SPG Trend Advisors Blog

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

Economic Trends recovery cycle, stock market, 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

Economic Trends business landscape, consumers, economics, GDP, government, March monthly unemployment report, 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

Economic Trends Ben Bernanke, economy, employment report, GDP, government, stock market, 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:

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

Economic Trends Ben Bernanke, business landscape, Capital Markets, credit crisis, economics, economy, government, obama, treasury, 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

Economic Trends consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, 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

Economic Trends 2009 economy, consumers, economics, future trends, GDP, global, government, recession, stimulas, 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:

Economic Trends 2009 economy, Capital Markets, economics, GDP, global, government, international, treasury, trends, 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

Economic Trends 2009 economy, Capital Markets, commodity markets, consumers, debt, depression, economics, GDP, 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

Economic Trends 2009 economy, business landscape, consumers, economic, economics, employment report, 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

Economic Trends 2009 economy, Capital Markets, Cash for Clunkers, economics, Geopolitical, healthcare plan, trends, 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

Economic Trends 2009 economy, Cash for Clunkers, consumer credit, economic, employment report, Establishment Survey, Federal Reserve, government, 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:

Presentations 2009 economy, business, business landscape, climate, crisis, debt, economic, future trends, globalization, recession, slowdown, strategy, trends, 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

Economic Trends business, economics, economy, employment report, 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

Economic Trends Chrysler, economy, GM, 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.

Economic Trends economy, government, investing, unemployment