It's Still The Economy, Stupid

Friday, February 06, 2004  

Job Growth is not Strong

What Atrios said, and then some.

January is typically the weakest month for job growth, as the temporary workers hired for the Christmas season are no longer employed. Not seasonally adjusted, nonfarm payrolls fell by 2.6 million in January. Typically, there is a symmetry beween the hiring during the Christmas season and the layoffs in January. As the Christmas hiring season was quite lame (743,000 hired between September and December, compare this to 2.2 million in 1998 and 2.4 million in 1999), the layoff season is less than usual as well. Add to this the move by BLS to concurrent seasonal adjustment (readjusting the data each month), which weights the most recent trends (poor employment growth) heaviest, and the "usual" amount of layoffs may not be usual at all. The usual amount of job losses between December and January was 2.7 million from 1994-1999 and were often closer to 3 million.

So people should be very careful of interpreting a 115,000 seasonally adjusted increase as "significant". I would not consider it significantly different from zero. Note also that last January had a similar increase of 104,000 seasonally adjusted. February 2003 had job losses of 159,000 and March 2003 had job losses of 110,000. This means nothing. The job market is still very weak, and it correlates with the Challenger report as well as yesterday's jump in weekly unemployment claims.

What Bush should be doing is putting effort into getting the GOP Congress to reauthorize the extension in unemployment benefits, putting money behind job re-training and Community Colleges, refunding the SBA, and providing alternatives for the people out of work. He is not, and that is yet another sign of total lack of compassion for the unemployed and underemployed, and yet another reason why his poll number suck so bad. The measley amount of money these efforts would require ($10-$20 billion) adds exponentially to the reality that this Administration has its priorities completely out of whack.

And the Chicago Trib has an article on the rise in self employment which always accompanies a downturn in payroll employment. The self-employed are not on payrolls (that is, if they are the only employee), and certainly these stories (all two of them) are well-educated employees with significant contacts in their old businesses who became consultants.

The majority of job losses since the employment peak of January 2001 have been throughout manufacturing (-2.77 million). These are industries like textiles and apparel (-289,500), computer and electronic products (-540,600), machinery (-314,400), and fabricated metal products (-280,000). The usual educational background of workers in these industries is high school education and they do not become "consultants" at their old firms. These jobs have been outsourced to China, India, etc. The average age of these workers is older, and they are having greater difficulty finding work. It doesn't help that older workers pay much more for health benefits (no longer paid by their employer) and are more frequently having their benefits cut off by their employer (who always say they can't afford it).

The mean duration of unemployment is currently 19.8 weeks, while the median is 10.7 weeks. Both statistics are typical for an economy coming out of a very deep recession. Figures for last January were 17.8 weeks and 9.3 weeks, respectively. For the 1982 recession, the peaks were 21.2 and 12.3 weeks, respectively. For the 1991 recession, the peaks were 19.0 weeks and 10.0 weeks, respectively.

To repeat, this is the weakest job market since the 1982 recession, and some measures are starting to equal numbers set back in 1982-83, when the unemployment rate hit 10.8%. While the nominal unemployment rate is 5.6%, that is the only statistic that is positive. When you add in the marginally employed, unemployment is 9.9%. And all the unemployment numbers are based on an extremely low rate of growth of the labor force. While the labor force was growing around 2+ million a year between 1992-2000, it has been growing at 1 million a year since 2001. If the labor force grew at a constant rate, we'd have 3 million more unemployed and an official unemployment rate around 8%.

posted by Teddy | 8:08 AM |

Tuesday, February 03, 2004  

I'm Super, thanks for asking, Tuesday update

Looks like Kerry remains the frontrunner, winning Delaware, Missouri and North Dakota, finishing a strong second in South Carolina, a strong third in Oklahoma. Edwards wins South Carolina and is neck and neck with Clark in Oklahoma, second in Missouri, tied for second with Lieberman in Delaware. Clark has taken a 760 vote lead in Oklahoma and finished a distant fourth in Missouri, South Carolina, and tied for fourth in Delaware. Dean has finished third or worse in every state and looks almost done. Lieberman dropped out. Sharpton pulled 10% in South Carolina and low single digits elsewhere. Kucinich has 6% in New Mexico (1% reporting) but is 1% everywhere else.

My guess is that Lieberman's support will mostly go to Kerry and about a fourth to Edwards. Sharpton will stick around until the majority of the South votes and then he'll probably award his support to Edwards or Kucinich unless he has enough delegates to warrant heading to the convention. Dean will need to win one of the larger states coming up like Michigan or he's through before the end of March.

At this point it looks like Kerry, Edwards and Clark. Sharpton and Kucinich will not be a factor except which camp they tell their supporters to and Dean looks on his way out. Clark also looks shaky, and will need to get some momentum soon or he may follow quickly after Dean. Kerry is the frontrunner, but as Edwards seems to pick up a good chunk of support the day before every single primary, you can't count him out as Kerry has only taken 50% or more in two states. My money is still on Edwards, as he's getting plenty of momentum and exposure (should his voice hold up), and his message is a bit easier to define (what there is of it). His focus on the economy(!) and jobs should definitely play well in MI, OH, IL, IN and PA, where Kerry would seem to have the natural advantage. But it's till very interesting with several months to go.

It will also be interesting to see if the ricin attack gives Bush much of a bounce in opinion polls. One out yesterday had Kerry beating Bush 53 to 46, and the President's approval ratings are back to the all time lows between 45-50%. The budget mess isn't helping, either.

posted by Teddy | 7:21 PM |

Cuttin and Pastin

Marshall Auerback hits multiple nails on the head regarding last week's change in Fed wording.

We still maintain that in the absence of a complete meltdown in the capital markets, the Federal Reserve is probably not keen to see a big appreciation of the dollar. On the contrary, it is happy to perpetuate the gentle declining trend. Of course, the danger of any trend, once it becomes firmly established, is to intensify, accelerate, overshoot, and ultimately spin out of control. It is the gentleness of the dollar decline that has accomplished at least 2 things: (1) It has kept the bid in the US debt market, which in turn has suppressed the mortgage interest rate and helped to absorb excess capacity, (2) kept the industrialists quiet about the effects of globalization/free trade, thereby reducing the dangers of a turn toward US protectionism which would be disastrous for all.

The change in language of the Fed should be understood in this context: it at least creates some doubt in the minds of speculators that the dollar is a one way bet, thereby helping to avert a dollar collapse. This also provides some support to beleaguered Asian central bankers apparently fighting a losing battle against accelerating dollar weakness, notably the Bank of Japan. Perhaps one should see Japan’s Minister of Finance Sadakazu Tanigaki’s comments, “Japan needs to carefully consider diversifying its official reserves to include more holdings of gold”, as a veiled hint that its seemingly endless support of the dollar will not go on forever. The Bank of Japan announced last week that it spent 7.2 trillion yen in the month of January, at the behest of the Ministry of Finance, to forestall further appreciation pressures on the yen.

That the Bank of Japan has intervened on such a scale suggests that the dollar’s fundamental weakness is far greater than has been hitherto implied by the relatively gentle decline in the dollar index. But for the BOJ’s unprecedented support, and (equally important) the renminbi peg (whose absence might also create a freefall in the dollar), the greenback might have already taken on status comparable to the Argentinean peso. Putting the odd bit of grit on the icy slope of dollar devaluation serves to prevent this fiasco from occurring, but it does not fundamentally change the underlying picture.

From a tactical standpoint, the Fed’s timing was impeccable: bond yields were near their 5 month lows, stock indexes were near 31 month highs, and so they felt they had some room to remove a clause they felt was doing more harm than good in terms of cultivating a policy of benign neglect in the external value of the dollar. It can be taken as a verbal tightening, but it is highly unlikely that the Fed has any real interest in changing the fed funds rate anytime soon.

From a relative perspective, keeping the Yen/renminbi appreciating less than the Euro helps Japanese and Chinese exports make inroads in Europe. For the mercantilist, export-driven growth economies of East Asia, accumulating $1,000 billions of ultimately worthless U.S. debts is a willing sacrifice - the yin to the U.S. yang.

Auerback then sets in for the kill.

The dirty little secret about the American economy today (that no central banker dare acknowledge publicly) is that there is no anti-inflation constituency left within the United States. There cannot be, given the preposterously high levels of debt, which makes the only socially acceptable policy response at this stage a deliberate policy of debt confiscating inflation. The ongoing weakness of the dollar over the past 2 years stems from the growing realisation that the United States cannot continue to be the source of global demand indefinitely, so long as its economic imbalances—from budget and trade deficits to record levels of private debt—remain firmly entrenched. Given the comparatively poor America social welfare safety net (in contrast to its Euroland counterparts), and its continued high levels of immigration, the political economy imperatives of the United States invariably push monetary and financial officials in the direction of growth, employment and higher inflation. There is no savings constituency to speak of any longer which might oppose this policy (at least in an electoral sense).
in a fiat currency system, any such constraint [to purchasing dollars] faced by a central bank is ultimately illusory. The BoJ is the monopoly supplier of yen. As long as private agents are willing to accept yen credits to their bank accounts, there is little besides pure accounting formalities between MoF and the BoJ that prevents the BoJ from creating and selling all the yen it desires in foreign exchange markets. There is simply no limit to the BoJ's ability to create its own fiat currency and sell it. Therefore, to state BoJ sales of yen are "extremely large" and "unsustainable" is to ignore the very nature of virtually unlimited money creation available not only to the BoJ, but to any central bank running a fiat currency.

In contrast to private sector agents, who do not have the endless capacity to create money out of thin air, central banks have an unlimited war chest with which to play this game. Eventually, these private sector agents will either have committed all their investable liquid funds to shorting the dollar against the yen, or their risk managers will swoop down and demand no further dollar short/yen long positions be put on given the existing extreme VAR's. Long before the BoJ runs out of yen to sell - which it can't, because it has the power to credit accounts with yen balances at will – private sector financial participants will find themselves tapped out of dollars to spend, or risk budget to spend, on this trade.

The unsustainability, in other words, rests entirely with the yen buying power of private currency speculators, not with the yen selling power of the BoJ. This asymmetry remains largely unrecognized because it is rare that a central bank is actively engaging in so massive an effort to depreciate its own currency. But because the BOJ has evinced its clear willingness to use the powers of the electronic printing press (at least whilst the dollar is trending around 105 to the yen) it is hard not to believe that it too has begun, albeit tentatively, to embrace a policy of competitive currency devaluation (although in the case of Japan, the political imperatives in relation to Washington and Beijing also militate against a substantially weaker yen above 120, particularly in a US Presidential election year, because of the protectionist pressures and competitive currency devaluation threats that such yen weakness would launch; so there are political limits today to yen weakness...

Although Auerback seems to think that it gives the U.S. an advantage (If every other country rushes to devaluate versus the dollar, woo-hoo! Cheaper goods for us!), this is not necessarily so.

The reason is that all this JCB money just sits there, doing nothing. The Yen reserves could be lent out to finance productive activity, but that is not the case. What productive activity do we need? The volume of complaints of China driving out jobs all over the world seem to rise by the day, as well as the complementary assertion that all this production is a bubble of its own - successful as long as it employs enough Chinese to keep a restive populace satisfied, and to keep vendor financing its very lucrative American customer.

Instead, the money simply rests in nonproductive activity, such as assets. While Japanese monetary base has jumped by 70% since the end of 2000, and foreign exchange reserves have nearly doubled since that time (coincidentally about the same amount, $400 billion), the result has been laughably little inflation or production within Japan itself. Milton Friedman must be rolling over in his grave (Oh, yeah. He's not quite dead yet - maybe Keynes is, though.)

And since this increases the ratio of unproductive assets (and liabilities!) to productive assets, it means the race to the bottom is really a race to zero returns.

Meanwhile, the other ratio rising is of speculative trading to actual trading. The problem with speculators is there's really no reliable way to know what they're thinking. A purely speculative economy is a zero-sum game that rests on the greater fool theory. Fortunately, there's no greater fool than the central banker, who will continue to lend at 1% while most borrowing rates are much higher. However, the more importance and money we devote to the speculator, the more unpredictable the markets, and those two little words excised meet quicker and more violent reactions when 1000 traders are slugging it out instead of 10, particularly when you've been cultivating an environment where "everybody knows" something. To find out you're wrong is a shocking experience, for everyone, to say the least.

More volatility in financial markets? Count on it. Opportunity for a major financial accident? Rising by the day. Ability of the Fed and central banks to control the monster they've created? Like an Indy 500 driver chugging beers in the cockpit. They may not realize it until the blowout occurs, but their ability to deal with financial problems has been seriously compromised. More to the point, there is an increasing number of things they cannot do. We cannot have deflation, yet we cannot raise interest rates (which would seem to be the case if we get inflation). We cannot let the dollar depreciate too much. We cannot let the U.S. economy slow down (bad economic news sends dollar buyers fleeing). We cannot have foreigners stop buying U.S. debt, and we cannot slow down our borrowing. As soon as those "invulnerable" institutions, these unshakable truths, have been tested and shaken beyond their means, things will certainly get interesting very quickly. We may find there are other things we cannot do.

posted by Teddy | 2:11 PM |

More Budget Unseriousness

George Bush's 2005 budget was released, and next to works by Austin, Twain, and Hawthorne, may go down as one of the greatest works of American fiction of all time.

Krugman really lays into him right away.

Well, whaddya know. Even as the Republican leadership strong-armed the Medicare drug bill through Congress, the administration was sitting on estimates showing that the plan would cost at least $134 billion more than it let on. But let's not make too much of the incident. After all, it's not as if our leaders make a habit of faking their budget projections. Oh, wait.

The budget released yesterday, which projects a $521 billion deficit for fiscal 2004, is no more credible than its predecessors. When the administration promises much lower deficits in future years, remember this: two years ago it projected a fiscal 2004 deficit of only $14 billion. What's new this time is that the administration has decided to pay lip service to conservative complaints about runaway spending.

While Krugman just hacks apart the 2005 budget, Calpundit notes that the Bush Administration has NEVER BEEN CLOSE with either revenue or spending projections in ANY of their budgets from 2001-4, and some of the assumptions in the 2005 budget are doozies. Referencing Daniel Gross over at Slate:

Not very confidence inspiring, is it? And as Gross points out, $2.04 trillion [in revenue] would be a 13% increase over 2004, a year-to-year increase bigger than any we've seen for the past 20 years.

Even the Washington Times notes that Bush has never issued a veto and, this being an election year, has no credibility to do so even by his own party. Hence the 2004 budget, long delayed, was passed with little fanfare and signed privately by Bush, who apart from riders on overtime rules had no significant spending issues addressed.

Despite economic growth, federal revenues are not growing. This is deeply troubling because it seems to be not growing even without the effect of the administrations penchant for giving much of it away via tax cuts and deductions. Let's face it, marginal spending is voluntary but marginal income is not. Even if the Bush Administration could possibly hold the line on spending, which it has never done, it would still be running $300-$400 billion budget deficits because the government seems to be stuck under $2 trillion in revenues.

To balance the budget, Bush (or his successor), will need to cut $400 billion from a $2.4 trillion budget where nearly two-thirds of spending is not discretionary. Right now the deficit is running at half of the $700-900 billion in discretionary spending. Fifty percent cuts in agency programs are simply not possible, so fantasy seems to be the order of the day. In short, the election year budget is a farce and should not be taken seriously.

Oh, and did I mention the budget doesn't include any money for Iraq or Afghanistan? Somebody must think we'll really be 100% out of both countries. It's a shame we can't keep those puppets in line.

posted by Teddy | 10:34 AM |