Economic Update: Much Afoot

Readers may want to understand what's happening in the economy by reviewing the following.

1. Picking Nits. This blog is related to the very valuable and influential Institutional Risk Analytics. In brief, it argues based on FDIC data that local banks are dragging the economy down/being dragged down by the economy, while Big Finance is being bailed out in innumerable ways.

2. Bureau of Labor Statistics April employment report, including supplemental info 1, 2, and 3 here and here and here.

The overall BLS data was cheered on the Street. Job losses dropped to an alleged 539,000 in April. However . . .

A. Job losses were revised upwards for Feb. and March to the tune of 66,000.
B. Somehow the BLS assumed that 226,000 uncounted more jobs were created by the birth of new businesses than were destroyed by the death of existing businesses. In the teeth of this economic depression, this assumes only a slightly worse performance than the BLS assumed for the same month of 2007, when the economy was gaining jobs.
C. Private sector employment was much lower than 539,000, due to about 60,000 new government hires for the 2010 census and an unknown net overadjustment due to the "birth/death" adjustment suggests a continued massive loss of jobs.

I suggest you read at least the first page of the BLS main report. Trusting the media for filtered news is unwise.

For supplement 1, which is brief, all listings are interesting. U-6 is a broad measure of underemployment. U-1 is the narrowest measure and is valuable, often measuring breadwinners. Its rate has gone up the most in the past year to a horrifying 4.5% and will likely rise further.

For supplement 2, the whole array is interesting. Slide 5 is interesting. It shows that total private hours worked are unchanged in 10 years, despite a larger workforce. This is tres bad.
Slide 12 shows that finance is one of the few industries with a larger workforce than 10 years ago. This is bad as well and reflects government meddling to favor Big Finance, inter alia. Slide 13 shows the disastrous situation in temporary employment. The temp industry is a marvelous predictor of permanent hiring. When it improved for real in 2003, it marked the beginning of that economic expansion (and the true intermediate bottom of the stock market).

Supplement 3 explains the birth/death adjustment. Read it and wonder who is creating all these unmeasured jobs. Not you or I or anyone we know, most likely. Anecdotally it is all in the opposite direction.

3. The Census Department (why this department?) released today the widely ignored manufacturing wholesale trade report for March 2009, which showed sales down 18% year on year, to a massive total of $311 B, or almost $4 T annualized, and therefore a large minority of the entire economy.

Sales down 18% is Depression-level data. Period.

The inventory/sales ratio has soared year on year, from 1.12 then to 1.32 in March 2009. There needs to be further rationalization of this ratio, meaning less production relative to sales (and therefore less cash flow).

4. Courtesy of Mish and yesterday's post California Continues to Implode, California's finances are shocking. Year on year, sales tax receipts in April were 51% lower, and personal income tax receipts were 44% lower. These numbers are beyond belief. They should be headline news in the WSJ and New York Times. You can access this and related data in May 2009 Summary Analysis, out of the State Controller's Office. (It is readable and non-technical.)

5. The ECRI (Economic Cycle Research Institute) could hardly be more bullish. The recession is almost over, according to this highly accurate predictive organization.

So what gives?

The U. S. has outsourced much of its manufacturing to Asia. Year on year production declines in the exporting countries such as South Korea and Japan have been massive, in line with the California sales tax declines described in #4 above. Thus there has been a Depression ongoing in the U. S.; Paul Volcker euphemistically calls it the Great Recession. It basically is an old-fashioned garden variety business depression; the ECRI writeup discusses this. This old-fashioned economic downturn has led to the bankruptcy of GM (impending) and Chrysler; of major financial institutions; an unprecedented loss of jobs; record low interest rates in the Western world and globally; unprecedented intervention in the economy by the Bushbama administration(s) (e.g. the Establishment).

The reluctance of the media and government to tell the people the truth about the severity of this downturn; the sugarcoating of the economic data; the massive stock market manipulation that was overt last year and more veiled this year; the "business as usual" mindset of and governmentally toward Big Finance; and other considerations suggest that while the ECRI is going to be more or less correct, economic growth will begin from an amazingly low level. We will just have to see how frugal individuals and business are as matters unfold. Arguing against a 1920's-type massive boom is the absence of exciting new consumer "must-have" products.

In thinking of a resumption of economic growth, remember that for example since California's sales tax receipts drop by half, then they have to double simply to get back to where they were, and they have to rise more than that to keep up with inflation.

In a prior era of unbridled capitalism and dominance of financial interests, the Dow Jones Industrial Average first hit 100 in 1906. It left that number for good 36 years later, in 1942. A buy-and-hold investor had many thrills and spills, but only got to keep the dividend payments that flowed year after year. This sort of mindset has not taken hold yet and could work against a stock market recovery.

One could foresee almost any scenario for stock prices for now. Working against stock prices is that following old-fashioned financial panics and economic downturns, stock prices tracked dividend increases or decreases; and dividend yields were generally higher than corporate bond yields; and were always higher than Treasury yields. This is nowhere near the case now. I would NOT equate economic growth mechanically either to a rise in stock averages or to a rise in Treasury interest rates.

The same is true over the short term for gold, if anxiety decreases and inflation trends below expectations. If there is to be an economic upturn of uncertain duration, then short term medium quality corporate bonds might be sensible total return vehicles. 5-10 year Treasuries and muni bonds

More broadly, economic power follows creditors. The U. S. Government is a debtor; most states are major debtors; too many companies have too much debt; too many individuals have too much debt; etc. Thus, internationally-focused investing has to be the intermediate to long term focus of serious investors. Future posts will examine this theme in more detail.


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