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, nonrevolving 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?
• U.S. consumer spending down 1% in December

The Canadian daily National Post has a good piece out today that highlights how the ‘Buy American’ provision is being seen in Canada.  Many see it as an affront that America could and would favor domestic firms over those of its largest trading partner and next-door neighbor despite the North American Free Trade Agreement.

For the second time in six months, pipe fittings in California are being ripped from the ground because they were stamped "Made in Canada," a move manufacturing companies say hurts both sides of the border.

Cambridge Brass Inc., a Canadian brass fittings manufacturer, discovered Thursday that it stands to lose more than $1.5- million in this most recent fallout from the Buy American protectionist measure.

Greg Bell, vice-president of sales and marketing for the Cambridge, Ont., company, received a call Thursday from the City of Sacramento, where the parts were being fitted into the public water system. He was told his product was no longer acceptable because it was not made in the United States.

"It’s disheartening. (The city) wants American-made products and there’s nothing I can do about it," Mr. Bell said. "Business is tough enough these days without having to deal with these roadblocks."

Anything already in the ground will have to be ripped back up at Cambridge Brass’s expense, Mr. Bell said. Between the costs of losing the project, pulling up the pipes and legal fees, he estimates his company stands to lose money in the seven-figure range.

Cambridge Brass has been based in southern Ontario for more than a century and has survived two world wars and the Great Depression, but Buy American may be what finally causes the company to bid farewell to the province.

Mr. Bell said losing a major project like this would mean more layoffs for the already suffering company.

It has already lost a supply distributor in Maine, and it has had to lay off half of its own employees in Cambridge – from a workforce of 140 it is now down to 77 – since the introduction of Buy American policies this year.

And if these protectionist measures continue, he said, the company will likely be forced to move its manufacturing to the United States in order to stay in business.

America seems clueless at how protectionist policies build rage that politicians abroad must quell or heed through retaliation. It’s as if only American politicians want to protect jobs.

It bears repeating because some people don’t get it: it’s not the act of protectionism itself which is so damaging, it is the retaliation and escalation that results.

"The government has got to stand up and propose some serious retaliation," said John Hayward, president of Hayward Gordon Ltd., noting the Halton Hills, Ont.-based industrial-pump manufacturing company has been barred from bidding on U.S. products. He said he has had to switch manufacturing from three Canadian plants to U.S. sites in order to stay in business, a survival decision that has resulted in local layoffs.

Read the full account below.

Source

‘Buy American horror stories’ building – National Post

Related posts:

• ‘Buy American’ will translate into a 21st century Smoot-Hawley
• Canada is furious about U.S. protectonism
• China launches retaliatory investigation into U.S auto subsidies
• The absurdities of ‘Buy American’
• China: we “will take steps to protect the interests of our domestic industries”

China on Friday accused the US of protectionist and biased trade policies less than a week before president Barack Obama’s first visit to Beijing.

In a stinging rebuke to Washington, China’s commerce ministry promised to take measures to protect its domestic industry after the US slapped anti-dumping duties on $2.6bn of Chinese steel pipe imports. The duties are part of a growing roster of trade conflicts between the two countries, despite a high-level meeting last week in China aimed at reducing tensions.

“China resolutely opposes such protectionist practices and will take steps to protect the interests of our domestic industries,” Yao Jian, ministry spokesman, said on its website.

I see this coming to a head.  More here.

Related posts:

• China launches retaliatory investigation into U.S auto subsidies
• China: reflation play spells trouble for rest of the world
• China issues bonds to “promote the RMB in neighbouring countries”
• Beijing starts a ‘Buy China’ policy
• Free trade is dead: victim of a poor economy

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:

• Payroll data mixed despite the bullish headline job loss figure
• U.S. loses 533,000 jobs, unemployment rate up to 6.7%
• The weak employment situation summary for June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• Unemployment rate to 9.7%, 216,000 jobs lost

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%
• Unemployment rate climbs to 9.4%
• U.S. unemployment rate 7.2%, 524,000 jobs lost

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?
• 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
• Jobless claims: 558,000 for week ended August 8

The sale to Canadian auto parts maker Magna International and its partner, Russian lender Sberbank is off. With bankruptcy now behind it, General Motors now feels confident it can proceed with Opel under the GM umbrella.

From the GM press release:

Given an improving business environment for GM over the past few months, and the importance of Opel//Vauxhall to GM’s global strategy, the GM Board of Directors has decided to retain Opel and will initiate a restructuring of its European operations in earnest.

“GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” said Fritz Henderson, president and CEO. “We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employee, suppliers, and dealers, which is reflected in the decision reached today. This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall’s long-term future.”

On a preliminary basis, the GM plan entails total restructuring expenses of about € 3 billion, significantly lower than all bids submitted as part of the investor solicitation. GM will work with all European labor unions to develop a plan for meaningful contributions to Opel’s restructuring. While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence.

“While strained, the business environment in Europe has improved.” Henderson said. “At the same time, GM’s overall financial health and stability have improved significantly over the past few months, giving us confidence that the European business can be successfully restructured. We are grateful for the hard work of the German and other EU governments in navigating this difficult economic period. We’re also appreciative of the effort put forward by Magna and its partners in Russia in trying to reach an equitable agreement.”

I will be speaking about this issue in an hour’s time on the BBC. But, look at this as a result of economic reflation. GM has exited bankruptcy and feels confident enough of the future path of the economy to keep Opel instead of having to sell in a fire sale. 

The Germans are livid, according to the Wall Street Journal.

The governor of the German state of Hesse, where General Motors Co.’s Opel unit is headquartered, said Wednesday he is "concerned and at the same time annoyed that the months-long efforts to find a good solution for Opel have failed because of GM."

In a statement, Roland Koch, a confidant of German chancellor Angela Merkel, said that considering the "negative experience in recent years with GM’s corporate policy, I’m worried a lot about the future of (Opel) and its staff."

In a surprise move, GM’s board late Tuesday decided it wants to retain its core European operations after talks over a possible sale have been dragging on for months.

Koch said he expects GM to repay by Nov. 30 the bridge financing provided by the German state "so that the German tax payer doesn’t get harmed."

Remember that other EU countries came out of the woodwork saying, in effect, that the Germans had bought off GM and were being advantaged by unfair subsidies while in places like Belgium and Spain workers were suffering.

Very interesting. More after the BBC show!

Related posts:

• GM considers keeping Opel, raising capital
• Economic nationalism and GM’s decision to keep Opel and Vauxhall
• Germans reject Chinese offer for Opel
• German Press: Fiat to sign a deal with Opel, not Chrysler
• GM headed for bankruptcy

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%
• Why the personal consumption data is important to the stock market
• Highlights from report with Q1 U.S. GDP down 6.1%

When it comes to the housing meltdowns in the richest economies, the US has been matched only by Spain, Ireland and the UK. All four countries have seen spectacular losses of wealth in the housing sector over the last two years.

The response by all four governments was to apply as much stimulus as they reasonably could to prevent their economies from descending into free fall. This has opened up gaping holes in each countries’ government accounts. However, in contrast to the United States or the UK, both Spain and Ireland have the Euro as an external constraint which limits their policy choices.  This has resulted in credit downgrades for the sovereign debt in Ireland and Spain.

Looking at Spain, there was massive over-building in the property sector, which attracted a lot of labor to Spain. Now that these jobs have been vaporized, the unemployment rate has soared to near 18%. The problem is quite acute and there are few policy solutions. Reinforcing this point for me was a discussion I had with Spain-expert Edward Hugh, who writes at the blogs Global Economy Matters and A Fistful of Euros, in the wake of some downbeat comments by Paul Krugman about the country.

Edward wrote:

The problem is Spain can only create jobs through exports. The problem is, with Brussels prices we cannot attract investment to build new factories to create high volume unskilled employment. At this stage in the game we are not in competition with Brussels, but with Bratislava. That may not be a pleasant truth, but it is simply like that. We have attracted a large quantity of people here to work in unskilled low-value employment. The industry that gave them work just permanently disappeared out of sight. We need, urgently to find alternatives since we cannot pay them all 420 euros a month for ever. This is more than a simple academic exercise, it is now a question of life and death for the Spanish economy.

Basically we need to go back to 2000 wages and prices and start again. Maybe you don’t like this idea, but can you point me to anyone who has an alternative?"

Obviously, a huge cut in nominal wages is never going to fly in any country because wage prices are sticky. Call it “money illusion” or call it a desire to maintain a decent standard of living, across-the-board nominal wage cuts are a political non-starter. But, this is what is needed in Spain.

Edward does address the standard-of-living problem this presents:

This is not simply about bringing down wages. It is about simulating a devaluation by bringing down prices AND wages together. So you as an employee should be in the same situation as before. The only realistic way to do this is through a pact between employers, unions and political parties, everyone.

The only real problem is with the debts, since they will also need adjusting down, but see another thread here on this.

But OK, I’m not saying this is going to be easy, just that we have no alternative. We shouldn’t have inflated the housing bubble in the first place.

Of course, being able to devalue the currency is one way to achieve this. But, Spain does not have that option. These are the very real policy cul-de-sacs faced in the aftermath of a debt-fueled asset bubble. And since another one seems to be inflating right now, I reckon the U.S. and the U.K. will be joining Ireland and Spain on this dead-end street in due course whether their currencies are weak or not.

Related posts:

• European House Prices are slowing
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain intervenes to save Caja Castilla La Mancha
• UK real wages falling
• UBS: ‘The disaster in Spain will continue’

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:

• 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
• Average unemployment claims up slightly

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

Annaly Capital Management’s blog has a good piece up on foreclosures, inspired by yesterday’s Case-Shiller data (hat tip Scott). If you missed it, The S&P/Case-Shiller index showed a pretty steep 1.2% month-on-month increase in U.S. house prices in its latest figures (for August 2009). This is the fourth consecutive month of increases, signaling to some that residential real estate prices have bottomed (see my post on Case-Shiller here).

Not so fast. First, we need to see this trend hold through the winter months after incentives have dissipated and after the summer selling season is less of a factor driving sales.  But, there’s something more ominous lurking in the data, and Annaly points this out. It’s the growing gap between delinquencies and foreclosures.

The S&P/Case-Shiller Home Price Index grew 1.2% month-over-month, and expanded for the third month in a row, according to data released this morning.  It would appear that the housing recovery is upon us.  To maintain this sunny outlook, we advise readers to please stop their analysis of the health of the housing market right there.  For braver souls, LPS (a provider of data and services to mortgage lenders and servicers) releases its Monthly Mortgage Monitor in the middle of every month.  The growing disparity between delinquencies and foreclosure starts is in focus in the chart below, from October’s release.

As the graph illustrates, delinquencies are rising, but foreclosure starts are not.  As of September 2009, 90+deterioration more than doubled actual foreclosure starts.  LPS has dubbed this “shadow foreclosure inventory.”  Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and various moratoria.  Depending on the success of programs like HAMP, more than a few of these loans are still destined for foreclosure.

This is the result of what is known as extend and pretend because a rolling loan gathers no moss or credit writedowns, but does gather fee income.  On the one hand, a lot of home owners are finding it difficult to get loan modification terms. But, on the other hand, mortgage delinquencies have more than doubled since the recession began, so the absolute number getting modifications has risen. The question is not so much whether enough modifications are being done, but rather under which circumstances are lenders modifying loans.

The Annaly data and graph above suggest that lenders are actually modifying a decent number of mortgages that fall delinquent – so much so that foreclosure statistics understate the overall distress in the housing market. So, this is a little bit of damned if you do, damned if you don’t as far as banks are concerned. On the one hand, they are getting pilloried for not modifying loans. Yet, on the other hand, in modifying loans they can be accused of “delay and pray” tactics in order to avoid writedowns. Both accusations seem fair given the enormous increase in foreclosures. Nevertheless, you can understand the dilemma. If you want a real-life story about how extend and pretend works in practice, see my post, “Short Sales in North County: “Feeding Frenzy” as banks pretend and extend.”

These cases are where the shadow inventory everyone keeps talking about comes from: houses that have not been foreclosed but where delinquencies show an increased probability of foreclosure, especially in a weak economic environment.

For banks looking to husband capital, it makes sense to extend and pretend where one thinks there is a reasonable chance that this will result in fewer loan losses. But, at the same time, given the securitized nature of the mortgage market, it is mortgage servicers which have an increased measure of control in loan modifications. And their incentives do not appear to align with those of the mortgagees. Time will tell how all of this impacts house prices.

Source

Who Knows What Evil Lurks In The Hearts of Men? – Annaly Salvos

Related posts:

• Prime Foreclosures greater than subprime
• Case-Shiller: House prices up for second month
• Subprime, Alt-A Delinquencies Rise
• Case-Shiller: U.S. home prices up for third month in July
• Consumer loan delinquencies paint bleak picture

Nouriel Roubini seems to think so. In remarks quoted via Bloomberg, he called the enormous increase in asset prices “the mother of all carry trades.”

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

If you recall, this is the same trade the world’s punters were putting on via the Japanese yen when the Japanese were pumping out huge amounts of liquidity earlier in this decade.  The yen’s real effective exchange rate only hit post Plaza Accord trade-weighted lows in 2007 when the carry trade was all the rage and just when all hell was breaking loose in subprime.

Reuters said then:

The yen’s real trade-weighted value slipped in October as the Federal Reserve’s interest rate cuts gave a boost to global stock markets and prompted investors to sell the Japanese currency in carry trades.

Bank of Japan data on Friday showed its index of the yen’s real effective exchange rate fell 1.9 percent in October to 96.7 JPYEEXR=J.

The retreat in the BOJ’s REER index took it closer to a 22-year low of 92.8 hit in both June and July, when the currency was sliding as carry trades flourished.

That was the weakest since the September 1985 Plaza Accord in which the five biggest industrialised countries agreed to depreciate the dollar against the German mark and the yen via intervention, aiming to correct the giant U.S. trade deficit at the time.

For the year the yen’s real value has lost 3.6 percent despite periodic bouts of strength as the credit market crunch this year and worries about the U.S. economy prompted market players to unwind risky carry trades.

The yen has suffered in the past few years from carry trades in which investors use the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies or rising assets, such as stocks or commodities.

My view has been that the Japanese yen carry trade was a major contributor to asset bubbles globally as the Bank of Japan’s excess liquidity found its way to other asset markets via the carry trade.  Last August, in my post “Japan’s easy money policy was the trigger for the tech wreck” I also pointed to the yen carry trade as a major factor in the Internet bubble. And I certainly see it as a major factor in this decade’s housing bubbles.

Now the U.S. dollar is the carry trade currency of choice, with zero percent interest rates funding asset purchases globally. This play is certainly pumping up all manner of asset prices. But as with the yen carry trade before it, I do not see this ending well.

Roubini takes a similar tack:

The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.

Source

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble – Bloomberg

Related posts:

• U.S. Bailout: the mother of all carry trades?
• Japan’s easy money policy was the trigger for the tech wreck
• The carry trade unwinds and it’s not pretty
• Chart of the day: Aussie – Yen cross
• Reverse carry trade borrowing is deadly

The latest data from the S&P/Case-Shiller house price indices shows house prices increasing in 17 of 20 major residential markets. The overall composite index are up for the fourth month in a row but year-over-year comparisons still show a double-digit decline in prices. A snapshot of the data is provided below.

The three lagging markets are Charlotte, Las Vegas and Cleveland. Otherwise house prices appear to have stabilized at 2003 levels, which in real terms is quite a loss of wealth. As the summer selling season is now over, we will soon begin to get a better indication of how permanent this price plateau is.

Source

S&P/Case-Shiller Home Price Indices – Standard & Poor’s

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller shows a further decline in prices
• Case-Shiller: House prices up for second month
• Case-Shiller: Price increases in 14 of 20 markets
• Case-Shiller Home Price index shows a 17% fall

The number is zero.  According to a recent Harvard study, two of every three bankruptcies in the US are medical-related. That’s why at least catastrophic coverage for everyone is the real purpose of healthcare reform. Why some Americans don’t understand this is beyond me.

Related posts:

• Chart of the day: the largest bankruptcies in US history
• U.S. ISM manufacturing survey hits 28-year low
• U.S. unemployment claims hit a 26-year high of 573,000
• Quote of the day: William Jennings Bryan
• Application for the Federal Bail Out Program, 2008-2009

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?

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
• Household debt as an indicator of secular bull and bear markets
• US personal income data for September shows pullback
• Why the personal consumption data is important to the stock market

I tend to think so. Yesterday, Ben Bernanke made what some media outlets are calling hawkish statements.  This, combined with heavy currency intervention by Asian central banks, helped to strengthen the U.S. dollar. However one must ask if there is anything fundamental about these moves.

Just a few days ago, we got a sensational article via the British Daily the Independent in which a well-respected journalist suggested that a move was afoot to move away from the greenback as the globe’s main reserve currency.  This sent the dollar into freefall against a host of major free-floating currencies and gold to an all-time high. I wrote a skeptical post about the report at the time (see my post here). And I think the currency intervention demonstrates why.

Many of the Asian currencies are pegged to the U.S. dollar.  So when the greenback declines in value, they are forced to intervene in currency markets to maintain their pegs.  if they do not and allow their currencies to appreciate, this hurts export growth in Asia.  So clearly, the central banks in Asia do want to upset the apple cart by permitting a freefall in the value of the dollar.  Asia is too dependent on export to the U.S. for this to be a preferred policy at this juncture.

Meanwhile, the U.S. does not want a freefall either. Certainly, they want inflation (via a currency depreciation if necessary) but they do not want higher interest rates which is what a freefall would mean. So the Fed is jawboning the market.  First, we saw Kohn and Fisher out making hawkish statements. now it’s Bernanke’s turn. 

What Bernanke actually said is that the federal reserve was prepared to withdraw liquidity in a number of ways, the most interesting of which was the so-called reverse repo by which the Fed finances its own portfolio via the banks instead of the of the way around (see story here). Bernanke also mentioned paying interest on reserve deposits, a topic he has broached before.  But, the bottom line is this:

My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.

This is what Bernanke said in his presentation.

Translation: We are keeping rates at zero percent for the indefinite future, something Bill Dudley at the New York Fed has said as well. The bottom line is that despite what hawks like Hoenig or Fisher might say, we are going to be on easy street for some time to come.

Related posts:

• Federal Reserve’s Fisher says tightening will be aggressive
• The dollar is rising against floating currencies
• U.S. Dollar: Cliff Diving Again
• Currencies pegged to the dollar under pressure to drop peg
• The latest dollar rout revealed

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

In July, I blogged on an interesting take on how employment affects equity returns during cyclical recoveries by Van Hoisington and Lacy Hunt. Their thesis was that a recovery in which employment lags the overall upturn significantly is bearish for stocks. Since then, employment has indeed lagged other economic indicators.  Witness the most recent employment situation summary released earlier today.

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

Household Survey Data

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent…

The civilian labor force participation rate declined by 0.3 percentage point in September to 65.2 percent. The employment-population ratio, at 58.8 percent, also declined over the month and has decreased by 3.9 percentage points since the recession began in December 2007.

Establishment Survey Data

Total nonfarm payroll employment declined by 263,000 in September. From May through September, job losses averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 to April. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

In September, construction employment declined by 64,000. Monthly job losses averaged 66,000 from May through September, compared with an average of 117,000 per month from November to April. September job cuts were concentrated in the industry’s nonresidential components (-39,000) and in heavy construction (-12,000). Since December 2007, employment in construction has fallen by 1.5 million.

Employment in manufacturing fell by 51,000 in September. Over the past 3 months, job losses have averaged 53,000 per month, compared with an average monthly loss of 161,000 from October to June. Employment in manufacturing has contracted by 2.1 million since the onset of the recession.

In the service-providing sector, the number of jobs in retail trade fell by 39,000 in September. From April through September, retail employment has fallen by an average of 29,000 per month, compared with an average monthly loss of 68,000 for the prior 6-month period.

Government employment was down by 53,000 in September, with the largest decline occurring in the non-education component of local government (-24,000)…

In September, the average workweek for production and nonsupervisory workers on private nonfarm payrolls edged down by 0.1 hour to 33.0 hours. Both the manufacturing workweek and factory overtime decreased by 0.1 hour over the month, to 39.8 and 2.8 hours, respectively. (See table B-2.)

In September, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls edged up by 1 cent, or 0.1 percent, to $18.67. Over the past 12 months, average hourly earnings have risen by 2.5 percent, while average weekly earnings have risen by only 0.7 percent due to declines in the average workweek. (See table B-3.)

The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.

A few points here:

1. Losing over 250,000 jobs per month nearly two years into recession is an indication of a still weak employment market.  This is 400,000 jobs per month below where we want to be.
2. Why is the labor force participation rate still falling? This is a sign of a deteriorating, not improving labor market.
3. Manufacturing is still shedding workers even though industrial production is rising. That demonstrates a weakness whose source is record low capacity utilization.
4. Local and state governments are cutting workforce and countering the stimulus provided by the Federal Government as I indicated in January they would.
5. The workweek is a record low and this is crimping earnings power.

Conclusion: the labor market is till weak, weaker than it should be at this point in a cyclical recovery. Unless this changes in the fall and winter, a double dip recession is going to be more likely. While the preceding points stress the negative, I should point out that my baseline view is for job losses to continue to diminish, albeit at a slow pace. I would anticipate job gains to appear by the end of the year or early in 2010.

That gets me back to Hunt and Hoisington and partial recovery. Even if we see job gains by Q1 2010, this will be a full 6 months after the manufacturing sector turned up. This must limit consumption because spending can only increase through higher employment and income or increased debt and leverage. As most of the cost-cutting and productivity gains inherent in those cuts is now behind us, the heavy lifting begins. Earnings growth is likely to be weak in this environment.

How a fully priced equity and corporate bond market continues to rally in the face of these factors is beyond me. I see government bonds as a better bet than either corporates or equities for the medium-term.

Update: I failed to mention the rather large (over 800,000 jobs) benchmark revision of prior unemployment data.  It’s this sort of thing which makes people not trust the numbers.  But, revisions are always necessary if you are going to do month-to-month measurements in an economy as large as the United States. 

Here’s what the BLS said:

Preliminary Estimates of Benchmark Revisions to the Establishment Survey

In accordance with usual practice, the U.S. Bureau of Labor Statistics is announcing its preliminary estimates of the upcoming annual benchmark revision to the establishment survey employment series. The final benchmark revision will be issued on February 5, 2010, with the publication of the January 2010 Employment Situation news release.

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March. These counts are derived from state unemployment insurance tax records that nearly all employers are required to file. For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2009 total nonfarm employment of 824,000 (0.6 percent).

Related posts:

• US Unemployment shows 5.5%, net loss of 62,000 jobs
• Unemployment rate climbs to 9.4%
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• 467,000 jobs lost in the U.S. in June 2009

The September 2009 Manufacturing ISM Report On Business showed the manufacturing sector and economy expanding.  But no matter, the markets wanted more. Equities sold off in a major way today. We’re talking over 200 points on the Dow and 65 points on the Nasdaq. On the other hand, Treasuries rallied and the yield on the 10-year is now down to 3.19%. As I told you selling equities and buying treasuries was a good idea two weeks ago, I think this move has further to run.

Looking at the actual data, things were not terribly bad. The index fell modestly from 52.9 to 52.6. But it was the trend which was dubious. Notice the highlights in red.

The PMI is down. And the major components, new orders, production and employment, are all going the wrong way. Not good.

What does this tell us?  Not a whole lot, really. I did note that the inventory purge is proceeding less slowly, which will help GDP but still has me wondering if there’s more to the resurgence in manufacturing than inventories. But, it’s just one month’s data. In isolation, it’s meaningless.  However, if we see the same pattern next month, you should be asking yourself where this recovery is headed.

Source

Manufacturing ISM Report On Business – ISM website

Related posts:

• ISM shows manufacturing sector close to recovery
• US manufacturing suffers a steep decline
• ISM: U.S. Manufacturing sector growing again
• ISM: Is this the mother of all inventory corrections?
• ISM Manufacturing Index: New orders growing