my day (very skippable)
I was out taking photographs early this morning. While I was waiting (in vain, as it turns out) for a decisive moment to show itself, I was also rehearsing the form this post would take.
I expected the monthly Employment Situation report to say that the economy had gained, say, +250,000 jobs. I’d remark that lots of recent anecdotal evidence supported the idea that business confidence was increasing and that the economic growth was beginning to accelerate a bit. I’d point out that the figures were presaged by Wednesday’s ADP employment report of a gain last month of +238,000 jobs. ADP’s is a quirky survey, it’s true, but on the money for once. And I’d observe that the present trend represented a monthly jobs gain of about +100,000 over the number needed to absorb new workforce entrants. Assuming continuation of this trend for the rest of the year, well over a million workers who lost their jobs during the Great Recession and haven’t been able to find work since would be gainfully employed again. That’s a really big deal.
S&P futures were up by 7.5 points in anticipation of a strong ES report. The only short-term investment question would be if, and by how much, futures would rise once the ES was published.
the Employment Eituation report
Well, the actual ES report was bad–very bad. Bad enough, in fact, that I think the market will dismiss the figures as being a case of seasonal adjustment gone rogue.
a tale of two surveys
According to the establishment survey, the part that generates the job gains and losses, the economy added +74,000 positions in December. That’s only a third of the job gains in November. It’s also less than half the number of jobs the economy added on average per month over each of the past two years.
For what it’s worth, the private sector gained +87,000 positions; government declined by -13,000. Other than retail trade and temporary help, weakness was across the board. Revisions to past months’ figures were positive, but not close to the magnitude of the December shortfall: October unchanged, November +38,000.
According to the household survey, the part of the ES that produces the unemployment rate, that fell from 7.0% to 6.7%. Of the improvement, a third comes from more people having jobs, the other two-thirds from people (mostly men) dropping out of the workforce. A good number, but a bad reason for it.
It will be interesting to see how Wall Street reacts as equity trading unfolds today. As I mentioned above, I think investors will ignore the report.
The reaction of the futures to the ES report suggests that the perverse, bond-oriented idea that economic weakness postpones interest rate rises and is therefore good news has passed its use-by date.
The 6.7% unemployment rate is very close to the 6.5% figure that the Fed set as a necessary condition for beginning to withdraw extra money stimulus (remember that “tapering” is just adding extra stimulus, but at a slower rate than before). But I don’t see any bond market reaction so far.
If I’m correct, next month’s ES assumes greater importance, since the market will likely expect substantial upward revision to the December figures.
I’ve always disliked the term, “Great Recession.” It almost seemed like the press was trying to make things worse than they really were and maybe even drive the economy down by destroying consumer confidence. From what I’ve seen it really hasn’t been as bad as the recession in the early 1980’s. And it is certainly nothing like the Great Depression with 25% unemployment and stock market losses of 90%. What is your take?
This is a really interesting question, one that made me look back to the two other big post-WWII recessions, 1973-74 and 1980-82–both associated with oil price shocks.
First of all, the Great Depression stands alone with, as you mention, 25% unemployment, a GDP loss of over 30% and a very long duration.
1973-74 saw the collapse of the UK economy, then #2 in the world, which had to be rescued by the IMF. US GDP loss of around 4%, 9% unemployment
1980-82 saw the Volcker interest rate tightening + collapse of oil prices. US GDP loss of around 2% (but with one wickedly bad quarter), 10% unemployment.
2007-09 saw the potential collapse of the world financial system (like 1930). US GDP loss of about 5%, 10% unemployment.
The numbers seem to say that this time was at least as bad as either of the other two.
To my mind, two factors are different in the most recent downturn. Compared with 73-74 and 80-82, recovery this time around has been extremely slow, and so far, incomplete. Also, in this recession, I think the potential for disaster was far greater than in either 73-74 or 80-82. The halt to finance and trade around the globe was immediate. Layoffs were very swift and very deep. Without the US bank bailout legislation and the Chinese decision to rev up their economy to take up some of the slack, the world would be in a lot worse shape.
We are going through a different process than the 73-74 period or the 80-82 period. The leverage in the economy is very high (currently 3.4x debt to GDP, it peaked at about 3.7x debt to GDP in 2008 and was between 1.5x and 1.8x during the 1970s and early 1980s). In 2007, the debt markets started to freeze because the debt couldn’t be serviced, that brought us 2008. This is a similar situation that happened in the late 1920s and resulted in the great depression (except that we are levered harder now than we were then). We are now in the process of trying to extinguish this leverage. The bad news is that we haven’t made much progress on leverage reduction, the good news is that we have avoided (so far) a complete economic melt-down and the banking system has been recapitalized (this was done via QE / the expansion of the monetary base, a lot of the debt has been drained-out of the finical sector). Like the 1930s, this is a global phenomenon. Labeling this “the great recession” is misleading and a bit euphemistic – recessions are typically instigated by a rise in interest rates and self correct in a year or so. A more accurate appellation would be to call this a de-leveraging (Ray Dalio’s term). We don’t have a consumer confidence problem, we have a leverage problem. If you look at the labor department’s figures on share of adults with jobs, you’ll see that the percentage was about 63.3% in 2007 and fell to about 58.5% by mid 2009 and has remained there. There are lots of ways to count unemployment, but the fact is, we haven’t returned to the pre-crisis employment levels – in fact, it doesn’t look like we have even started to turn the corner. Again, this is math, not something fuzzy like consumer confidence. The risk in a de-leveraging is that deflation sets in (all these assets got bid-up by the massive amounts of credit created in the last 30 years) – so the central banks try to fill the gap by creating bank reserves and currency and induce a small amount of inflation. This is tricky business – assets want to deflate, the central banks want a small amount of inflation – who wins? There are lag effects, and inflation can show-up in all kinds of places, e.g., PE expansion, bonds priced for zero return. Things can get ugly if the inflation gets out of hand (raising interest rates in a highly leveraged economy causes lots of problems) and things can get ugly if deflation sets in (again, deflating assets financed with debt are a disaster). So, here we are, in what is euphemistically labeled the “great recession.”
But the term “Great Recession” was coined within a month of the start of the mortgage crisis. In a way it has become a self-fulfilling prophecy and largely for the same reasons. The collapse in the mid-1920’s was over within a year, while the Great Depression drug on for 14 years. After the collapse in the 1920’s, the government did largely nothing. In the 1930’s, all sorts of employment regulations were created (minimum wages, restrictions on layoffs and prices). This made it good if you had a job, but there was not a lot of hiring. In the 1940’s these regulations were repealed by necessity to get people working again to supply the war. This is when the depression ended.
The downturn in 2001-2003 corrected after lowering of rates and reductions in taxes. The current recession is seeing a lot of government involvement in the auto and banking sectors. There is also the specter of the huge healthcare law hanging over the economy, talk of an increase in the minimum wage, and long term unemployment benefits and welfare programs that are competitive with entry level wages. You have to wonder if this one is draggign on for similar reasons as the great depression.