporarily, some pressure on consumer incomes and business profitability will be relieved. This augurs well for consumer and business spending in the second and third quarters and fortifies our optimism for heightened GDP growth for these periods. Another very positive development in the first quarter was the stronger than expected level of corporate profits reported for the period. Our optimism must be tempered by adverse events overseas, the current debate regarding the federal budget, which will impact the level of federal spending going forward, and the expiration of the Fed’s QE2 program which has supported low interest rates and ample liquidity for the economy and the stock market. We will be publishing our power point, comprehensive economic update and outlook on our website shortly.

Morris R. Segall

March Employment: Still Encouraging But…

Morris Segall      "hard core" unemployed, business profits, Economic Growth, employment report, hourly earnings, inflation, job creation, jobs for college graduates, labor market "slack", labor market growth, unemployment

The March employment report continues to show the improving trends we have been recounting in our previous employment blog articles (March 6 and February 5, 2011). The March report showed a second straight month of more than 200,000 new jobs created in the private sector. This is the highest consecutive level of private sector monthly job creation since well before the recession. According to the Household survey, nearly 1 million more workers have been employed since March, 2010.   

The March report showed a continuation of the positive trends of: fewer unemployed from the loss of part time work; a further increase in manufacturing jobs; another decline in the level of unemployed from 5-26 weeks, particularly in the important 15-26 weeks category; and further improvement in management and professional jobs in the important Business and Professional Services segment.

However, all is still not well in the job market despite the recent improvement. Temp jobs still comprise the “lion’s share” of Professional and Business Services employment. The labor market is not growing. The number of persons not in the labor force or marginally attached continues to  grow and the employment/population ratio still stands at a recessionary level of 58.5%.  The increasing “hard core” unemployed of 27 weeks and longer comprised almost 46% of the total number of recorded unemployed in March versus just under 44% in March of 2010. This is becoming a major socio-economic dilemma for this country. Many of the jobs created in March were lower wage service jobs in healthcare, wholesale and retail trade and in the leisure and hospitality industries. Compounding this issue is weak wage growth overall. Average hourly earnings reflected in the March employment report showed annual growth of 1.7%, far less than the nearly 4% annualized growth in nominal consumer prices for the six month period ending in February.  Our March 7th website article on inflation highlighted the increasing problem of rising prices for consumers and businesses. Continued price escalation which pressures consumer discretionary spending and business profits could hurt further permanent hiring gains. 

So while the recent trends in employment, as reflected in the monthly jobs report and weekly first time unemployment claims, are showing concrete improvement, the gains are not uniform and still leave a large amount of “slack” in the U.S. labor force. In addition, there are far too many instances where mature, experienced workers and recent college graduates cannot find meaningful and permanent jobs with good salaries. This will hurt economic growth, longer term, if it is not corrected. However, in the near term,  we remain optimistic the recent gains and improved outlook for job creation can be maintained for this year and into next.

Morris R. Segall

February Employment Report: More “Green Shoots”

Morris Segall      Employment "green shoots", employment report, February employment report, positive employment trends, turning the corner on unemployment, unemployment

The monthly employment report for February showed more “green shoots” of positive employment signs that we mentioned in our February 5th blog article on the “ January Employment Report”, and along with other recent empirical and anecdotal data, are leading us to believe we may be turning the corner on unemployment. We note the following positive data in the February report that builds on the encouraging trends we have noted since November:

1. The number of persons working part time for economic reasons declined again by 67,000 from January and has declined by 760,000 since October, 2010. This includes persons who are working part time due to business conditions and persons who could only find work part time. 

2. The number of persons unemployed for more than 15 weeks declined in February by over 300,000 from January, including a decline of over 200,000 in those unemployed 27 weeks and longer. Since November, the numbers of such unemployed have declined by over 670,000 and 330,000, respectively.

3. Total private sector payrolls increased in February by over 220,000, well above the monthly average of approximately 100,000 gains of the past year, and included widespread and significant gains in most goods producing and service industries.  Manufacturing employment has grown for four months and construction employment has shown a gain after more than a year of decline. In the important Professional and Business Services segment, employment is picking up in key sectors aside from temporary workers which have fueled virtually all of the gains in this sector. Management and Technical Consulting employment has increased by 25,000 since October and Administrative and Support Services has grown by over 150,000 jobs since October. In addition, architecural services as measured by the Architectural Billings Index has moved from retrenchment to expansion with readings of 50 and above since November, 2010. This is the most encouraging growth in these sectors since the recession.

4. As we forecast in our previous blog article of January 9th and our website article of December 6, 2010, previous months employment have been revised upward, including November and December, 2010 by 22,000 and 49,000, respectively, and January, 2011 by 27,000.

5. There are other positive indications such as an increase in the average workweek and manufacturing overtime and increases in job recruitment in financial and accounting, IT and new business development positions and an increase in marketing and advertising spending by businesses. In addition, an increasing number of industries, 68%, were hiring in February versus 60% in January and 58.6% in December, 2010. Lastly, the number of first time unemployment claims for the week ended February 26 fell to 368,000, the lowest level since May, 2008 and importantly, below the key 400,000 for the first time since the recession. This is a very bullish employment development.

These positive trends and developments are lending credence to the improved 9% employment rate attained since November and augur well for further employment gains as the economy continues to improve as we expect (See our website article, “Great Expectations-2011″, January 6, 2011).

Morris R. Segall, CFA, CIC

January Employment Report: Weak but Contains “Green Shoots”

Morris Segall      "green shoots" in employment, 2009 economy, 2010 employment data, employment report, future trends, strenthening 2011 economy, unemployment, winter recovery in jobs

The January monthly employment report reported on Friday showed a dispappointing creation of 36,000 jobs versus the 150,000+ again expected by economists and analysts. 2010 job market data for both the Household and Business Surveys have been revised to reflect new Census numbers and new seasonal adjustment and other measurement changes. Since October’s 171,000 revised level of new jobs, November, December and now January’s job growth have not been close to the 150,000 level expected since October. Yes, the revisions to November and December job growth numbers  have been positive, as we expected, amounting to a cumulative 40,000 additional jobs from previously reported data. Nonetheless, the average number of new jobs created in November and December of last year amount to a weak level of slightly over 100,000. We have no doubt the very low level of job creation in January was negatively affected by harsh winter weather and expect an upward revision when February monthly job data is reported because of the absolutely low level of job creation reported. We also believe the weather in January interrupted timely and more complete survey reporting. However, December winter weather was harsh also and still allowed for over 120,000 new jobs being created. In addition, the weather so far in February continues to be severe, so it might be a March thaw before job creation, per the monthly surveys, show a more normalized pattern. In addition, major benchmark revisions to 2010 data will be forthcoming in February which will reflect new readings on the 2010 labor market. Finally, the unemployment rate surprisingly dropped for the second month to 9%. However, the drop in the unemployment rate since November primarily reflects a decline in the labor force of over 750,000 workers, a sign of continued discouragement among American workers.

Despite the low level of new jobs reported, the January employment report shows some continued improvement in  labor market trends that we mentioned in our January 9th blog article. Namely, further improvement (+ 49,000) in manufacturing employment making it three consecutive months and a cumulative increase of 78,000 jobs in this important sector. It supports the strengthening in the manufacturing sector in the fourth quarter of last year which is leading to increased hiring. In addition,  jobs were created in wholesale and retail trade, in furtherance of the fourth quarter hiring in these sectors. This reflects the strong retail sales trends in the fourth quarter of last year and the positive indications for retail sales in January as recently reported by major retailers. Lastly, the January data show a drop in temporary help hiring, the first such decline in a year, and significant increases in IT and administrative jobs indicating a broadening of permanent hiring in the important Professional and Business Services category. Continuing a positive trend first seen in December, job losses due to the ending of temporary assignments dropped again by nearly 500,000 and the number of  unemployed 5-14 weeks in duration dropped by 168,000 and are down over 400,000 since October. Thus, while the overall employment situation is still weak, we see “green shoots” in the monthly data and improvement in the weekly unemployment claims data. Other positive data on consumer and business spending and manufacturing orders and production augur well for further improvement in job creation going forward.

Morris R. Segall, CFA, CIC

December Unemployment: Still a mixed Story

Morris Segall      employment report, improvement in unemployment trends, unemployment

Friday’s unemployment report for the month of December continued to show the mixed data we have been seeing since late last summer. While the unemployment rate for the month dropped steeply to 9.4% from 9.8% in November ( due primarily to a contraction in the labor force), the job creation in the month was a disappointing 103,000 jobs. Estimates of new job creation for December had ranged from 150,000 to 300,000. Consistent with our comments in our December 6, 2010 website article on November unemployment, we believe erroneous seasonal adjustment factors and incomplete business survey results are again understating new job creation in the initial monthly report. As we stated in that article, we believed the very low job creation data reported initially for the month of November, 2010 would be revised upward. Indeed, in Friday’s December monthly report, November job creation was substantially revised upward from 39,000 to 71,000 and October’s job creation data was also substantially revised upward from 151,000 to 210,000. In fact since July, revised monthly job data has shown a cumulative increase of 280,000 additional jobs being created versus initial estimates. We had stated in our December 6 website article that we noted the trend of upward revisions to the initial job creation data and the revisions in the December report confirms this trend. We expect a similar upward revision to the December data when the January monthly data is reported and when the semiannual revisions to 2010 data are made in February. We base this on the large reduction (over 500,000) in December in the number of people who have lost their jobs due the completion of  temporary jobs. This is the largest positive change in this category in a year. In addition, we also note a major positive shift in the number of unemployed by the duration of unemployment. The December report showed a reduction of over 500,000 people who have been unemployed from less than 5 weeks to 26 weeks. This also is the most dramatic improvement in this series since the end of the recession.

These positive trends do not change the fact that while employment is improving (we also believe there is a marked improvement in initial unemployment claims below the 450,000 level which had been a sticking point for so long), it is still well below levels necessary for accelerated economic growth. The fact remains that over 15 million Americans are unemployed and under-employed and over 6 million of these have been unemployed for over 27 weeks. The latter continues to grow and represents an increasing problem of long term unemployed. Labor remains a surplus commodity and wage growth in 2010 was less than 2%. The new fiscal stimulus of extended and new tax cuts enacted by the “lame duck” Congress aids the environment for increased job creation and offers the best hope since the end of the recession of improving employment. It remains to be seen if the promise will be fulfilled but the data is moving in the right direction and our optimisim for improvement has increased.

Morris R. Segall, CFA, CIC

June Unemployment: More Bad News

Morris Segall      recovery cycle, stock market, unemployment

Friday’s unemployment report for the month of June was weaker than economists had expected and weaker than the surface numbers show. It also was the latest in a series of weaker and disappointing economic data reported last week. Last week saw a continuation in weak consumer spending  in May for the second month in a row despite healthy gains in consumer incomes over the April-May period. The consumer savings rate increased in May for the second month in a row to 4% reflecting consumer caution. Also, last week, the Conference Board reported consumer confidence in June fell dramatically from 62.7 to 52.9. Clearly the stock market declines in May and June are depressing consumer attitudes but respondents are also again expressing difficulty in getting jobs and are increasingly pessimistic about both current conditions and future expectations. We have repeatedly stated in our economic presentations, since the economy began recovering last year, that the absolute level of consumer confidence in this survey have been well below levels normally seen in postwar economic recoveries and indicated to us a muted consumer reaction to the economic recovery.  Rounding out last week’s economic reports were: a greater than expected decline in the ISM purchasing managers index reflecting a pause in the upward trend in orders and shipments seen since last year and a decline in hiring  by respondents; an increase in first time unemployment claims for the last week in June, taking first time claims to over 470,000 for the third time since May and well above the level of 350,000 seen in previous economic expansions; and finally, factory orders for May dropped for the second consecutive month after rising steadily since last spring. 

But the June employment report contained cause for concern despite the expected decline in census worker jobs and a reduction in the unemployment rate for the first time this year. The number of discouraged workers at 1.2 million is up by over 400,000 from last year. The number of people in the work force, as measured by the Household monthly data,  is down by over 1 million workers since June of 2009 and despite that drop in the labor force, the employment participation rate is down to 64.7% from 65.7% in June, 2009. A full year after the economy began recovering, the average workweek is only at 33.4 hours versus 33.0 hours in June, 2009. Over the last twelve months, average hourly earnings are up by only 1.7%, less than the 2% annual rate of inflation as measured by the CPI through May of this year. The private sector created only 83,000 jobs in June, below an expectation of approximately 100,000+. Of that 83,000, approximately 21,000 were in temporary help services and 37,000 were in leisure and hospitality. A number of leisure and hospitality jobs, 28,000, were in amusements, gaming and recreation that may be seasonal hires to cope with a very active vacation season. Other professional and business services added another approximately 25,000 jobs and healthcare added approximately 17,000 jobs. Most of the remaining sectors in goods producing, services and governments cut jobs in June. The June numbers follow a downwardly revised estimate of 33,000 private sector jobs created in May and establishes a pattern of weak private sector hiring for the two month period when empirical and other evidence should be creating the opposite result.

Tomorrow we plan to publish our updated economic and capital markets analysis and forecast on our website, www.spgtrend.com. It will extend the theses we have articulated in our blog articles since May. That is the expansion cycle in the U.S. equity market has reversed because of the international credit alarms caused by sovereign debt issues in Europe and these developments are having a negative impact on the U.S. economic recovery cycle. The economic data of last week, particularly the monthly job report, lead us to believe the U.S. economic recovery is  pausing while businesses and consumers assess the outlook for the remainder of this year and next.  We are afraid businesses in particular are already starting to plan “cutbacks” in anticipation of a weaker economy going forward.

Morris R. Segall, CFA, CIC

Happy Days Are Here Again: But How Happy and for How Long?

Morris Segall      business landscape, consumers, economics, GDP, government, March monthly unemployment report, trends, unemployment

The March monthly unemployment report was the latest in a series of positive economic reports that confirms an expansion in the economic recovery. Since late February, we have observed a perceptible pick-up in consumer spending since the end of the severe winter weather. We have noticed an increase in traffic in restaurants and malls and have heard firsthand of increased travel by consumers. This empirical data has been confirmed by reports from major retailers and cruise ship lines over the past two weeks of increased revenues in the month of March.  The spring thaw has unleashed pent up spending which we have expected would spur a real economic recovery when the unemployment situation improved. While we believe new job losses have peaked, we have stated in previous comments that the chronic level of long term unemployment and the suppressed level of wage and salary income growth would be depressants to increased consumer spending.  Despite repeated evidence that the level of long term unemployment is not improving, consumers are apparently satisfied with their financial conditions to allow an increase in discretionary spending.  Combined with a continued surge in factory orders from businesses and rising exports, we expect first quarter GDP to be a solid 3% based on a strong March performance and the second quarter could be even stronger with growth in the 4%-6% range based on:

1. A strong rebound in housing to take advantage of the extended home buyer tax credit set to expire in June. We  would not be surprised to see that credit extended again to compensate for the lost time in January and February due to harsh winter weather.

2. An increase in auto sales as replacement demand increases due to the extended age of the automobile fleet and the detrimental impact on cars from this winter’s weather.

3. Continued and broader increases in capital equipment orders from businesses that are seeing increased sales, pent-up demand for capital equipment and rising corporate profits.

4. Increasing exports to fast growing and recovering overseas economies.

5. Increased federal spending from the accelerated release of stimulus funds.

If our projections are correct, strong consumer spending in the second quarter will lead to an inventory replacement cycle in the third quarter and increased industrial production from building backlogs. We do not foresee a double dip recession in the second half of this year.

However, we do expect a slowdown in GDP growth in the second half because the current surge in consumer spending cannot be sustained under current employment and consumer income conditions. We expect the current increase in consumer spending will come from savings and reduced reduction in consumer debt. While that helps spending in the short term it is cause for concern longer term. We have consistently commented in our posted economic presentations that a consistent effort on the part of American consumers to save more and reduce debt results in a healthier, more consistent and more creditworthy consumer that can sustain an increasing level of economic growth. Thus, while the industrial sector and exports can keep economic growth going through this year, reduced federal subsidy programs and lower levels of consumer spending make the economic outlook for 2011 more difficult to predict. Furthermore, commodity and energy prices are already on the rise which will increase inflation going forward and we expect the Fed will have to raise interest rates by this summer. The confluence of rising prices and interest rates will put additional pressure on consumer incomes and spending.

So while the economy is improving, sustained recovery still needs permanent job creation and the absorption of the large pool of long term unemployed.

Morris R. Segall, CFA, CIC

Ben Bernanke, the Stock Market and the Economy

Morris Segall      Ben Bernanke, economy, employment report, GDP, government, stock market, trends, unemployment

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

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

Third Quarter GDP Revised Down

Morris Segall      2009 economy, consumers, economics, future trends, GDP, global, government, recession, stimulas, unemployment

Yesterday’s second reading on the third quarter GDP showed a downward revision from the robust 3.5% preliminarily reported at the end of October. As November wore on expectations of the second and more definitive read on the third quarter was for a downward revision to the 3% level but no one was alarmed. It was considered more or less statistical.

After taking a look at the revisions from the preliminary report we are concerned for the following reasons:

1. Personal consumption was revised down from 3.4% growth to 2.9% with spending on goods dropping from 8.1% growth to 7.2%.
2. Business capital spending dropped from 11.5% growth  in  the preliminary report to 8.4% in the revision with large downward revisions in the growth of inventories and business structures.
3. Federal government spending growth was revised upward from  2.3%  to  3.1%.
4. Growth in final sales of domestic product was revised downward from 2.5% to 1.9%.

This revised mix of weakness in business and consumer spending with all of the federal government stimulus in the quarter is alarming and casts further doubt on the underlying strength in the economy as federal stimululs abates going into next year. Our assumption of 1%-3% GDP growth in the fourth quarter will need strong contributions in both consumer and business fixed investment from the revised third quarter levels. We detect an improved level of retail sales in the quarter but  will need to see sales results of “Black Friday” to see if that is true. A disappointment in this weekend’s sales will cause a shift in outlook for both the economy and particularly the capital markets which have been seeing the glass “half full” in November despite the warning signs in consumer sentiment, new home sales and continued high levels of unemployment. It is noteworthy that the market gains in November have been accompanied by low levels of trading volume, an ominous sign for sustained capital market gains.

In our previous website and blog articles on the preliminary third quarter GDP, we remained skeptical of the durability of the third quarter gains and said we would be watching fourth quarter economic data closely for future direction. With the downward revision in third quarter numbers, we will be even more vigilant to see if this economic recovery has “legs”.
Best wishes for a Happy Thanksgiving holiday and stay tuned.

Morris R. Segall, CFA, CIC

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

Morris Segall      2009 economy, Capital Markets, economics, GDP, global, government, international, treasury, 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:

The Government Stimulates the Third Quarter but Doubts Remain

Morris Segall      2009 economy, Capital Markets, commodity markets, consumers, debt, depression, economics, GDP, unemployment

GDP for the third quarter comes in strong stimulated by the government but the details and other consumer economic data create doubts on sustainability and make the capital markets nervous. Continue reading this premium article at spgtrend.com.

Related reading:

Economic and Capital Market Update

The September Employment Report: More Unsettling News

The Economy, Capital Markets, Healthcare and Geopolitical Events

The September Employment Report: More Unsettling News

Morris Segall      2009 economy, business landscape, consumers, economic, economics, employment report, unemployment

Friday’s monthly employment report for September was bad. September job losses, per the Business Establishment series, was a -263,000, worse than analysts projected. Job losses were widespread between manufacturing, construction and a huge 147,000 loss in service sector jobs. The stated unemployment rate increased to 9.8%, another record level. The unofficial unemployment rate that includes underemployed and discouraged workers rose to 17%. The average workweek declined to a record low 33 hours and the employment to population ratio declined to a record low of 58.8%. That means less than 60% of the available working age population are employed in full time jobs. Unemployment rates increased in all demographic groups led by teenagers at a crushing 26% and minority groups in the low to mid teens. The unemployment rate for adult men escalated to over 10%. While these numbers have chronic economic implications they also have negative social impact as well and we are seeing it in an increase in crime, divorce, domestic violence and physical and psychological disorders. We wrote about the social and emotional toll of this recession in our website article of March 23rd, “ I am Mad as Hell…“. The scars from this growing and continued high level of unemployment will be felt long after the economy recovers.

As if the current level of unemployment were not distressing enough, the Labor Dept. announced that a preliminary estimate of its annual benchmark revision to the monthly unemployment data shows that private sector employment going back to March of this year is lower than originally reported by 855,000 jobs. In a previous blog article, “The July Employment Report…“, August 10, 2009, we stated that we believed recent monthly unemployment numbers would be revised downward when the annual revisions are made next March. The 855,000 increase in lost jobs is a PRELIMINARY estimate and we are expecting it to go higher when the final revisions are made next year.

Friday’s unemployment data on the heels of Thursday’s increase in first time unemployment claims is the latest in a string of weakening economic data last week. We stated in our last blog article, “The Economy, Capital Markets…“, October 1, 2009, that we are getting “uneasy about the underlying improvement in the economy”. Friday’s unemployment report is more unsettling and increases our unease.

To be sure we need to see more economic data for the month of September before making revisions to our economic and capital market outlooks. However, we are advising our capital markets clients to take some capital gains where tax considerations are not an issue and hold onto cash as a defensive measure. We still believe there was enough “pop” in the government stimulated economy in the third quarter to generate 3%+ GDP growth. But we are increasingly unsure about subsequent quarters as government stimulus wanes. If our fears are realized, equity markets here and abroad have considerable downside risk from current levels. As we have stated repeatedly in previous blog and website articles, there is no recovery without the consumer moving “goods off the shelves” on a continuing basis. Worsening levels of unemployment just keep postponing that development. Investors and businesses will need to be flexible and nimble in planning for next year. Stay tuned as we continue to analyze data and events over the remainder of this year.

Morris R. Segall, CFA, CIC

The Economy, Capital Markets, Healthcare and Geopolitical Events

Morris Segall      2009 economy, Capital Markets, Cash for Clunkers, economics, Geopolitical, healthcare plan, trends, unemployment

Today the government released its third and final revision to the second quarter GDP numbers and shaved the 1% contraction to .7%. There were no major shifts in trends from the previous report but the positive direction of business fixed investment and consumer spending was aided by a surge in government spending, as expected. As we have stated previously, it appears the recession ended in the second quarter. Led by rising home and auto sales, positive trends in industrial production and retail sales continued through July.

The expectation was for these trends to continue through August and into September led by continued government stimulus and subsidy programs. However, August numbers for existing and new home sales declined in August from July levels and factory orders for durable goods in August were also unexpectedly down from July levels. This makes us uneasy about the underlying improvement in the economy. We have stated previously that government stimulus and subsidy programs, notably the “Cash for Clunkers” program and the tax credit for first time home buyers, were likely to spur positive GDP growth in the third and fourth quarters of this year. The question in our mind was what happens when those programs expire. Now we see that despite the positive demand stimulus from the government programs and the momentum of increased home sales and prices and auto sales in June and July, there was no follow through in August. And there should have been. The decline in factory orders is particularly disturbing because the positive trend in auto and home sales should be leading to a steady improvement in factory orders and production to replace goods sold.

The decline in many of the components of the factory orders report suggest that businesses are not ready to ready to begin a sustained capital spending uptrend. If they are not going to increase spending with government stimulus, what happens when that stimulus ends. It will be very important to see housing and business spending levels for September and the remainder of this year to gauge whether we are really in recovery or facing a downleg in the “W” shaped economic outlook we raised in our August 3rd blog entry, “Turning the Corner…“. While the “Clunker” program has expired we expect the current home buyer tax credit program to be extended into next year given the success of that program.

Today also marks the end of the third quarter and stock markets around the world concluded one of the most successful quarters in decades. The Dow Jones Industrial Average gained 15% in the quarter and overseas markets showed bigger increases including Europe and Japan as well as emerging markets. Fed by infusions of liquidity from central banks and the specter of worldwide economic recoveries, capital markets surged. In recent weeks, increased speculation and appetite for risk have reappeared in debt and banking transaction markets. Year to date the Dow is up 50% from its March lows. Overseas markets show comparable and greater gains. But at this point both bond and stock markets here and abroad are stretched and need further evidence of economic and corporate profit improvements to protect present gains and sustain additional appreciation. If the outlook for worldwide economic growth proves correct we believe worldwide debt markets are vulnerable to declines from higher interest rates next year from the current depressed levels. Here again, economic data over the remainder of this year will influence the direction of worldwide capital markets. If our concern over a “W” shaped economic outlook proves correct, expect a major correction in U.S. and overseas markets from current levels. We are watching developments closely.

In our blog entry, “Healthcare Reform and the Democrats…“, of August 6, we raised concerns over passage of the President’s healthcare proposal and the split in the Democratic Party that we felt would be the undoing of the President’s plan. Events since then have validated that concern and it now appears that for the same $1 trillion price tag Congress will pass a healthcare bill that omits a public option. This will leave the private healthcare and pharmaceutical industries intact and escaping significant third party competition. The political “fallout” is considerable. The President is wounded and his party is split. There is concern about Democratic Party losses in next year’s Congressional elections as the debate over healthcare reform has been framed as big government socialism versus libertarian, individual democracy. A perceived defeat of the President and a fractious Democratic Party will have international implications as both our allies and foes evaluate the strength of this President.

Speaking of geopolitics, this weekend’s victory of Angela Merkel in German elections lends further support to our contention that Europeans are turning to the political “right” (See our website article, “I am Mad as Hell…“, March 23, 2009). Running on a pro business, lower tax platform, Chancellor Merkel and a right of center, pro business party won nearly 50% of the popular vote. The long time Social Democratic Party garnered less than 25% of the popular vote, its worst defeat in postwar history. Angela Merkel joins Nicholas Sarkozy of France heading a center right European government and the victory of center right parties in this year’s European Parliament elections. Furthermore, it is widely believed Britons will elect a Conservative government in next year’s elections. The disillusionment of European voters with socialist governments is the direct result of the economic damage to those electorates from the recession and the increase in protectionist sentiments to protect domestic jobs and incomes.

Additionally, geopolitical events from Afghanistan to Honduras are hurting President Obama and his foreign policy agenda. The President is in danger of being viewed as impotent and more style than substance. While he remains very popular overseas, his policies and lack of forceful actions in the face of antagonistic behavior will erode his ability to lead a free world coalition against rising threats. We will publish on our website in the near future an in depth analysis of international events and the Obama foreign policy.

In summary, as we conclude the third quarter recent economic data is disquieting and if continued will threaten the outlook for economic recovery in the U.S. and the large gains in worldwide capital markets achieved to date. Overseas events also threaten to undermine the “honeymoon” in foreign affairs enjoyed by President Obama to date. We are not changing our intermediate and longer term positive economic and capital markets outlooks at this point but we are watching data and events over the next three months very carefully.

Morris R. Segall, CFA, CIC

The July Monthly Employment Report: More Good News But…

Morris Segall      2009 economy, Cash for Clunkers, consumer credit, economic, employment report, Establishment Survey, Federal Reserve, government, unemployment

On Friday, the Labor Department reported the monthly employment situation report for the month of July. The Establishment Survey, the one most widely used as the benchmark for measuring monthly job creation showed nonfarm payroll employment declined by 247,000 in the month of July, a number better than widely held forecasts. It is the lowest level of monthly job losses since last August before the massive economic declines in the fourth quarter of last year and the first quarter of this year. It is also two thirds lower than the peak level of monthly job losses recorded in January of this year at over 740,000. With a number this low, naturally job losses in most major industry sectors measured by the survey saw significant declines in job losses from the surprisingly weak June levels. The exception was retail trade which saw job losses in this category double from 21,000 in June to 44,000 in July reflecting the continued poor consumer spending environment. Nonetheless, economists and financial commentators viewed the dramatic improvement in the monthly numbers as further evidence of the recession’s end and imminent economic recovery. To be sure, we concur the huge decline in monthly job losses reported since March’s 652,000 follows the general trend in first time unemployment claims which peaked at 674,000 in late March and has declined to 550,000 as of August 1st and signifies a peaking in new job destruction in this cycle and fortifies other economic data suggesting the recession has bottomed.

However, as we have written in previous posts, “Current Economic News Needs a Dose of Reality“, May 15th, 2009, the dramatically improved job loss numbers in the government’s Establishment Survey continues to be at odds with other government employment reports and empirical data we are getting from job seekers and businesses. Inconsistencies include:

1. While job losses in July measured 247,000 and a 9.4% unemployment rate, the civilian  labor force saw over 400,000 people leave it in July versus June and over 570,000 since May. The civilian labor force participation rate in July fell to 65.5%, matching the lowest level of worker participation in this cycle in March of this year.

2. While monthly job losses per the Establishment Survey have declined from 652,000 in March to 247,000 in July, first time unemployment claims, representing new job layoffs, have declined from 674,000 to 550,000 over the same period. A figure twice as high as the establishment survey estimate.

3. The number of unemployed workers including discouraged workers and part time workers who cannot get full time employment continued to increase in July. The number of people leaving or not in the work force increased substantially (over 1 million people) in July reflecting discouragement with finding gainful employment. This is consistent with the empirical information we hear from job seekers who say jobs are very hard to land and employers who tell us they are still not hiring and will have to lay off more workers if sales do not pick up.

4. The average work week increased by .1% to 33.1, the second lowest work week during the entire recession. We will see if the recent three month trend of monthly job losses per the Establishment Survey of approximately 330,000 is accurate. We continue to believe these recent numbers are vulnerable to downward revision when the Labor
Department makes it annual benchmark revisions next March. For now, the consensus is taking the numbers at face value.

There was another very important economic announcement on Friday. The Federal Reserve released its report on Consumer Credit for the month of June and for the fourth consecutive quarter, consumer credit declined. Consumer credit contracted at nearly a 5% annual rate in June, nearly double the 2.6% annual rate of decline in May. Since its peak in the third quarter of 2008, consumer credit outstanding has declined 3% or over $75 billion at the end of June, 2009. Most of this decline has occurred in revolving credit, i.e. credit cards. Since the third quarter of 2008, revolving credit has declined 6% or over $55 billion. Clearly consumers are continuing to pay down their debt in an attempt to de-leverage their balance sheets. Combined with a continued high savings rate in excess of 4% at the end of the second quarter, it is clear American consumers are paying down debt and increasing their liquidity. These trends and the existing high levels of unemployment continue to suppress consumer spending.

The government is artificially creating increased consumer spending and retail sales via its “Cash for Clunkers” program and the other stimulus package spending that will be impacting the economy over the next four quarters. However without job creation rather than “less worse” job destruction, a sustained consumer led spending increase is unlikely. In fact, to the extent the government creates consumer spending near term, it could result in deflated consumer spending longer term when the government stimulus ends. The key to a real economic recovery continues to be the revival and return of the consumer, with a job and the financial capacity and creditworthiness to spend. The consumer led us into the recession. He will have to lead us out. Recovery in this cycle was always going to be a long stretch in re-liquifying and de-leveraging the consumer so he could “get back in the game”. He is doing just that but the loss of his job is making those tasks longer and more difficult. While these trends hurt the economy in the short term, they will help sustain the recovery in the longer term.

Morris R. Segall, CFA, CIC

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:

June Employment Report—”Green Shoots” Fading

Morris Segall      business, economics, economy, employment report, unemployment

Thursday’s release of June unemployment numbers has cast a pall over the economic recovery thesis for the second half of this year. The report was pervasively weak. The overall job loss reported of 467,000 was much higher than expected and the breadth of the job losses was even more disappointing. Every industry sector except healthcare saw
increased job losses in June than in May with striking increases in the Professional and Business services and Government sectors. The negative tone and implications of the June report sapped the stock market on Thursday, knocking the major market averages down almost 3% and leading market sectors like commodities down even more.

We believe the June employment report and the attending stock market reaction signal the beginning of the long awaited stock market corrections both here and abroad as the prevailing optimistic sentiment regarding the U.S. economy is now in doubt. This change in sentiment and the upcoming earnings guidance from companies reporting second quarter results this month are expected to put increased pressure on the elevated stock markets. We expect the capital market declines to be led by commodities, particularly energy, which have paced the market gains since March. The weakening economic outlook diminishes the recovery story for materials and energy given a protracted weak demand environment.

Our capital markets strategy of holding significant cash reserves in anticipation of market corrections, while the U.S. economic recovery was in doubt, should provide a cushion to near term market declines but more importantly, provide liquidity to invest in the market at lower prices. We are “bullish” on stocks over the 2010-2012 period and believe the stock market lows of this past March are the cycle lows for this recession. But the markets, particularly foreign stock markets have appreciated very much, very fast and needed confirmation of an economic recovery to stimulate an upsurge in corporate earnings to sustain the recent market strength. Failing that, the markets were in our opinion, fully valued. So we will watch the slope of market weakness to see where it lands but be prepared for at least a 5% to possibly 10% correction, particularly if corporate earnings guidance for the remainder of this year and the early part of next year is disappointing.

Morris R. Segall, CFA, CIC

Unemployment And The Cycle

Morris Segall      Chrysler, economy, GM, unemployment

Today’s unemployment report for the month of  May,  showed a stunning decrease in the monthly trend of job losses since the recession intensified in the fourth quarter of last year. The Labor Dept reported non farm payrolls declined by 345,000 in May, the lowest monthly level of job losses since last September, and far below analysts’ expectations of 500,000 lost jobs in May. Combined with the recent downward trend in first time unemployment claims seen in the months of April and May, we believe the current level of monthly losses in the U.S. economy has subsided from 600,000-700,000 to 500,000-600,000 reflecting the already massive cutbacks in payrolls over the last six months. However, we are highly skeptical that monthly job losses have declined below the 400,000 level at this point in the cycle for the following reasons:

1. The May figure of -345,000 is not consistent with the ongoing level of first time unemployment claims of 600,000+ reported through the month of May.

2. The May figure of -345,000 is not consistent with the rising level of long term unemployed workers that reached over 6.7 million during the month of May.

3. The May figure of -345,000 in the Business survey is not corroborated by the less quoted Household Survey which showed an increase in unemployment of 787,000.

4. The May figure of -345,000 does not reflect the continued increase in part time and discouraged workers which now number over 11 million.

We believe the May job losses will be revised downward when the June unemployment report is released next month. The monthly unemployment report from the government is becoming increasingly unreliable in its initial release, and has been subject to consistent and often large revisions in subsequent monthly releases.

Nonetheless, were it not for the forthcoming increases in job cuts coming from the restructuring of GM and Chrysler, we would be comfortable in stating that the rate of new job destruction has peaked for this cycle, which is a prerequisite to a bottoming in this recession. Next must come a peaking in the level of long term or continuing unemployment claims. But a recession bottom is not an economic recovery. The current level of TOTAL unemployed, and part time, discouraged and underemployed workers is approximately 25 million, and there can be no recovery until these people get back to work and start spending again. So while we have hit the nadir of this recession in terms of rate of economic contraction, we fear it will be the fourth quarter of this year before any measurable economic growth will be reported.

Morris R. Segall, CFA, CIC

Unemployment Numbers

Morris Segall      economy, government, investing, unemployment

The government needs to invest in new industries that actually will re-employ the increasing number of unemployed. That includes energy, biotech, and agriculture.  For example, there is a 25,000 person shortage in technicians for wind farms. We can cross-train unemployed factory workers, including unemployed auto workers, to be wind farm turbine technicians. Those jobs pay $25 per hour.

If the government is going to spend another trillion dollars they should do a massive consumer rebate program with the emphasis on consumers paying down debt and getting current on their financial obligations, including mortgage, credit card and auto loans. If the consumer gets current on his debts, the financial system won’t have to write down consumer debt obligations.

The recession and credit crisis cannot end until the consumer is made financially sound and creditworthy again. Pumping dollars into banks, credit card companies, insurance companies and auto companies will not solve the recession until the consumer starts spending and begins to move goods off retailers’ shelves.