Valero Energy has just announced it is shutting down its Delaware City Refinery.  This is a major news announcement because refiners should be seen as a canary in the coalmine for end-user demand and Valero is one company in the oil patch which has been loath to cut workers to improve the bottom line. This announcement is an indicator that, despite a technical recovery, the economy still has major obstacles to overcome.

Business Wire reports:

Valero Energy Corporation (NYSE: VLO) announced today it intends to permanently shut down its Delaware City refinery due to financial losses caused by very poor economic conditions, significant capital spending requirements and high operating costs. The shutdown will affect approximately 550 employees at the plant.

Valero notified refinery employees today of the impending shutdown, and will immediately begin negotiations with the refinery’s unions regarding the effects of the plant closure and the employees’ severance packages. A safe and orderly shutdown of the refinery will commence immediately. Valero remains committed to its marketing businesses in the Northeast and will continue to reliably supply its customers, partially through higher throughput rates at the company’s other refineries.

“The decision to permanently close the Delaware City refinery was a very difficult one,” said Valero Chairman and CEO Bill Klesse. “We have spent the last year diligently trying to avoid this situation, and I have worked closely with Gov. Markell in an effort to find a different outcome. Earlier this fall, we shut down the gasifier and coking operations in an attempt to improve reliability and financial performance, but the refinery’s profitability did not improve enough. Additionally, we have sought a buyer for the refinery, but feasible opportunities have not materialized. At this point, we have exhausted all viable options.

“We realize that the decision to close the refinery affects many employees, their families, and the community. We are thankful to our employees for their service, and we will treat them fairly during this difficult period.”

In the fourth quarter of 2009, the company expects to report a pre-tax charge of approximately $1.7 billion to $1.8 billion, or $2.00 to $2.15 per share after taxes, related primarily to asset impairment, employee severance and other shutdown costs. The company estimates the cash portion of the pre-tax charge will be in the range of $125 million to $150 million. The current and historical financial results of the affected operations will be shown as discontinued operations in the company’s financial statements.

The new CEO Bill Klesse came to Valero via Ultramar Diamond Shamrock (UDS), which Valero acquired at the top of the market in 2001. So, company ethos may be different than under Bill Greehey who was very committed to community. And Delaware City is an old Getty/Shell-Motiva oil refinery and a legacy asset of Blackstone-controlled Premcor, the company run by former Tosco head and Salomon Brothers commodities trader Tom O’Malley. So, it was not core to Valero’s operations. Valero already cut staff there in September. And the Shell-Motiva JV had serious operating difficulties with the asset before offloading it to Premcor.

Nevertheless, this was a refinery which has been upgraded significantly to process less expensive heavy, sour crude oil. The fact that Valero is laying off workers and shuttering the entire site tells you that the situation is bad. They are saying in effect “we cannot continue to operate at a loss through this business cycle.” If Valero can’t make money, no oil refiner can.

I see this in a macro context as a sign of cyclically weak end-user demand.  I do think peak oil is for real but the world is awash in oil and oil products right now.  Witness the recent post by FT Alphaville’s Izabella Kaminska, which points to a glut of distillate entering the season of high distillate demand:

We feel it’s Olivier Jakob at Petromatrix who really expressed the matter best on Friday. As he wrote (emphasis FT Alphaville’s):

As per our Tuesday ad hoc note on floating stocks; on a crude equivalent basis all of the OPEC and half of the IEA estimated oil demand growth for 2010 is already parked at anchor in floating stocks and these idled cargoes filled with oil are getting more and more attention.

By the end of the winter there is likely to be as much distillates afloat as in the total US at the end of winter 2007 and we expect that it will be more and more difficult for some of the Wall Street commodity banks to avoid mentioning the subject and to continue to hide the floating storage fill-up as “demand from emerging economies”.

The ICE Gasoil contango is currently widening and this will not work towards the reduction of these floating stocks. In an environment of spare refining capacity the only solver to the growing floating stocks of Distillates is a sharp reduction in OPEC supplies [ahem…Daily Mail], but only lower prices would trigger that.

The only answer that we see to GOD (Glut of Distillate) is a flat price correction sharp enough to force more OPEC supply cuts.Starting 2010 with WTI at 80+$/bbl and a contango in a low demand environment there will not be much returns to be expected from commodities by some of the largest financial institutions; hence with the evidence of the GOD being harder and harder to hide we would not be surprised if in a few weeks some of the Wall Street commodity banks start to change their tune and start to publicize the GOD. A flat price correction would anyway be needed in the first quarter to allow a repositioning from the large financial players at better entry levels.

Which, of course, doesn’t mean banks have been hoarding oil in a bid to drive the prices up. It means, if anything, they’ve been too slow to acknowledge the extent of the oversupply in the market and degree of muted demand, as well as depended too much on the idea that economic recovery will help spur demand by the year’s end.

Meanwhile, as Jakob states, the solution to the glut lies in Opec shut-ins — not more output.

The fact that oil is trading at $80 a barrel in this climate should tell you that it is trading more as a financial asset than on supply/demand imbalances. Is this why Warren Buffett is buying yet more oil assets? Watch refining margins; they are telling indicators.

Disclosure: I have owned owned shares and call options in Valero and other refiners for a number of years, but I sold all positions in 2007.

Related posts:

• Refiners as proxy for demand: layoffs for first time at Valero
• Valero crushes earnings: I was wrong
• Refiners as a canary in the coalmine
• Stocks pummeled as value plays increase
• Germany: Hertie as a symbol of recession

Video embedded below

Related posts:

• Bill Gross thinks the June unemployment data is bad
• Bill Gross: Fed on hold through 2010
• Bill Gross: Sell equities and buy Treasuries
• Bill Gross: “almost all assets appear to be overvalued on a long-term basis”
• The $1 trillion deficit: has Bill Gross gone crazy?

Initial jobless claims for the past week were 505,000, tied with last week for the lowest since January. This brings the 4-week average down to 514,000, the lowest since November of last year and the 11th consecutive week of declines. 

Clearly, fewer people are losing their jobs.  But, 505,000 is still a large number – one consistent with a net loss of 150,000-200,000 jobs per month. And there are still 5.6 million people with continuing unemployment insurance claims, 1.8 million more than at this time last year.

I see this as reflective of an inexorable but slow decline in layoffs complicated by a lack of new jobs, which will keep unemployment elevated as far as the eye can see. So, yes, the employment market in the United States is improving. But it is improving slowly, leaving many long-time unemployed workers bereft. This is what is called structurally high unemployment – and its happening at a level much higher than even I thought likely.

Here are two nuances in the data flow.

Dichotomy in seasonal and non-seasonal data.

All of the numbers above are seasonally-adjusted data. But, I tend to think they overstate the number of job losses (this particular point puts me somewhat at odds with David Rosenberg).  My reason is simple: we are in the recovery part of the business cycle, which means that any seasonal adjustment bias will tend to elevate the numbers.

For example, when you look at year-on-year numbers, the seasonally adjusted continuing claims data show an average 1.82 million more workers filing claims. But, the non-seasonally adjusted data show 1.56 million.  That’s a pretty sizable difference. This leads me to conclude that the seasonal adjustments may be overstating continuing claims.

Year-on-year data much worse for continuing claims

On the other hand, the initial claims numbers are flat with year-ago levels. While, as I indicated above, continuing claims are greatly elevated. To me, this points to the likelihood that the unemployment rate will rise much higher. Last year, we were seeing 500,000 layoffs as well. Yet non-farm payrolls were declining at a greater rate (380K in October, almost 600K in November and almost 700K in December). I see only two ways this is possible: 1. more people are getting hired today so the net job loss is less; or 2. more likely, non-farm payrolls understate the number of job losses because of losses not tracked in small businesses.

I have not been able to reconcile these two points. I hope to see a trend which explains both points develop in the coming weeks.

Related posts:

• US Jobless claims decline in latest week
• Initial and continuing jobless claims decline
• Jobless claims in second week just over 600K
• Jobless claims fall again due to seasonality
• Jobless claims rise 30,000 from artificially low number

Today, I want to run a few thoughts by you courtesy of John Mauldin.  In his recent weekly newsletter, he makes a number of points I have made here over the past few weeks and comes to a similar conclusion about the weakness of recovery and the likelihood of a double dip recession.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:http://www.frontlinethoughts.com/learnmore

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. "Ah," they said, "less competition. Our competitors have gone out of business."

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter’s creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won’t know for some time, as the stimulus is just getting ramped up. "According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly." (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away. The Pew Study shows that at least nine other states are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

"Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

"The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on "shovel ready" infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market."

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

In August, I did an interview with CNBC from Leen’s Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month, let alone adding the needed 250,000.

Look at the chart below. It shows the establishment survey employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job of taking that speculation of mine and putting it into a spreadsheet that helps us get a real handle on what unemployment is likely to look like for the next ten years. I am going to make use of his basic analysis and then modify some of his assumptions in the spreadsheet he provided me, in order to think about different scenarios.

All three scenarios are based on assumptions, so let’s see what Mish started with. There is a wealth of data available from the Bureau of Labor Statistics and the Census Bureau. According to the Census Bureau Population Estimates we are going to add about 2.5 million working-age (16 years old and up) citizens a year, from now until 2020. The numbers varies slightly year to year. Mish used an estimate of the average, summing up the buckets from 16 to 100+ for the years in question and rounding the result.

You can go to the BLS site and look at Table A-1, which shows the civilian noninstitutional population (those over 16 not in prisons), the participation rate (those who are working and/or want to work), the unemployment rate, the number employed, those not in the labor force, and those who want a job. Those are starting numbers for the charts below.

For those interested, you can read Mish’s very full (and quite detailed) analysis at his blog site http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html). But let’s look at his assumptions:

• Job losses are likely to continue for a minimum of another year.
• When job gains start, they will be very slow at first, then pick up.
• An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.
• A falling participation rate (boomers retiring) will continue to mask reported unemployment.
• Starting in 2013 the labor pool will start decreasing because of Boomer demographics.
• The noninstitutional population will rise by 2.5 million workers a year.

The spreadsheet below needs a little explanation. Let’s start with the assumptions. Mike starts with current working-age population and adds 2.5 million people a year. He assumes that Boomers will retire at 65 (something which all the surveys say is not going to happen). And his last estimate is what the unemployment numbers will be. Everything else is based on those assumptions, which leads to the first column, or the expected unemployment number.

By the way, we know that everyone will want to make different assumptions. I am going to create three scenarios, but you can go to Mike’s blog and at the bottom of the post is a link to the actual spreadsheet. Have fun. Let’s look at scenario 1.

This assumes there is no double-dip recession, and jobs roughly rise along the same lines as the last recovery. Actually, Mish is far more optimistic, as in the very first chart you will notice that job losses were negative in the first year after the end of the recession and flat the second year. Mish has jobs rising by 120,000 next year and 600,000 the second year (2011), and then a fairly robust recovery. Below is the graph of the unemployment numbers under such a scenario.

Notice that unemployment stays at or above 11% for three years. Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

Let the Good Times Roll

What would it take to get back to 5% unemployment? I played with the spreadsheet and came up with the following numbers, which get us below 5% by 2020. I assume no recessions for the next ten years, and 2 million new jobs a year after 2011, which I start off with almost 1.5 million jobs. Of course, we have never done that, but let’s be optimistic.

And the graph below shows the unemployment numbers for the Good Times Scenario.

Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

The Quick Double-Dip Scenario

When I called the last two recessions about a year before they happened, it was not all that hard. We had inverted yield curves, falling leading indicators, and a lot of other data that pretty much pointed to a recession. Believing that we had a housing bubble and a looming credit crisis also helped my conviction in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit there will be little if any statistical evidence in advance this time. This is more of an instinct call. I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is a very bad idea in a weak economy. Small businesses are where the job growth comes from. Taking money from productive businesses and giving it to government is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then maybe we avoid the double dip. But right now it doesn’t look like that will be the case. So, let’s quickly see what a double-dip scenario might look like. Let’s be optimistic and assume we only lose another 1.2 million jobs in the next recession, since we have already lost so many in this one (8 million and counting). And then the economy comes roaring back in 2012 with 1.5 million jobs and continues to grow rather smartly for the rest of the decade. No further recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above 10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise to between 12-13%. The former Merrill Lynch economist was one of the few mainstream economists who called the recession and the credit crisis. The so-called "Blue Chip" economists told us at the beginning of 2008 that unemployment would peak out at 6%. While Rosie is not optimistic of late, he has a rather solid record of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it’s getting late, so let me close with a few thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive. As I’ve noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity. Over the next few months, I will write more about how to do that.

Related posts:

• Comprehensive unemployment rate is 17.5%
• Payroll data mixed despite the bullish headline job loss figure
• Are jobless claims pointing to structurally high unemployment?
• Unemployment numbers still point to partial recovery
• US unemployment hits 5-year high of 6.1%

From Bloomberg:

Confidence among U.S. consumers unexpectedly dropped in November as the loss of jobs threatened to undermine the biggest part of the economy.

The Reuters/University of Michigan preliminary sentiment index decreased to a three-month low of 66 from 70.6 in October…

Rising joblessness puts the economy at risk of slipping into a vicious circle of firings and declines in consumer spending that will limit the emerging recovery.

I don’t pay as much attention to consumer confidence as I do to some other economic data because I have yet to see enough statistically significant correlations between confidence and future economic paths.  However, I do realize there is a connection having recently posited the following about a term I coined unemployment rate illusion:

behavior changes in accordance with the nominal numbers used as economic signposts in an economy…

The parallel of money illusion to unemployment rate illusion is that a higher posted rate of unemployment can have a serious negative impact on consumer confidence and personal consumption (think balance sheet recession). All else being equal, higher unemployment rates mean lower confidence and consumption…

• If people see 12-13% in 2010, they will be floored, angry, and looking for someone to blame. As Democrats control Washington, they will get the lion’s share of the blame and lose big time in 2010.
• Making matters worse, this is the kind of shock that causes people to put their checkbooks away and go home for the night a.k.a sending us into a double dip recession.

So I am concerned that we are going to se a relapse. (Note: I have moved from seeing a double dip recession as a 1/3 chance to a base case scenario). My optimism about recovery is now fading.

Unfortunately, similar downbeat confidence numbers are also coming from the Conference Board index which unexpectedly fell in October:

The Consumer Confidence Index, released by The Conference Board, sank unexpectedly to 47.7 in October — its second-lowest reading since May.

Forecasters predicted a higher reading of 53.1. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

The index has seesawed since reaching a historic low of 25.3 in February and climbed to 53.4 in September.

The connection to markets comes again via David Rosenberg from this past October 29th who I seem to be quoting a lot recently. In reference to the Conference Board numbers, Rosenberg said (highlighting added):

So many people are deluding themselves that we have some sort of durable recovery on our hands and yet consumer confidence, at 47.7 in October, is unbelievable — the lowest this every got in the 2001 recession, which included the 9-11 terrorist attacks, was 84.9. Think about that for a second. If the equity market is catching on to the view that we could be in for some slowing in the data, then a significant correction after a 60% surge is very likely. This is a time to be raising cash if you haven’t done so already — valuation, technicals, fund flows and fundamentals at this juncture are all near-term obstacles.

Related posts:

• Consumers ‘do believe in the green shoot story’
• Unemployment rate illusion
• The slow but inexorable decline of jobless claims
• A note on government statistics and unemployment
• Data on past consumer deleveraging during recessions

This morning, David Rosenberg of Gluskin Sheff had another wonderful piece. I am only going to take on one part of it here. I have linked to the full article below so that you can read his analysis in it’s entirety (registration free but required).

The part I want to focus in on has to do with GDP revisions. Basically, the GDP numbers the U.S. government releases are always revised when more complete data come in. Often the data come in years later via tax returns and other slower-to-report channels, so we can get huge disparities in what was reported at the time and what ends up being the final data series. Rosenberg thinks Q3 is going to see major, major downward revisions because of small businesses.

He says the following (highlighting added):

We noticed an interesting piece of research on U.S. GDP from Goldman Sachs’ Economics team that’s worth highlighting. The team questions whether the official government GDP statistics capture how poorly small businesses (ie, sole proprietorships) are doing. The weakness in small business sentiment is seemingly at odds with the recent 3.5% Q3 GDP reading but may explain why the unemployment rate has continued to steadily increase. Part of the reason for small business weakness is that most don’t have the same access to credit as larger firms and larger firms’ output tends to be better captured in the GDP data. While sole proprietorships tend to be small they collectively account for a nontrivial 17% of the U.S. economy.

The Goldman team uses a couple of different statistical approaches to test their thesis. They use timely data from the National Federation of Independent Business (NFIB) confidence survey, which shows that despite a recent improvement, confidence remains exceptionally weak (in fact two standard deviations below long-run trends). The first model suggests that the NFIB survey is consistent with overall GDP growth of 2.5% to 3.0% — not the 3.5% reported. As well, they find that current NFIB readings are more in line with below-50 readings on the ISM manufacturing index versus the actual reading of 55.7.

The second approach has to do with revisions to the GDP data and their relationship to the NFIB. U.S. GDP goes through many revisions as more, and better, information becomes available with lags — historically preliminary numbers are revised down by almost 0.5 percentage point. This second model suggests that Q3 GDP could be revised down by as much a 1-2 percentage points.

Translation: small businesses are suffering disproportionately because of a credit crunch. Their pain is not adequately reflected in the numbers because of big company bias in real-time data. GDP growth is probably much lower than we realize.

This view is consistent with the dichotomy in the BLS (Bureau of Labor Statistics) household survey used to calculate the unemployment rate and the establishment survey used to calculate non-farm payrolls.

See the data below and pay attention to the area highlighted in red:

That shows employment levels dropping off a cliff over the last three months in the household survey. While I question the magnitude of the fall given the weekly jobless claims data, these numbers are much worse than the job losses seen in Non-farm payrolls. Directionally, this has to be right, meaning the 530,000 weekly claims was probably translating into something more like 300,000 job losses than the 200,000 reported. Again, underreporting of small business distress explains the difference.

My conclusion based on that we are still seeing about 500-510,000 jobless claims is that we are around a 200,000 job loss level at present.

As for third-quarter GDP growth, it is most certainly lower than 3.5%. How much lower? We won’t find out for years to come.

Toast with Dave (pdf)– David Rosenberg, Gluskin Sheff

Related posts:

• GDP revisions are out
• Last week’s employment numbers
• Rosenberg: “the mother of all jobless recoveries”
• GDP benchmark revisions coming on Friday
• US GDP comes in at minus 1%

The latest number on unemployment claims shows a seasonally-adjusted 502,000 people applied for unemployment insurance last week, bringing the more meaningful 4-week average down to 519,750, the lowest since late November 2008. That is a good thing because it shows the labor market is improving.

Nevertheless, 500,000 initial claims in an environment of reduced hiring is still consistent with the loss of 200,000 jobs monthly.  We really need to see this number hit 450-475,000 before non-farm payrolls increase.

Of course, seasonal adjustments are a big factor here going into the holiday season.  Actual claims were 529,446, which is up nearly 50,000 from the prior week. The pre-New Year’s seasonal adjustment peak comes in early December (140% adjustment down) followed by another peak in early January (up to 180% downward adjustment).  If we see smaller spikes in these weeks (last January hit a peak of 956,791 actual claims), then this could be a harbinger of better to come in Q1.

Source

Unemployment Insurance Weekly Claims Report – U.S. Department of Labor

Related posts:

• A sustainable recovery with 530,000 weekly claims?
• Better last claims report before employment number
• Unemployment claims falling faster than in half of past recessions
• Jobless claims stuck near 530,000, point to structurally high unemployment
• U.S. initial jobless claims fall 21,000 to 554,000

I have just taken a look at the consumer credit figures for September, released just yesterday by the Federal Reserve. The data do show some modest deleveraging, especially when looking at the recent increase in nominal GDP. However, it is still not clear to me that the scale of deleveraging is great enough to induce a recessionary relapse.

My baseline for deleveraging is Debt to Nominal GDP – when debt to GDP goes down, that shows deleveraging. For example, for the latest data released in September for Q2 2009, Private sector total debt to GDP (incl. financial services) in the U.S. was 292.2% of GDP. Because of the huge drop in nominal GDP, this was actually up from 283.0% when the recession began in Q4 2007. For households, the number was 96.8% in Q2 2009, up slightly from 95.9% at the end of Q4 2007.  What this shows is that deleveraging has yet to begin in earnest as debt levels have remained relatively high even while GDP had collapsed.

The lack of deleveraging is probably a result of financial stress. In the Great Depression, the personal savings rate dropped from 4.5% in 1929 to 4.1, 3.9, –0.9, and finally -1.5% in 1930-1933.  People had to use savings to service debt as the deflationary spiral took hold.

So, in the absence of quarterly data on debt levels, I look at data from things like consumer credit for a proxy.  On a seasonally-adjusted basis, consumer credit declined to $2.471 to $2.456 trillion. That is the lowest since June 2007 and marks the ninth consecutive monthly drop.

However, looking at the non-seasonal data makes plain what is happening:

Nonrevolving credit is now increasing along with GDP. Look at the area highlighted in red; that coincides with the 3.5% real GDP print we just saw. On the other hand, revolving credit is getting crushed. Below is the reason why (click to expand):

Credit from commercial banks and savings institutions have dropped off a cliff.  When you hear people saying that banks aren’t lending, this is what they are talking about. In Q3, banks are lending again (think cash for clunkers) because nonrevolving debt is up.  That’s also why GDP is up. But, revolving credit lines (credit card lines) are being cut.

My conclusion is largely the same as last month, namely I had anticipated more deleveraging than we are seeing. However, consumer credit is only coming down on the nonrevolving side. And given the stabilization in house prices and increases in refinancing activity, I wouldn’t expect mortgage debt levels to be down substantially. When we see Household Debt to GDP levels from Q3, they probably will not be substantially lower than they were in Q2.

This does support recovery but only at the risk of continued high levels of debt to GDP.

G.19 data series – Federal Reserve

Related posts:

• Data on past consumer deleveraging during recessions
• Consumer credit falls 4.4% from year ago levels
• Why is everyone saying consumer credit is falling? It’s not.
• Do the personal income data demonstrate unbalanced reflation?
• Household debt as an indicator of secular bull and bear markets

While I see the job numbers as pretty much what was expected, the data do make clear that we are seeing a major jobless recovery. David Rosenberg has a piece out today that goes right to the heart of the issue:

All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.

But while Uncle Sam can try and stimulate spending on autos and housing and even mortgage credit via the myriad of policy measures that have been undertaken, the return to job creation is as elusive as ever. It is hard to fathom that, according to the White House estimates earlier this year, the stimulus was supposed to help cap the unemployment rate at 8.5%. Here we are today with both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%. While real GDP did manage to rebound at a 3.5% annual rate in Q3 — stagnant if not for the government incursion — those dual 10%-plus figures cited in the previous sentence highlight the fact that GDP is not the only barometer of a nation’s economic health.

TODAY’S HEADLINE PAYROLL PRINT CONTAINED TROUBLING SIGNPOSTS
While the government can try to induce people to spend, no recovery can be sustained without a resumption in job growth and October’s employment data contained some troubling signposts.

While the -190,000 headline nonfarm payroll print was not that far off the consensus, and while there were upward revisions to the prior two months (of over 90,000), the major problem is that the Establishment Survey, at this time, is missing a very important part of the story, which is the strain that the small business sector continues to face. Small businesses have less cash on the balance sheet, less access to credit and less exposure to overseas growth dynamics compared to large companies. The Establishment Survey (nonfarm payrolls), has a “large company” bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recessions.

My interpretation of this is threefold:

• The headline data understate the severity of the problem because of “large company” bias and a low labor force participation rate. In reality the U-6 number of 17.5% is more reflective of the state of the economy – and that is a depressionary number.
• To the degree you expect the recovery to continue, labor force participation rates should be increasing, not decreasing. In my previous post, I failed to point this out, leading to the conclusion I saw the data as a net positive. I see the data as a net wash – as it was in line with expectations. However, when discouraged workers come back into the labor force, we are going to see a much higher headline unemployment rate.
• Given the fact that unemployment is pointing to depression but we are in a recovery, you should conclude that this recovery will fade once government stimulus is removed.

Lunch with Dave — U.S. Payrolls: 10-Plus (PDF, registration free but required) – David Rosenberg, Gluskin Sheff

Related posts:

• The weak employment situation summary for June 2009
• Payroll data mixed despite the bullish headline job loss figure
• Comprehensive unemployment rate is 17.5%
• U.S. employment data in line with estimates
• Payrolls fall by 159,000 in U.S.

The employment market is pretty grim. We’re talking a double digit unemployment rate – and that’s just the base rate. The comprehensive unemployment rate is now 17.5% in the US.  This is a fact not lost on our politicians. Today, Barack Obama signed a bill that extends unemployment benefits and home buyer tax credits. But,, let’s parse the data to get a real read of what’s happening.

The household survey

The unemployment rate is based on a household survey. Basically, the Bureau of Labor Statistics (BLS) asks a bunch of people, “do you have a job?  No? Are you looking? By asking enough different people these questions, the BLS can produce a statistic to represent the nationwide unemployment rate. That number is currently 10.2% – or 15.7 million of a labor force of 154.0 million in a population of 236.6 working age folks.

The two things to note are the rate 10.2% and the participation rate, now 65.1%, the lowest in 23 years. What this is telling us is that the actual toll of joblessness is much higher than 10.2% because a lot of people have given up looking for jobs.

The numbers above are all seasonally-adjusted. So, the true picture could be somewhat better because without adjustments the number of unemployed is actually 14.5 million, 9.5% of the active labor force and down from 15.2 million in August. Either way, it’s still a grim picture.

I actually like to watch year-on-year data as an indicator of directionality.  On this front, the report is looking much better. The increase in the number of unemployed is down from a peak of 6.0 million (6.2 million unadjusted) to 5.5 million (5.1 million unadjusted). So the year-on-year rate increase is now 3.6%, down from 3.9% in June.  Again, these numbers are grim (the peak y-o-y change was 1.8% in 2001, for example). But the direction of change is now down.

The establishment survey

This is where the BLS gets non-farm payrolls (NFPs), the number of job losses per month. Non-Farm Payrolls (130.8 million) are now at their lowest level since March 2004 (also 130.8 million). And if one goes back to the period before the previous recession, NFPs were 132.5 million in February 2001. That means we have lost 1.7 million jobs over a nine-year time frame. This is an ugly data point.

The silver lining here is that both unadjusted data and y-o-y changes are better. NFPs are now 132.0 million unadjusted and that is up 1 million from 2 months ago. year-on-year changes are now falling. Translation: the labor market is still grim, but the worst is over.

My read of the data is this: There were no big surprises. I expected losses of 200,000 based on the ADP number and the jobless claims numbers.  Yes, there was a jump in the unemployment rate, but jump was misleading because of a falloff in the labor participation rate. On the whole, the employment market is weak, but it is not deteriorating. Can we sustain a recovery even so? Probably.

Related posts:

• The weak employment situation summary for June 2009
• Unemployment rate to 9.7%, 216,000 jobs lost
• Payroll data mixed despite the bullish headline job loss figure
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. employment data in line with estimates

Average weekly hours a record low of 33.0. Stock futures now down. The household survey says we have lost 1.3 million jobs in three months. 17.5% U-6 unemployment. Median duration of unemployment is now 18.7 weeks from 15.4 just 3 months ago – ugly.

Here is an excerpt from the release (bolding added).

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

Household Survey Data

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. (See table A-1.)

Among the major worker groups, the unemployment rates for adult men (10.7 percent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed over the month at 5.6 million. In October, 35.6 percent of unemployed persons were jobless for 27 weeks or more. (See table A-9.)

The civilian labor force participation rate was little changed over the month
at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent. (See table A-1.)

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in October at 9.3 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

More info coming shortly.

Related posts:

• 467,000 jobs lost in the U.S. in June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. loses 533,000 jobs, unemployment rate up to 6.7%
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• Unemployment rate climbs to 9.4%

The Department of Labor data released this morning indicated that 512,000 people filed initial claims for unemployment insurance in the latest week.  This is down 20,000 from last week and marks the last data points we are to get on employment before tomorrows employment numbers are released.

All indications are that the number will come in around the 200,000 job loss range. Wednesday’s ADP number of –203,000 jobs is consistent with this. Stock futures rallied on the data and the Dow is up about 80 points in early trading.

Nonetheless, 512,000 weekly claims is still very high.

Source

Weekly Unemployment Claims Report – ETA Press Releases

Related posts:

• A sustainable recovery with 530,000 weekly claims?
• New unemployment claims are coming down
• U.S. initial jobless claims fall 21,000 to 554,000
• Jobless Claims: 404,000
• Jobless claims stuck near 530,000, point to structurally high unemployment

The data released this morning by the U.S. Department of Commerce’s Bureau of Economic Analysis on personal income somehow managed to show weakness in income and consumption as well as savings.  I see this as proof that Americans are not saving and hence not deleveraging, but they are also so income constrained that their consumption should not be expected to increase markedly either. This points to a mild recovery.

The numbers from September show a significant decline in consumption from the cash-for-clunkers juiced August numbers.

Personal outlays — PCE, personal interest payments, and personal current transfer payments — decreased $48.8 billion in September, in contrast to an increase of $138.2 billion in August. PCE decreased $47.2 billion, in contrast to an increase of $139.8 billion.

If you take out August and cash-for-clunkers and look back at June and July, September’s consumption numbers are up a tick (annualized $10.53 trillion in personal outlays versus $10.44 trillion for July and $10.42 trillion for June).

So consumers are spending money. You can see this in the savings data as well.

Personal saving — DPI less personal outlays — was $355.6 billion in September, compared with $307.0 billion in August. Personal saving as a percentage of disposable personal income was 3.3 percent in September, compared with 2.8 percent in August.

3.3 percent is higher than 2.8 percent but it is a lot lower than 5.9 percent, which is where things were in May. I took this issue up at length in my post, “Americans are not increasing savings” earlier this month saying:

Savings rates averaged 9% through 1982. They were consistently above 7% through 1992. Since then, savings rates have collapsed. From Jan 1969 to November 1997 (comprising all monthly data since record-keeping began), the 10-year average savings rate was higher in every single month than the 5.9% savings rate achieved in May 2009.

So 2.8% is ridiculously low and inadequate to meet Americans’ needs in terms of reducing debt and Baby Boomers’ preparing for retirement. Absent asset-price appreciation as a source of savings, we are going to be in for some tough sledding in a few years. Clearly, record low interest rates are reducing the propensity to save.

On the other hand, incomes are still constrained. The BEA reports:

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis…

Real disposable income decreased 0.1 percent in September, compared with a decrease of 0.2 percent in August. Real PCE decreased 0.6 percent, in contrast to an increase of 1.0 percent.

This puts personal income on par with Aug 2007 levels, as income is being reduced by high unemployment.

My analysis says the data are pointing to a mild recovery on the back of consumer spending which is being spurred by low interest rates. As a result, savings are now going back down to dangerously low levels. This mix is a direct result of policy decisions made in Washington, which are designed to recreate the pre-crisis status quo ante. Thus far, they have been successful.

Related posts:

• Do the personal income data demonstrate unbalanced reflation?
• Savings in America hit 5%, up from nil last year
• Third quarter GDP growth comes in at 3.5%
• Highlights from report with Q1 U.S. GDP down 6.1%
• Why the personal consumption data is important to the stock market

The Nationwide monthly index of house prices came in this morning showing a 0.4% bump in October from September. While this was less than last month’s 0.9% rise, it was the sixth consecutive month of price increases and it marked the first time in two years that house price in the U.K. were higher year-on-year. In fact, house prices are now a full 2.0% higher than in October 2008 according to the Nationwide figures.

Nevertheless, the Nationwide Chief Economist Martin Gehbauer is sticking to his more cautious view in contrast to his predecessor.  He says:

House prices rose for a sixth consecutive month in October, but the strong upward momentum in property values seen over the summer is showing some signs of moderating as we head into the autumn months. The price of a typical property was 0.4% higher on the month in October, compared to an increase of 0.9% in September and 1.4% in both July and August. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – dropped back slightly from 3.8% to 3.4%…

Preliminary GDP figures released by the Office of National Statistics showed that the UK remained in recession during the third quarter of 2009, defying widespread expectations that the economy had begun growing again over the period. The surprisingly poor figures have mixed implications for the housing market. On the one hand, a deeper and longer recession implies higher levels of unemployment and a longer period of subdued wages, both of which will act as constraints on the housing market’s recovery. Given the poor labour market situation implied by the economy’s ongoing weakness, it is difficult to imagine the housing market returning to the buoyant levels of activity and price inflation that prevailed earlier in the decade. On the other hand, the figures mean that interest rates are likely to remain at or near their current record lows for well into next year. As a result, mortgage affordability will remain relatively favourable for both new and existing borrowers. This should limit the number of distressed sales and cushion the negative impact of labour market weakness on housing demand.

The Nationwide numbers have generally been more bullish than the Halifax numbers and a gap has opened up between the two indices (see last month’s post). So, it will be necessary to see how the data are confirmed by the Halifax early next month. What should be clear is that low interest rates are a temporary salve.  The recent increase in house prices is not sustainable unless we see an uptick in the British economy and a stabilization of the jobs market.

Source

House Prices Rise At A Slower Rate In October – Nationwide press release

Related posts:

• Nationwide: UK house prices up strongly for third month
• Nationwide: U.K. house prices resume their descent
• UK: House price fall moderates, prices still down 13.9% in year
• Nationwide: UK house prices down 15.9% from last year
• Nationwide: UK house prices down 14.6%

That’s what we seem to be expecting based on the huge uptick in equities since March. While stock markets have long since moved it up a gear, the employment market is stuck in neutral. The latest seasonally-adjusted jobless claims numbers came in at 530,000. The widely-followed four week average is still 526,250 and is not coming down.

These numbers are more consistent with a loss of 200,000 jobs per month than of one of declining unemployment. When you have more people losing jobs than getting them, you don’t have the pre-conditions for a sustainable recovery. The economy needs to move it up a notch or we are looking at a double dip.

Source

Weekly Unemployment Claims Report – ETA Press Releases

Related posts:

• New unemployment claims are coming down
• Better last claims report before employment number
• U.S. initial jobless claims fall 21,000 to 554,000
• Jobless Claims: 404,000
• Jobless claims stuck near 530,000, point to structurally high unemployment

While a positive number was expected, let’s wait to crunch the numbers before we pop the cork on the Moet – the price index was only 0.8% versus an expected 1.4%. So I will want to see what is happening with nominal GDP.  I also want to see how inventories look given the huge purges in inventories we saw in Q1 and Q2.

Notice that personal income was down but personal outcome was up because the savings rate decreased in Q3; this gives further support to my contention that consumers are not deleveraging.

I may have more to say about this in another post later today

For the time being, here are excerpts of the BEA press release (emphasis now added):

GROSS DOMESTIC PRODUCT:  THIRD QUARTER 2009 (ADVANCE ESTIMATE)

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP decreased 0.7 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 5).  The “second" estimate for the third quarter, based on more complete data, will be released on November 24, 2009.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in private inventory investment, in exports, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.  Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change…

Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second.  Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent.  The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second.  Services increased 1.2 percent, compared with an increase of 0.2 percent.

Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second.  Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent.  Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent.  Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.

Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second.  Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change.  Private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first…

Disposition of personal income

Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second…

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second.  Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second.  Personal saving — disposable personal income less personal outlays — was $364.6 billion in the third quarter, compared with $533.1 billion in the second. The personal saving rate — saving as a percentage of disposable personal income — was 3.3 percent in the third quarter, compared with 4.9 percent in the second.  For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp…

Related posts:

• Highlights from report with Q1 U.S. GDP down 6.1%
• US personal income data for September shows pullback
• GDP revised to down 5.7% for Q1 2009
• Durable goods orders down 4.5%, double expectations
• ADP report shows 371,000 jobs lost

We received word today from the British government that GDP in the UK contracted for a record sixth quarter in Q3 2009. I like Neil Hume’s headline on this one, “GDP shock flop.”  If you were listening to the

BBC’s Wake Up to Money

Bloomberg puts the right spin on things:

Britain’s failure to escape the worst recession since World War II may force the Bank of England to increase its bond-purchase plan next month, economists said.

Seven months after Governor Mervyn King’s central bank started a 175 billion-pound ($287 billion) program to rescue the economy, the Office for National Statistics said today gross domestic product unexpectedly shrank 0.4 percent in the third quarter. None of the 33 economists surveyed by Bloomberg predicted a contraction.

“Having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery,” said Stephen King, chief global economist at HSBC Holdings Plc, in an interview with Bloomberg Television today. “They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.”

Britain is still mired in recession even after pledges of about one trillion pounds in stimulus and banking aid from the Bank of England and Prime Minister Gordon Brown. King, whose push to expand bond purchases to 200 billion pounds in August was defeated, may win more support at the next Bank of England decision on Nov. 5.

The yield on the two-year gilt declined 6 basis points to 0.88 percent after the GDP report. The 10-year gilt yield slipped 3 basis points to 3.67 percent.

I would add that Sterling is getting crushed in the foreign exchange market – even against a weak US Dollar.

So, riddle me this: if the economy is so bad, why are house prices in London at an all-time high?  The explanation I came up with on Monday was that this is the natural  response to easy money when the economy has a large output gap – namely asset price inflation.  And this is certainly helping to pad bonuses in the City of London, a contributing factor to the increase in residential property prices in London.

Meanwhile, in the rest of Britain, the only thing keeping the country from economic freefall is budget-busting government stimulus. The Telegraph’s Angela Monaghan has a good article out today showing the emergency measures still in place including record low interest rates, quantitative easing, sales tax cuts, and the car scrappage scheme, not to mention the government’s backstops in the financial services industry. Where this leads is anyone’s guess at this point.

What should be clear, however, is that now is not a good time to tout a need for people to “tolerate the inequality as a way to achieve greater prosperity for all” as Lord Griffiths has done. He only brings greater scrutiny onto the financial sector. I found this statement particularly unconvincing:

I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people

This is an argument for good times, not recession – and even then one must question whether large bonuses in the financial sector are truly in the medium-term common good.

Related posts:

• London house prices at an all-time high
• Random Musing: London house prices
• French economy contracted in Q2
• Recession ‘95% likely’ in Britain
• Recession nears in New Zealand

For the latest week’s data for jobless claims, all you need to know is that the 4-week average barely budged and remains just above the 530,000 mark, consistent with a loss of 200,000 jobs. Clearly employment continues to lag at this point in the business cycle.

The Good

• Unadjusted initial claims. Actual initial claims came in at 460,449, putting them back below 500,000 after last week’s 509,562 broke a string of ten weeks below 500K.
• Unadjusted continuing claims. This number is now at 4.89 million, the lowest since last December.
• Adjusted initial claims. The 4-week moving average SA initial claims is still falling. Now at just over 532K, it is at the lowest since Jan 17th.
• Adjusted continuing claims. The same goes for continuing claims, where the 4-week average SA number fell to 6.03 million, the lowest since April 18th.
• Change in continuing claims. 6-month and year-on-year comparisons for both NSA and SA continuing claims have been falling since May. The six-month comparisons are poised to go negative soon.

The Bad

• Change in unadjusted initial claims. The year-on-year number is up for the second week in a row, after falling every week but two since May.
• Change in adjusted initial claims. Here again, the year-on-year comparisons are going the wrong way. They are up very modestly (53,250 vs. 52,500) after falling consistently since March.

Basically, the numbers are coming down but not fast enough.  The 2nd derivative i.e. the change in claims is going the wrong way – and this is in comparison to a period when claims were leaping up post-Lehman.  I see this data point as an ominous sign.

That said, at the same time in the last recession (28 weeks after the average initial claims had peaked) in May of 2002, jobless claims had risen in March and April and were in the process of flatlining at around 400- 425,000. This lasted until September 2003, two years after jobless claims had peaked.

Is this what we should expect this go round?  Yes.  And that means the economy will have structurally high unemployment levels, putting it at risk of a recessionary lapse.

Related posts:

• Jobless claims in second week just over 600K
• U.S. jobless claims: Claims rise 62,000 to 589,000
• Initial claims under 600K, continuing claims at record high
• Seasonally-adjusted jobless claims way down but…
• Jobless claims still above 600,000

For the latest week, U.S. jobless claims hit 514,000, the lowest level since early January. This brings the widely-tracked four-week average down to 531,500, also a 9-month low. In addition, continuing claims fell below 6 million for the first time since March. All of these seasonally-adjusted data points suggest that the unemployment situation is slowly improving. My baseline scenario to date sees this improvement continuing to where initial jobless claims fall back into the mid-400s by year end so that non-farm payrolls show job gains late this quarter or early next quarter.

However, this past week saw two negative data points pop into the picture.  When looking at the non-seasonally adjusted (NSA) data, the number of initial claims spiked up above 500,000 for the first time in 11 weeks. This is the normal seasonal pattern and is to be expected; however, last week’s spike caused comparisons to last year in (4-week average NSA) initial claims to tick up (42K more initial claims than last year versus 36K more the week before).  Translation: initial claims are not coming down fast enough to rule out a double dip recession.

I see this period through early December as critical for the economy and jobless claims will be a key signpost.  Right now we are in a weak recovery: jobless claims are coming down, retail sales (ex-autos) have stabilized, inventory levels are incredibly low. All of this points to an economy poised for a rebound.  However, employment indicators are still lagging. With the holiday season upon us soon, the moment of truth will arrive.  In the next couple of months, two things will happen.

• Seasonal adjustments on jobless claims data will spike up through January. That means there will be more layoffs due to seasonal patterns. Because jobless claims are in cyclical decline, this sets up situation in which the adjustments could really cause a surprise downswing in claims.  The week ending December 5th when the adjustment factor hits 140.2 is the week to watch.
• Holiday retail sales will be critical to post-Holiday layoffs. Some retailers see the holiday season as a make-or-break.  Last year, there were lots of stories about retailers waiting until after the holiday season to shut down stores and end leases.  Is this what we should expect if holiday sales are poor? If so, there will be a concomitant rise in jobless claims which would put the recovery in jeopardy.

Overall, as the jobless claims series is published weekly, it is the best real-time gauge of how the recovery is progressing and it bears watching closely.

Related posts:

• U.S. unadjusted jobless claims fourth highest in history
• U.S. jobless claims fall to 3-month low, still over 600,000
• Jobless claims data tell a mixed story
• U.S. jobless claims of 652,000 show continued weakness
• Has the increase in U.S. jobless claims peaked?

Last year at this time I posted “The Economy’s Four Horsemen,” which described macro cause and effect leading into and out of recessions.  When looking at income, spending, output and employment, it is income which is the steer variable going into a downturn.  Year-on-year changes in income precede changes in spending, output, employment and recession. So, in order to gauge what is likely to occur in any business cycle downturn and plan your business spending accordingly, you need to know what is happening to personal income.

To get a grip on this, I am going to look back at prior monthly data series on personal income dating to 1929.  What I am looking for is to pinpoint when in the economic cycle the change in personal income reverses course and whether this presages recoveries as well as recessions.

Here goes.

(click on image to enlarge)

*Note on data: I am using a six month average of the year-on-year change in inflation-adjusted personal income.

Top in personal income growth precedes recession. What I found is that a downturn in the change in personal income almost always precedes recession – and often by a large margin.  This proves that an individual business could look at the data on personal income and get a hint of an impending downturn – and react accordingly.

War used to stoke domestic income growth. There were a few false tops, however.  Most of them were war-related. For example, during World War II, there was a false top in 1941. But, by mid-1942, wartime production caused a renewed boom in personal income. the lag between the false top of Sep 1941 and the renewed turn in Jun 1942 was pretty significant. But, this was a clear aberration. As were the false tops in Dec 1950 associated with the Korean War and the ones in Feb 1966 and Nov 1968 associated with the Vietnam War. It seems post-depression, the ginning up of the military industrial complex was a significant factor in preventing economic bust.

Near-recessions in the mid-1970s and 1980s. After the Wars, a mid-1970s and mid-1980s dip were evident as well. However, in neither case did the change in inflation-adjusted personal income go negative.  Think of these as almost-recessions.  The markets went lower as well. In the mid-1970s, the near-recession personal income trough came in Jul 1977. The Dow peaked in Dec 1976 and kept falling until Feb 1978. In the mid-1980s, the numbers hit a trough of 1.9% in September 1987 when the stock market crashed. There were relapses in 1993 and 1996 as well. But, markets did not fall.

Recovery seems to precede uptick in income growth. While incomes suffer before recession on the way to recession, they lag on the way out, making recessions that much more painful. (See chart above). An increase in the change in personal income does not presage recovery.

Income-less recoveries in 1991, 2001, and 2009.  In each of the last three recessions, average year-on-year real income changes were negative. It is still negative now (-2.6% year-on-year, –2.5% average year-on-year, and –1.3% year-on-year adjusted for inflation).

So what does this say about the current cycle?

There are no false bottoms in the real income data. So,the data suggest that we are in recovery (maximum decline in personal income was November 2008), but that we are still in a very weak period in which a double dip is possible (average real personal income change is still –1.3%). Also, average real personal income losses have been less than they were in 1980 when we were in the first dip of the last double dip recession – one benefit of not having high inflation.

As far as I can ascertain, the data don’t really reveal any patterns between the stock market and personal income.

Related posts:

• Do the personal income data demonstrate unbalanced reflation?
• US personal income data for September shows pullback
• Why the personal consumption data is important to the stock market
• Recession: How Long and How Deep?
• Data on past consumer deleveraging during recessions

You have probably heard a lot of chatter from the media about a newfound thrift amongst American consumers.

The general take is that Americans, faced with lost incomes and wealth and burdened by record levels of debt, have moved away from the asset-based consumption models of yore. Instead of using the 401(k) or the house to do one’s savings, Americans are now saving the old-fashioned way by cutting spending and stashing money away in bank accounts.  The commonly-held belief is that we are witnessing a secular change away from excess consumption toward thrift in the household sector.

Not true.

If you haven’t noticed, asset markets in the United States are all rising: stock prices, bond prices, house prices, even gold prices and commodity prices. This certainly is not lost on the mutual fund industry.  And it is not lost on American households either.  The savings rate has declined to 3.0% after briefly hitting an 11-year high of 5.9% in May.  Welcome back to the asset-based economy.

(click on image to enlarge)

In the charts above, the left side shows how savings levels spiked up in response to the recession and credit crisis. The right side shows a fall off in the savings rate since May, just after the jobless claims numbers first began to recede.

A few factoids about the savings rate:

• Savings rates averaged 9% through 1982. They were consistently above 7% through 1992. Since then, savings rates have collapsed. From Jan 1969 to November 1997 (comprising all monthly data since record-keeping began), the 10-year average savings rate was higher in every single month than the 5.9% savings rate achieved in May 2009.
• Measuring the 12-month average savings rate, savings troughed in America at an all-time low of 1.4% in April 2008.
• Average savings has since increased monthly to the present 3.9%.
• The monthly savings rate peaked in May 2009 at 5.9%.  It declined every month to August, hitting 3.0% in August.

What should be evident from the charts above is that the collapse in savings coincided with the secular bull markets in bonds and equities and with a secular build-up of debt (see “Household debt as an indicator of secular bull and bear markets”).

My takeaway from the data during this past downturn is that American households are not necessarily saving more. As asset prices have risen, a return to the asset-based economic model seems to be taking hold. Let’s look to future personal income data from the BEA to confirm if this trend holds.

If so, the feedback between asset price increases, collateral for bank lending, increased consumption and economic growth could be more powerful than is commonly assumed. This is what could drive a multi-year recovery… that is until the next debt- and asset bubble-induced downturn ends this brief nirvana.

Related posts:

• Do the personal income data demonstrate unbalanced reflation?
• Chart of the day: Savings Rate
• US personal income data for September shows pullback
• Household debt as an indicator of secular bull and bear markets
• Stephen Roach: Americans’ abandonment of overconsumption is a good thing

I found the recent consumer credit data unsatisfying because the data seemed to point in two directions. The seasonally-adjusted data showed a large $12 billion decrease in consumer credit which received headlines. Meanwhile, the non-seasonally adjusted data showed a large $7 billion increase in consumer credit. I suspect this divergence has a lot to do with cash-for-clunkers (post here), but we can’t be 100% sure until we get another month or two of data.

Let’s delve into this issue a bit more because we are at  a critical stage in the economy right now. A lot of pundits are talking about a V-shaped recovery, while others are pointing to a secular move toward consumer deleveraging which basically spells no recovery.

I am somewhere in between, believing we will get a weak recovery that could or could not last more than a couple of years depending on the path of consumer deleveraging. While I do believe the U.S. economy is fast approaching ‘terminal debt,’ I am not convinced we are there in this particular cycle, largely due to the massive stimulus and easing. The posts which best outline this view are two recent ones, “The recession is over but the depression has just begun” and “A brief look at the Asset-Based Economy at economic turns.”

So, here are my questions on consumer credit:

• What happened to consumer credit in past downturns? 
• Specifically, how much did it decline from peak to trough?
• Was the decline mirrored by a similar fall in output as measured by nominal GDP?
• Is the pattern this time around any different?
• And what does that say about the thesis of secular deleveraging?

The way I am going to attack these questions is by looking at past recessions and peak-to-trough declines in both nominal GDP and consumer credit (note: the credit series is monthly, but the GDP series is quarterly – and I am leaving out the recessions in 1945 and 1949 because of wartime anomalies).  Here goes.

1953-54

• GDP declined 1.8% peak to trough. Consumer Credit declined 1.6%. It took 8 months to hit the previous credit peak.

1957-58

• GDP declined 2.7% while credit declined 1.6% from January to June of 1968.It took 11 months to hit the previous credit peak.

1960-61

• GDP declined 1.0% and credit also declined 1.0%.It took 8 months to hit the previous credit peak

1970

• Nominal GDP did not decline due to inflation. Credit did decline from October to November 1970 by 0.2% however.It took 2 months to hit the previous credit peak.

1973-75

• Again inflation meant nominal GDP did not decline. Meanwhile credit declined 1.8% from September 1974 to June 1975.It took 13 months to hit the previous credit peak.

1980

• Again inflation meant nominal GDP did not decline. Meanwhile credit declined 1.8% from February to June 1980.It took 12 months to hit the previous credit peak

1982.

• GDP declined 0.3% and credit also declined 0.1%.It took 2 months to hit the previous credit peak.

1990-91

• Inflation meant nominal GDP nearly did not decline (down –0.08%). Meanwhile credit declined 2.0% from November 1990 to well past the recession’s end in June 1992. It took an enormous 27 months to hit the previous credit peak. This was the worst credit cycle to date.

2001

• We cruised through this recession with neither a decline in nominal GDP or credit.

2007-2009

• GDP declined 2.7% and credit has already declined a massive 4.6%. This is the largest decline in consumer credit to date.

The table of data looks like this:

I draw the following conclusions :

• In an economic downturn, consumer credit has generally declined more than nominal GDP.
• The 1990-91 recession saw a very drawn out drop in credit and easily generated the longest time before credit regained its previous peak.
• The 2001 recession was unusual mild as it was the only time in the last 56 years that the U.S. has experienced a recession without a drop in consumer credit.
• The 2007-2009 recession has been unusually severe. The drop in nominal GDP is the largest in the last 56 years. However, the drop in consumer credit has been even worse at more than twice the largest previous decline.

None of this necessarily helps me decipher whether we are in a secular deleveraging cycle. But, the severity of the fall-off in consumer credit relative to output may point in this direction.

Related posts:

• Consumer credit down, but does it show deleveraging?
• Consumer credit falls 4.4% from year ago levels
• Unemployment claims falling faster than in half of past recessions
• Why is everyone saying consumer credit is falling? It’s not.
• Jobless claims rise slightly, weakness remains

But, everywhere I look, everybody is saying it is.

I would like to be true to the data and not just take the government’s seasonally-adjusted numbers at face value.

Judge for yourself. Here’s the data:

This is what everyone is focused on – the seasonally-adjusted data. The part in red shows consumer credit down $12 billion.

But, what about the actual unadjusted data?

What do you know, it’s up $7 billion. It is indeed down $4 billion for revolving credit as banks are cutting credit card limits. But, non-revolving credit is up over $11 billion.  It was decreasing and is down 4.4% year-on-year (see the section highlighted in green above), but that ended this month.

Yes, I too believed that consumers were poised to begin deleveraging, but with stocks up 60%, interest rates at record lows, and house price declines stalled, why would you do that?

Conclusion: consumer credit is increasing, not decreasing. I wish people would actually look at the data.

The question you should be asking is not whether consumer credit is increasing, but whether it will continue to do so after August and cash for clunkers.

Sources

G.19 Current – Federal Reserve

G.19 Historical – Federal Reserve

Related posts:

• Consumer credit falls 4.4% from year ago levels
• Consumer credit down, but does it show deleveraging?
• Data on past consumer deleveraging during recessions
• Chart of the day: consumer credit growth
• U.S. jobless claims fall to 3-month low, still over 600,000

Jobless claims were reported as 521,000 on a seasonally-adjusted (SA) basis for the week ended October 3. This is the lowest reported figure for initial claims since January 3. The data came in lower than expectations and was matched by a drop in continuing claims to 6.04 million.

While both numbers are still high by historical standards, the trend has been down since March for initial claims and June for continuing claims. The widely followed 4-week averages are at their lowest levels for initial and continuing claims since January and April respectively.

Of course, the unadjusted numbers have been in the 400s since the beginning of August. Because of the downward drift in initial claims, I do not expect them to tick significantly higher despite the usual seasonal pattern. 

Overall, that means the employment market is weak enough to contribute to rising unemployment rates and job losses for the next few months.  However, as the trend is toward lower numbers, I would anticipate this to end in Q1 at the latest. But, because of increasing labor force participation, I expect the base unemployment levels will continue to rise. This fits in with my general view of a weak recovery vulnerable to exogenous shocks.

Update: One more thought – we have what I would describe as a structurally high private unemployment level. At a minimum, we could change our automatic stabilizers to add more stimulus as depending on the severity of the downturn. For instance, it would be a good start to extend unemployment benefits to 39 weeks automatically if the rate of unemployment rises more than 1% over six months/one year and to 52 weeks if it rises more than 1.5% over that time frame.

As an example, Germany has a more robust system of automatic stabilizers and it is thought this has helped them recover from recession faster. We might benefit from some kind of automatic but prudent counter-cyclical stimulus.

Related posts:

• Jobless claims in second week just over 600K
• Are jobless claims pointing to structurally high unemployment?
• Initial claims under 600K, continuing claims at record high
• Jobless claims stuck near 530,000, point to structurally high unemployment
• Initial claims hit lowest in 5 months, continuing claims hit record

The Federal Reserve has just released the most recent data on consumer credit. The data show outstanding consumer credit falling to $2.47 trillion in August from a December 2008 peak of $2.59 trillion – on a non-seasonally adjusted (NSA) basis. That is down 4.4% from the year ago period, continuing the acceleration of the year-on-year change that has been in place for 15 straight months. The seasonally-adjusted data tells an even worse story.

Clearly, consumers are not off to the races. Nevertheless, the NSA data do show a tiny pickup in overall consumer credit, although you have to go to the third decimal place to see it (from $2.460 trillion in July to $2.467 trillion in August.  You have to question the seasonal adjustments given where we are in the business cycle. So I am not using this data set.)

I was especially interested in the Federal Reserve’s data on Q3 consumer credit since I just crunched the numbers on their quarterly data and found that deleveraging in the household sector was not preceding as quickly as I had assumed (if at all).

What I am looking for is a sign of how consumer credit is proceeding as compared to output. But since we don’t have any monthly output data, we’ll have to wait. I will just comment on the trend.

The trend is down. Because of the decline in higher than normal inflation in 2008, we saw two peaks in year-on-year growth in credit. The first was August 2007 right before the recession began, when, adjusted for inflation, total consumer credit was growing 3.6% year-on-year. This went negative, reaching a trough of –1.5% in August 2008. Before climbing to a second peak of 1.5% in December.  Since then, the wheels have fallen off the cart and we are now down 2.9% year-on-year adjusted for inflation (all of the figures are NSA).

But, remember nominal GDP is down 2.4% year-on-year through Q2.  That is the key here.  When one makes a comparison of nominal GDP to consumer credit, there had been little deleveraging through Q2 2009.  Moreover, since prices are still falling (NSA CPI is –1.5% year-on-year through August), the change in nominal GDP will be lower than real GDP for Q3.

It is still not clear to me that debt levels, when measured as a percentage of GDP are decreasing significantly. I am, therefore, much less sold on the prospect of a secular deleveraging in the household sector than I was yesterday.

And since consumer credit is much more volatile than mortgage-related debt and a much smaller percentage of household debt, I am more interested in how the mortgage market is doing.  Right now, mortgage applications are through the roof because of ridiculously low interest rates.

Source

G.19 data series – Federal Reserve

Related posts:

• Consumer credit down, but does it show deleveraging?
• Why is everyone saying consumer credit is falling? It’s not.
• Data on past consumer deleveraging during recessions
• Chart of the day: consumer credit growth
• Household debt as an indicator of secular bull and bear markets