It's Still The Economy, Stupid

Friday, January 09, 2004  

Employment Situation for December

Employment skyrocketed by 1,000 in December. Bush is another 343,000 behind his tax cut pledge.

Despite positive data for manufacturing output, manufacturing employment was down 26,000 in December. Hours per week in manufacturing fell 0.1 hour. If there is any pickup in demand for manufacturing, it is not being reflected in either hiring or extra hours.

Unemployment fell to 5.7%. The recent decline has been entirely due to a lack of growth in the labor force. In June, when unemployment peaked at 6.3%, the labor force was 146.917 million. Last month the labor force was estimated at 146.878 million. A constant labor force participation rate would have meant unemployment at 6.2%. The unemployment rate assuming a constant labor force participation rate is somewhere between 7-7.5%. About 1.6 million more people have been classified as "not in the labor force" in the past six months.

It seems to me that the NAIRU (non-accelerating inflation rate of unemployment) has returned to the 6% level that prevailed for much of the 1980s and 1990s. The lower rate from the end of the 1990s appears to be due solely to the economic bubble. Unfortunately, this means that 2% of the labor force now unemployed has little chance to be rehired, short of another bubble.

Despite record economic growth, businesses are not hiring. Capacity levels are still below what normally accompanies hiring in manufacturing. Going forward, there appears to be little to suggest that the caution employers are now showing has any reason to lift. While the economy may add jobs over the next several months, I do not see the possibility of hiring in numbers corresponding to the strength of the recovery, nor in numbers able to make up the deficit in hiring. Bush will almost certainly go into the election as the first president since Herbert Hoover to have negative employment growth during his term.

posted by Teddy | 7:43 AM |

Thursday, January 08, 2004  

And I thought the GOP only screwed workers

Congress has "forgotten" to fund the Small Business Administration, which cannot meet demand for loans and has shut down.

The U.S. Small Business Administration has temporarily shuttered its most popular loan guarantee program because it cannot meet an unexpected surge in demand.

The closing of the 7(a) loan program pinches a key source of financing for many of the USA's 5.6 million small companies just as the economy is recovering, small-business advocates warned Wednesday.

The agency blamed Congress' failure to approve its fiscal 2004 budget, which began Oct. 1. That budget called for $9.4 billion for the loan program.

But small-business advocates and bankers said the agency underestimated demand.

"As the economy struggles to create jobs, now is not the time to cut off small businesses from access to capital," said Rep. Nydia Velázquez of New York, the ranking Democrat on the House Small Business Committee.

The Labor Department has recently been trumpeting their household survey, which assumes around 500,000 have left the workforce to start their own businesses in the past year (as opposed to the establishment survey, which is down around 2.6 million since Bush took office). With unemployment rates staying at high levels, is it really wise to cut all available options for most Americans to earn money? We can't all work at Wal-mart, nor would we want to.

posted by Teddy | 6:31 AM |

Wednesday, January 07, 2004  

Your daily dose of bad news/Whither China?

Despite the rising stock market, one-third of U.S. corporations with a pension plan are planning to freeze benefits if they are not given relief. After a short respite, credit card delinquency reaches a record high. Japan has spent $28 billion to strengthen the dollar in just two days. China will use $45 billion in reserves to recapitalize several struggling banks. How does your debt compare?. Which reminds me of an old joke: Which Japanese (or Chinese) owns your house?.

The article on the way China is recapitalizing was the most interesting. In order to recapitalize the banking system, normally the Chinese central bank would have to sell dollars (the majority of reserves are in dollars) and buy Yuan, but the article states that the banks are required to keep these reserves in dollars, so in other words this is simply a transfer of assets from one balance sheet to the other. In addition, the funds are being transferred largely to facilitate the global stock offering for banks: China Construction and Bank of China. While Chinese IPO's have lately been oversubscribed up 700-1 a Beijing analyst asks the pertinent question, "Why would anyone think these banks," which have bad loans anywhere from 20-50% of total assets, "have changed their behavior?"

The stock offering would increase the reluctance of Chinese to revalue the Yuan anytime soon, as any appreciation of the currency would devalue the banks' dollar assets. At the same time, if the banks do have significant problem loans, they may still need to liquidate these assets to provide working capital, and this probability increases with the proportion of assets that are recapitalization funds. This is a catch-22 for China similar to the one that is also enveloping the Japanese economy. A proper recapitalization of the banking system would mean dumping a significant number of dollar assets on the market and incurring a considerable loss on the remaining dollar reserves (in order to give the banks Yuan for working capital and to make new loans). At the same time, this would mean an erosion of the advantageous terms of trade with the U.S. and Europe. But protecting the exchange rate with the dollar is becoming exponentially more expensive by the day. Neither Japan nor China can commit any funds to developments like improving the power distribution system, when they instead commit the money to buying U.S. treasury, agency and corporate debt.

At the same time, Chinese real estate is looking more and more bubble-icious. As the Chinese know very well that the real estate bubble in Japan is the origin of Japanese banking problems, they are surely reluctant to do anything to pop this bubble, which would only compound the bad loan problems in their banking system.

As a result, I think the global reflationary effort will hinge on what China does. China, just as much as the U.S., needs to generate significant domestic inflation at some point to reduce their burden of bad debts. But how to accomplish this when growth is already straining the infrastructure within and worsening global overcapacity without? No wonder China is still go any which way on the Yuan: revaluation, devaluation, or a multicurrency peg and are still "studying" the issues. Ultimately, all these roads lead to the liquidation of dollar assets, and with trade relations with the U.S., North Korea and Taiwan ongoing, it's difficult to entertain policy going against U.S. interests. Yet the decision will have to be made. The question is will it be made in 2004. Could the ultimate "October surprise" come not out of "Bush's Brain" but somewhere else?

posted by Teddy | 12:00 PM |

Tuesday, January 06, 2004  

Thinking about the next slowdown

There I go again, thinking ahead.

We survived 2003 thanks to the continuation and expansion of the greatest credit bubble in history. By the end of 2003, the ratio of debt to GDP should be 3.1 to 1. In 1982, it was 1.7 to 1. In 1990, it was 2.3 to 1. In the last four quarters, we've added $5 of debt for every $1 of GDP. The new Z-1 tables will be out on January 8th, and I don't anticipate they will be good news.

Japan, China and the rest of East Asia are lending us about $1 trillion a year just to keep our currency from depreciating too quickly. Private investors bailed out last year, so the central banks had to step in. It hasn't helped much. The Euro is up to a record high of $1.27 today. The Yen is up to 106 to the dollar. If China were to revalue the Yuan, we would see a very quick uptick in inflation. We're already seeing a jump in raw materials prices because the Chinese are starting to buy them instead of our debt securities. Either we get inflation, companies sacrifice profits, or we borrow even more, inflating our debt instead of our CPI.

And at some point, there will be limits to how much we can borrow. The ratio of debt to income will eventually backtrack to more sustainable levels, someday. Foreign central banks are clearly nervous, and there are scattered voices among economic commentators that maybe, this time, the dollar reserve monetary system may be ending once and for all. China is considering repegging the Yuan to a basket of currencies, for one.

If there is such an adjustment, there are two ways that debt to income levels can return to normal. The first is a debt-deflation that reduces debt levels through default. This will also crush asset prices. We should hope we don't go that way. A more likely candidate is a resurgence of inflation, which boosts nominal GDP relative to debt levels. The Federal Reserve is certainly hoping for the latter outcome. The only difficulty is that if official inflation picks up, then there will be upward pressure on interest rates as well. In an economy living and dying by monthly payments and refinancing, and growing numbers of people converting to adjustable-rate mortgages, a rising interest rate environment contains its own corrective mechanism. If we can no longer reduce monthly payments (or if they increase), we can no longer spend and the economy slows down again.

And we used a big chunk of the leeway we had just to get through the year. Thanks to the tax cut, the federal budget deficit is expected to be around $500 billion or almost 5% of GDP. The Federal Funds rate remains at a 50-year low at 1%. Thanks to the largesse of our foreign creditors and money market funds yielding nothing, we were able to fund any bond issue that dollar borrowers needed to float, particularly if it was corporate and high yielding, and yield spreads fell to levels not seen since the bubble years. Everything went right, and there is little room for improvement. If the economy were to slow down, there simply aren't a lot of resources left.

During periods of economic growth, we should see a gradual reduction in borrowing, particularly by the government. We should see a resurgence of employment - 300,000 jobs a month, not 100,000. We should see the Fed boosting interest rates, not keeping them at obnoxiously low levels. That we are not seeing this taking place belies the daily blathering of a strong, recovering economy. Things are not right at all. Current policy is contradicting decades of economic thinking. NAIRU and Taylor's rule are out the window. Doesn't that seem odd?

So what happens as the economy gradually slows down? Economists certainly don't believe we can keep 8% up forever. Paul Kasriel is predicting a 3.7% growth rate for the fourth quarter. After that, what if we don't get 4% GDP growth as far as the eye can see? Will employers want to hire? Will the government be able to engineer another tax cut? Will the Fed lower interest rates, and will anyone care? Will states be able to stay solvent? Will housing prices go up another 10%? Will the falling dollar finally increase CPI inflation, or will we just be able to inflate our asset prices and debt levels for another year?

Things certainly look shaky at present. We've been seeing one good piece of economic news followed by one bad piece. Again, not the stuff that sustainable recoveries are made of. I think the most likely scenario is that a slowdown in the U.S. will impact other nations first. South Korea has a significant consumer credit bubble. Mexico would be immediately impacted by a decline in U.S. imports. Japan and Europe are already tottering on the edge of recession. At that point, they will have to decide whether to keep financing our borrowing binge or start redlining us. The next six months are going to be key to whether Bush gets re-elected. If things start to slow down abruptly, he is going to be toast.

posted by Teddy | 8:45 AM |

This is just shameful

Sweet Jeebus. The Department of Labor advising businesses on how to not pay workers overtime.

WASHINGTON -- The 1.3 million low-wage workers the Labor Department says will be guaranteed overtime pay as part of new rule changes may not necessarily see any extra cash.

While touting the $895 million in increased wages it says those workers would be guaranteed from the changes, the Labor Department is suggesting ways employers can keep their labor costs from going up.

Among the options: cut workers' hourly wages and add the overtime to equal the original salary, or raise salaries to the new $22,100 annual threshold, making them ineligible.

The department says it is merely listing well-known choices available to employers, even under current law.

Bullshit. The object of the Department of Labor is to protect workers: their wages, their benefits, and their rights. This is the opposite. It undercuts anything the Department can say about protecting workers. At this point, they might as well rename it the Department of Profit Protection and get it over with.

Here is the Department of Labor's mission statement.

The Department of Labor fosters and promotes the welfare of the job seekers, wage earners, and retirees of the United States by improving their working conditions, advancing their opportunities for profitable employment, protecting their retirement and health care benefits, helping employers find workers, strengthening free collective bargaining, and tracking changes in employment, prices, and other national economic measurements. In carrying out this mission, the Department administers a variety of Federal labor laws including those that guarantee workers’ rights to safe and healthful working conditions; a minimum hourly wage and overtime pay; freedom from employment discrimination; unemployment insurance; and other income support.

Funny, I don't see anything in there about cutting overtime benefits for 8 million workers and advising businesses how to not pay overtime for 1.3 million more. Labor Secretary Elaine Chao should resign. She is a disgrace to her office.

posted by Teddy | 6:50 AM |