WRFest 4Apr08(Economy): the Chairman Said What ?!
There was lots of economic news last week, none of it particularly good when you read over the excerpts, but two stand out. First off the job market dropped -80K in March, which continues the downtrend started in early '06 but accelerates it. And, if our analysis & charts are accurate, we're just beginning to see the beginnings of a serious downturn. The other almost equally important news was that the Fed Chair used the R-word in Congressional testimony.
Now you really need to put that in context. It's the Chair's responsibility to tell the truth in such a way that we can all grasp it but not scare either the horses or the peasants...meaning us. In pursuit of that noble goal you'll hear a lot of careful language and hedging, which may struck some as mealy-mouthed. Actually it's the right thing to do because the horses tend to stampede when somebody screams fire. But consider the chain of public commentators who've been fairly fore-sighted about all this (ourselves excluded of course). People like Roubini and Fleckstein were pretty negative over a year ago. Then last fall we began to hear from the grey eminances of the econ profession who were sounding the tocsin's because of the structural disruptions they could see emerging (Summers, Feldstein, Greenspan, et.al.). (NBER's Feldstein says U.S. sliding into recession) It doesn't get more eminant than that. Now in the last few weeks we've started seeing the Street's economic eminances speak out (Goldman, Merrill, et.al.) about a likely downturn. And now the Chairman.
When the Chair speaks you really....really need to listen. And understand.
The other big new was of course jobs, which we covered in a seperate post and excerpt below. BUT...the talking heads still aren't getting that right either so may we suggest that you go back and review those charts ? And as a final note - if you click thru to read only one link do so for CalculatedRisk's take on the likely duration of the Housing downturn. Here's the money quote:
If the Composite 20 bust takes a similar amount of time,
the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).
READINGS
Bernanke Warns of Possible Recession Federal Reserve Chairman Ben Bernanke warned Congress on Wednesday that the economy may shrink over the first half of this year, saying "a recession is possible." Yet, he didn't offer any assurances of further interest rate cuts. Bernanke's testimony to the Joint Economic Committee was a much more pessistic assessment of the economy's immediate prospects amid a trio of crises -- housing, credit and financial. It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. GDP measures the value of all goods and services produced within the United States and is the best barometer of the United States's economic health. Under one rule, six straight months of declining GDP, would constitute a recession.
- Manufacturing activity edges up A key index of manufacturing activity rose unexpectedly in March, but the indicator remained below the level that shows growth in the sector.
- Construction spending declines Construction spending fell in February, according to a government report released Tuesday, but the decline was less than expected. The Commerce Department reported that total spending fell by 0.3%.
- Jobless Claims Shoot Up to 2-Year High, Weekly Unemployment Claims Indicate Probable Recession
- Overdue Consumer Debts Highest Since 1992, ABA Says
- Yellen sees uptick in second half But San Francisco Fed president sees "sluggish performance" for all of 2008, with job markets worse.
Downshift in March auto sales Automakers reported double-digit U.S. sales declines in March as demand for trucks and sport utility vehicles plummeted, with consumers holding back because of concerns about gas prices, the housing slump and tightening credit. General Motors Corp.'s (GM, Fortune 500) U.S. sales fell 19%, Ford's sales dropped 14% and even industry stalwart Toyota was down 10% compared with last March, according to figures released Tuesday. Chrysler dropped 19%, Nissan fell 4% and Honda reported a 3% drop. Some automakers warned things could continue to worsen in the near term.
Employers Slashed 80,000 Jobs in March -- Employers buffeted by talk of recession slashed 80,000 jobs in March, the most in five years and the third straight month of losses. At the same time, the national unemployment rate rose from 4.8 percent to 5.1 percent, the clearest signal yet that the economy might already be shrinking.The new snapshot of the job market, released by the Labor Department Friday, underscored the damage that a trio of crises --in the housing, credit and financial sectors -- has inflicted on companies, jobseekers and the economy as a whole. The unemployment rate was the highest since September 2005, when significant job losses followed the devastating blows of Gulf Coast hurricanes.Job losses were widespread in March. Construction, manufacturing, retailing, financial services and various business services all racked up losses. That overwhelmed gains elsewhere, including in education and health care, leisure and hospitality as well as in government. The new employment figures were much weaker than economists were expecting. They were anticipating a drop of 50,000 payroll jobs and the unemployment rate to rise to 5 percent. The 5.1 percent rate is relatively modest by historical standards, but was nonetheless the highest in 2 1/2 years. Job cuts in both January and February turned out to be even deeper. Employers got rid of 76,000 in each month. The elimination of 80,000 jobs in March was the most since March 2003, when the labor market was still struggling to recover from the 2001 recession.
Housing Bust Duration This first graph shows real Case-Shiller house prices for Los Angeles and the Composite 20 Index (20 large cities). The indices are adjusted with CPI less Shelter. The most obvious feature is the size of the current housing price bubble compared to the late '80s housing bubble in Los Angeles. The Composite 20 bubble looks similar (although larger) to the previous Los Angeles bubble. (Note the Composite 20 index started in 2000).Perhaps we can overlay the current Composite 20 bubble on top of the previous Los Angeles bubble and learn something about the possible duration of the current bust. In the second graph, the real price peaks are lined up for late '80s bubble in Los Angeles, and the current Composite 20 bubble. Note that the real price peak for the Composite 20 was flat for several months, so the real peak was chosen as May '06. It could also be a few months later. Prices are falling faster this time, probably because the bubble was larger. It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment. The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).
Where's the bailout for Main Street? It would be hilarious that economists are still debating whether or not the economy has fallen into a recession if so many people weren't hurting so badly. If you live in the real world, you know there's a recession going on. From January 2006 through January 2007, employment grew by 2%; over the next 12 months, through January 2008, employment grew by just 0.2%. And the pain is worse than those numbers indicate. As employment growth slowed, so did wage growth, while at the same time inflation took a bigger bite out of paychecks. The rate of annual change in real wages -- pay adjusted for inflation -- turned negative in October. By January 2008, real wages were declining at an annual rate of 1%, according to the Economic Policy Institute. So if you think your paycheck isn't keeping up with the price of milk, bread, medicine and gasoline, you're absolutely right. And for many American families, this isn't a recent phenomenon. The median hourly real wage has been falling for the last three and a half years. So a family in the middle of the U.S. economic pyramid knows there's a recession going on; for some the recession has been going on for three years. And, of course, that median family isn't among the worst off. Think of this the next time that anyone, myself included, tells you that the national unemployment rate is just 4.9% and that 4.9% isn't high enough to make this a real recession: Unemployment in Michigan was running at 7.6% at the end of 2007. It's one of seven states with unemployment rates above 6%.
The shadow job crisis An unemployment rate at 5% used to be called full employment. Today it's considered the sign of a recession. When the Labor Department gives its March employment report this Friday, it's important to keep in mind that the relatively low unemployment rate isn't telling the whole story about the weakness of the U.S. labor market. Economists surveyed by Briefing.com are forecasting a loss of 50,000 jobs from the nation's payrolls in the month. That would mark the third straight month of job declines. The unemployment rate is expected to jump to 5.0% from 4.8% in February.But some economists point to other readings, which show that the market is much weaker than the unemployment rate would suggest. For one, there has been an increasing number of people who want to work full time who are only able to find part-time jobs. There is also a rise in the number of those who have stopped looking for jobs because they've become discouraged by the weak market. Finally, there has been a decline in the number of employees working as independent contractors. According to the February jobs report, there were 565,000 more non-farm workers who were limited to part-time jobs than a year ago. That's a 21.1% jump in the number of those who are under-employed. Also not showing up as unemployed are those who want a job but are no longer counted as being in the labor force for a variety of reasons. The number of people fitting this category rose by more than a half-million between November and February. And if you look at the number of people out of work in addition to part-time workers who want full-time jobs as well as people not searching for a job at the moment, a far more alarming picture emerges. Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure stood at 8.9% in February, up from 8.1% a year ago.
Jubak's Journal: Why is unemployment so low? The unemployment rate is below 5%, low for such a seemingly weak economy. Two possible reasons: a lag in the official numbers and changes to the traditional ways we work full-time and part-time jobs.
Employment Outlook: Where Have All the Jobs Gone ? Well not quite yet but for the third month in a row the economy lost jobs in total. Some -80,000 of them, not counting the downward revisions in the prior months. Interestingly the markets held up well last week and futures are up this morning despite these realities. There are a few more realities we ought to be concerned with as well. Which we can begin to see in the chart at right, who's construction and implications we've certainly discussed. Here we look at YOY% growth in payroll employment since Jan00, which as you can see continues the downtrend established in '06. BUT, that downtrend looks like it's beginning to accelerate a bit. Just to put a point on that last statement let's remind ourselves that the engine is Consumption and the drivers of consumption growth are growth in Employment and Real Wages. We got a gift from the Econ Gods when real wages spurted up in late '06 as oil price declines pulled down inflation and reduced the implicit oil tax. Both of which have reversed, resulted in a very sharp drop indeed in the YOY% growth in W+E (Wages + Employment). A final key point - none of the headlines, talking heads or punditocracy appears to be reflecting the normal economic cycle lags in their comments. Certainly it's not being reflected in analyst earnings estimates which are holding up the markets.