Central Perk: Mish's Global Economic Trend Analysis

joi, 30 decembrie 2010

Posted: 30 Dec 2010 05:16 PM PST

The latest Contrary Investor Subscriber Report contains an interesting set of charts and commentary that shows just how misguided Fed and Obama administration focus on supporting consumption as the means to improve GDP.

Their analysis is always well written, so inquiring minds may wish to take a closer look.

I have permission to do occasional clips so please consider this clip from Looking For Love In All The Wrong Places?

Looking For Love In All The Wrong Places?...You are all very much aware of the change in market tone and sentiment over the last four months. Strategists and investors fretting over rapidly deteriorating macro leading economic indicators (remember the ECRI reaching levels always consistent with recession?) and contemplating the possibility of a double dip has given way to these same folks now trying to one up each other in putting forth ever higher domestic GDP growth estimates for the new year. Goldman (Jan Hatzius) has been a poster child example of this about face, but they have plenty of company. The transition is not hard to understand. With the heavy POMO started in September, followed up by QE2, and now the tax cut extension legislation that should add about $400 billion of "new" fiscal stimulus in 2011, we better have an improved outlook. Certainly THE issue as we move into 2011 is the potential for organic economic growth, or otherwise. Personally, we just can't put a big "multiple" on marginal stimulus (read borrowed money) additions to macro near term economic expansion. But this issue will not become relevant until 2011 is well underway.

As we see it, one of the really big keys for economic and we believe ultimately financial market performance in the new year will be first, whether corporations spend their currently amassed "savings". It's more than well known that through both operations and borrowing in a generationally low interest rate environment, corporations are sitting on top of a boatload of cash at the moment. We're already seeing the M&A deals primarily in tech and health care sectors taking place. Secondly, again if QE2 is to be effective, corporations must spend their cash domestically, and not let that cash "leak" into foreign direct investment and/or capital markets. Preferably, corporations would spend their cash domestically on productive investment. Even we'll admit, that would be bullish. And crazily enough, it would be in stark contrast to what we believe are the misguided policies of the Fed and US government over the last three years.

Right to the key point of this portion of the discussion that happens to be a question and will hopefully become clear as we look at a few longer term data points. Why has the Fed and Administration focused their monetary and fiscal policies virtually exclusively on consumption when it is productive investment that is the key to longer term sustainable economic health and ultimately growth?

The Fed and Administration are carrying out a failed longer term policy of focusing virtually exclusively on trying to stimulate consumption. Unless they change their ways, and fast, it will only be the corporate sector that can truly save the day for the longer term sustainable health of the US economy. Keep an open mind and let's walk through a bit of history.

The top clip is self explanatory. You may also remember, and we will not drag you through it again, that US credit market debt relative to GDP began a three decade acceleration in the early 1980's leading up to the recent peak of a generational credit cycle.

We believe the message of the combo chart above is as clear as a bell. As consumption became an ever larger piece of US GDP over time, the ten year rolling average of US GDP growth went into longer term rate of change decline.

The point is that debt financed consumption pressured the longer term growth rate of US GDP over time as consumption adds nothing back to the longer term infrastructure and productive capacity of the economy itself.

Now, remember that disposable income can either be consumed or saved. And it's that very savings that ends up as productive economic investment over time. So next up is a look at the US savings rate relative to the 10 year rolling average of US GDP growth over the last half century. Notice anything? Of course you do.

From the late 1950's through to the early 1980's, the US savings rate reached ever higher highs, as exactly did the rolling ten year average of US GDP growth. But once the decline in the savings rate began, so did the decline in the longer term growth rate in US GDP. Directionally these two data points are twins.

Below we're looking at the year over year change in nominal US GDP. About as simple as it gets. Alongside is the year over year change in non-residential US fixed investment. A very broad proxy for productive investment/corporate capital spending. These two data points are about as highly directionally correlated as they come. And what this clearly implies is that the longer term rhythm of the US economy is integrally tied to productive investment. Not consumption, but productive investment.

So stepping back just a bit, why have the Fed and Administration been focusing their efforts on consumption when it's clear that productive investment is the driver of longer term US economic growth? Is it consumption that allows China to grow its economy at double digits, or productive investment? Again, we know there has been over investment in China and we have too much productive capacity globally for now, as this is really a story for another complete discussion. But China never could have "arisen" economically without an important investment in long lived productive assets. You know the fiscal remedies so far stateside. Cash for clunkers, home buyer tax credits, appliance purchase rebate credits, the recent one year drop in the employee side of payroll tax rates, etc. - every single initiative focuses on consumption as opposed to investment. Again, maybe we'll look like nut balls before the current cycle is over, but Fed and Administration policies are not going to put the US on a longer term firm economic footing, especially within the context of a globalized economy. The US is not going to borrow and consume its way to prosperity. That only enriches the nations doing the actual production. We did that over the last thirty years and the rolling ten year US GDP growth report card is our reward.

Unfortunately, as opposed to supporting and encouraging this transition from reliance on consumption (in a still highly levered economy) to increasing focus on productive investment, the Fed and Administration are acting in contravention. They appear blind to the messages of history. We're scratching our heads. To be honest, we have only one answer as to why this is happening, and we sound like conspiratorial maniacs when we voice it. Consumption favors the financial sector, especially if that consumption is even partially financed.

It's simply out in the open these days that the Fed and Administration have done everything in their power to protect the financial sector in the US, even at the expense of the taxpayers and small business. The same thing is happening in Europe. Could it really be that this misguided and myopic focus on consumption as our current savior is simply an extension of that blanket of "protection" to the financial sector? Let's hope not. Let's just hope it's ignorance, ok?

Explaining Fed Actions

The Fed is clearly beholden to the banks, especially large too-big-to-fail (TBTF) banks. Certainly the Fed may sound concerned about unemployment, but it's safe to assume the Fed's overriding concern is borrowers' ability and willingness to pay back the banks.

History shows Bernanke's idea of inflation targeting at 2% ignoring asset bubbles that build along the way is economically stupid. So why does he do it?

For the sake of argument and in deference to Occam's Razor , let's assume that all of the Fed's mistakes are out of ignorance as opposed to some conspiracy by the Fed to transfer wealth to the financial sector. Simply put, never ignore stupidity when it is a plausible answer to why something happened.

Regardless of why, nothing changes from the perspective of the Bank CEO. The TBTF banks know full well they can take enormous economic risks, secure in the knowledge the Fed will bail them out if they get into trouble.

The latest twist is Citigroup's chairman now brags that Citigroup is "Too Interwoven To Fail". Please see 98 TARP Recipients Close To Failure; Citigroup's Chairman Gives Reasons Citigroup Should Be Broken Up for details.

When profits are rising CEO and executive compensation soars. When the banks fail, taxpayers bail out the banks and shareholders take the hit. However, the CEO gets a golden parachute worth hundreds of billions of dollars. Thus, from the perspective of TBTF banks, the right thing to do is take enormous risks.

The same thing is happening in Canada right now. Please see Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion for further discussion.

This process explains the massive boom bust cycles we have seen and how wealth gets increasingly concentrated into fewer and fewer hands over time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Anecdotes on the Payroll Tax Cut

Posted: 30 Dec 2010 11:46 AM PST

A small business owner friend of mine has some thoughts on the 2% payroll tax cut that I would like to share.

SBO writes ...

Hello Mish
Here's a quick note on the 2% payroll tax cut. We own a couple of small companies, each with under 200 employees. We provide health insurance to our employees, but they share the cost. We pay $300 per month per individual, and any cost above that (including cost increases) are shared 50-50. Our average salary is about $42,000. The 2% payroll tax cut will be about $70/month for the average person.

However, our health insurance cost increased by $117 per month for individuals (more for families) and that was only after altering the benefits, shopping intensively, and changing providers.

Thus, the same average employee will pay an additional $58.50/month for increased health care costs. The net additional dollars to the employee will be $11.50/month. So, spending another $70/month will all be a boost to GDP, since spending on health care is deemed consumer spending but I don't think my employees are going to feel any richer.

This adds to what I said in Jobs Forecast 2011 Calculated Risk vs. Mish (correcting a couple of awkward sentences).

OK there is going to be more money in paychecks because of a reduction in Social Security collection. In response, I see ever increasing estimates as to how much that payroll tax cut will add to GDP.

However, I have to ask "How much of that payroll tax cut will go to increased sales taxes, state income taxes, and property taxes?"

I have not seen anyone properly address that question. I suggest we need that payroll tax cut to break even. Certainly taxes of all kinds are going up in Illinois. Our idiotic governor wants to hike income taxes 33%. Sales taxes will likely go up as well.

While Illinois may be an extreme example, bear in mind that places where taxes are not going up will see more layoffs.

SBO adds another aspect I did not even consider. Some employees who share medical costs with their employer will have the payroll tax cut completely eaten up before they see a penny of it. The payroll tax cut will not be there to spend, it will have already been spent. That applies even more so to the self-insured.

Then there are property taxes, state income taxes, and sales tax increases to consider (or additional cutbacks in states that do not raise taxes). GDP may get a small boost from this in theory, but the overall net effect will be a decrease in jobs and the average taxpayer will not see a dime of the decrease.

Addendum:

Here is a a reader email from David who lives in North Carolina regarding the above post.

Hi Mish,

Just read the article and thought I would offer my two cents (maybe a dollar after you finish this!) on the payroll tax cut.

I am the sole employee of my S Corp, so I am self employed. The 2% FICA cut is worth about $155 a month to me. I got my annual letter from Blue Cross stating my new rate for Health Insurance. It goes up $154 a month, so I net out $1 per month. I if see you in North Carolina maybe we can share a cup of coffee if we can find a cup for $1.

I read you blog every day along with several others I deem worthy. Really enjoy it. I am floored by stories of the public unions and pensions in other states and click on the links to read the full story. NC has no public unions, virtually no private unions, and a pension system that is solvent NC public pensions are not extravagant. These stories are unheard of in NC, not that we don't have a few of other types to tell. Our corruption is a little different.

NC is facing a 20% (3.7 billion about) hole in the state budget next year. The politicians are stating they will close it without raising taxes or borrowing, but I am waiting to see what they do. There is no way to close the budget without cutting the state payroll. Most State employees have gone without pay increases for the last two years. I suspect a number of them will be laid off unless the idea of pay cuts I am starting to hear discussed is real. The precedent is there, NC cut pay in the Great Depression to close a similar gap without cutting employees / services.

David
Chapel Hill NC

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Jobs Forecast 2011 Calculated Risk vs. Mish

Posted: 30 Dec 2010 04:05 AM PST

Calculated Risk, a good friend of mine, has come up with employment projections for 2011. He thinks the economy will grow by 2.4 million private jobs (200,000 a month), with an upside chance of 3 million jobs.

I think those estimates are extremely high and we will not come close to even 2.4 million jobs. I give my rationale below, but first let's see what Calculated Risk has to say.

Please consider Calculated Risk's Question #5 for 2011: Employment

The U.S. economy added about 87 thousands payroll jobs per month in 2010 through November. This was extremely weak payroll growth for a recovery. How many payroll jobs will be added in 2011?

The U.S. will add around 1.2 million private sector jobs in 2010. And this despite the construction sector losing over 100 thousand jobs in 2010 (the fourth year in a row of construction job losses).

It now appears that job creation is picking up, and it also appears that the construction sector will add employees for the first time since 2006. There were over 2 million construction jobs lost during the downturn, and a relatively small number will be added next year - but every little bit will help.

This suggests to me that private payroll employment will increase by over 2 million jobs next year, maybe as high as 3 million jobs! My guess is around 2.4 million jobs as shown on the following graph.

Of course state and local governments will probably lose some jobs, but it looks like 2011 will be the best year for private job creation since the '90s.

What is the Driver for Jobs?

One question I continually ask is "What is the driver for jobs?"

Let's address that question, sector by sector, using all the major component breakdowns of job categories by the BLS, starting with the BLS Current Statistics reports for October or November (the latest graphs available).

Please click on any chart below to see a sharper image.

For all the brouhaha about the manufacturing recovery, employment in the manufacturing sector has dropped four consecutive months. Before estimating manufacturing for 2011, let's look at the long-term chart.

That does not look so pretty. Nonetheless, manufacturing averaged +10,000 jobs a month in 2010. Will 2011 look more like the first half of 2010, more like the second half, more like the long-term trend, or more like another temporary flattening out?

I will take an average of 2010 as a guess.

Manufacturing Jobs Expectation for 2011 is +10,000 per month.

January and February were a disaster for construction in 2010 so let's drop those. The average March through November is +3,000. Let's be generous and round to the nearest 5,000.

Construction Jobs Expectation for 2011 is +5,000 per month.

The average number of mining jobs January-October 2010 is +8,000.

Mining Jobs Expectation for 2011 is +8,000 per month.

Temporary help services was one bright spot in 2010. The January-November average is +27,000 a month. The August-November average is 31,000 a month. Let's be generous and add 4,000 jobs a month to the August-November total.

Temporary Help Services Jobs Expectation for 2011 is +35,000 per month.

BLS has Temporary Help as a subcomponent of Professional and Business Services. It is hard to say whether or not permanent hiring takes hold but if it does it will likely be at some expense to Temporary Help.

There are no charts available for Professional and Business Services, but let's add another 10,000 jobs a month to give a total of +45,000 jobs per month for Professional and Business Services.

Retail trade was certainly all over the map in 2010. I am not sure what to make of these big swings. The average for January-November 2010 is +6,000.

Retail Trade Jobs Expectation for 2011 is +6,000 per month.

Let's discard January and February as not being representative of the year. The 9 month average March-November is 9,000.

Transportation and Warehousing Jobs Expectation for 2011 is +9,000 per month.

Financial activities is one sector that did not recover in 2010. Look for a repeat in 2011. Mortgage refinancing is falling off a cliff. I expect bank warnings about profits and lots of layoffs in this sector as a result of rising interest rates in general and mortgage rates in particular.

The average number of jobs January-November is -7,000. Look for a repeat with job losses stacked in the first half.

Financial Activities Jobs Expectation for 2011 is -7,000 per month.

The January-November average is +15,000. I think we have seen some of the restaffing we are going to get and growth in 2011 will not be as robust.

Leisure and Hospitality Jobs Expectation for 2011 is +10,000 per month.

Healthcare has been a rock solid performer throughout the recession. The one possible downside to 2011 is cutbacks at country hospitals over budget concerns. Otherwise a continuation of 2010 seems likely. The average for January-October is +20,000. Let's ignore the downside risk and be slightly generous, using the average of the latest 4 months.

Healthcare Jobs Expectation for 2011 is +24,000 per month.

The BLS groups education and healthcare together in the monthly jobs reports (why I do not know). However in these summary reports the BLS breaks out healthcare separately. There are no charts for education.

Education is one of the big wildcards. Traditionally this is a growing segment. However, cities are under a lot of pressure here. There could be losses in this component, perhaps big losses with increasing class sizes unless teachers' unions take pay or benefits cuts or unless help comes from the federal government. I am going to assume no growth in education as a middle ground.

Education Jobs Expectation for 2011 is +0 per month.

Wholesale trade is a minor jobs component. I do not have a chart, but will assume a nominal amount of growth.

Wholesale Trade Jobs Expectation for 2011 is +3,000 per month.

Information is a very minor jobs component. I do not have a chart. The last three months were -7,000, -1,000, and +1,000. Let's assume +1,000 a month.

Information Jobs Expectation for 2011 is +1,000 per month.

I do not have a chart of Other Services . The last three months were +17,000, +30,000, and -8,000. The average is +13,000.

Other Services Jobs Expectation for 2011 is +13,000 per month.

Note how local governments were still expanding mid-recession, all the way up till July of 2008. A year later, starting June of 2009, local governments finally got religion and started cutting jobs. Look for this trend to continue into 2011.

The average number of local government jobs for January-November 2010 was -21,000. Let's assume it will be the same for 2011 although there could be a disaster coming up at the local level.

Local Government Jobs Expectation for 2011 is -21,000 per month.

In spite of all the whining at the state level, states have not yet made any significant cuts in employment. The average for January-November 2010 rounded to the nearest 1,000 is 0. Let's assume there will be no net gains or cutbacks at the state level for 2011, even though I expect some losses.

State Government Jobs Expectation for 2011 is +0 per month.

Total private employment January-November 2010 was +1.2 million. Total nonfarm employment was +951,000. That means 249,000 government jobs were lost so far in 2010. Of those 231,000 were local government jobs and none at the state level. Thus a net of 18,000 jobs, about 1,000 a month were lost at the Federal level. Instead, let's assume no net federal jobs for 2011.

Federal Government Jobs Expectation for 2011 is +0 per month.

Totals and Subtotals by Category

I come up with +127,000 private jobs a month in comparison to Calculated Risk's estimate of +200,000 jobs a month. That is quite a difference.

I have total nonfarm jobs at +106,000.

Let's do a reality check.

Monthly Job Growth 1999-2009

Chart courtesy of BLS. Annotations by me, numbers are in thousands.

The areas in deep blue mark recessions.

At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.
At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. If anything, outsourcing of jobs to Asia is likely to remain intense.

Finally, consider all the financial engineering jobs, banking jobs etc, that are not coming back.

I simply do not see any driver for jobs. Many of these optimistic scenarios are based on a "typical recovery". Well this is not going to be a typical recovery. Indeed, it already is not a typical recovery.

Furthermore, Europe is a basket case, the housing bubbles in Australia and Canada are popping, China and India are both overheating and will slow, and topping it off, there is a very genuine chance that the retail hiring done for the Christmas season is all we get.

Store expansion is not going to be like it was in 2006-2007.

OK there is going to be more money in paychecks because of a reduction in Social Security collection. In response, I see ever increasing estimates as to how much that payroll tax cut will add to GDP.

However, I have to ask "How much of that payroll tax cut will go to increased sales taxes, state income taxes, and property taxes?"

I have not seen anyone properly address that question. I suggest we need that payroll tax cut to break even. Certainly taxes of all kinds are going up in Illinois. Our idiotic governor wants to hike income taxes 33%. Sales taxes will likely go up as well.

While Illinois may be an extreme example, bear in mind that places where taxes are not going up will see more layoffs.

Thus, from every angle, I struggle mightily to come up with +200,000 a month. Note that I stretched in several places to be purposely optimistic, tossing out bad months at the beginning of the year, etc. If everything goes right, perhaps we can add 160,000 jobs a month, but that assumes I am way off on the education component.

If the economy does add 160,000 private jobs a month, depending on government cutbacks, the unemployment rate will barely drop, and in fact might not even drop at all.

At +100,000 to +125,000 total jobs a month, the unemployment rate will likely rise. Given all the tremendous risks, the economy might not add that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

joi, 30 decembrie 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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joi, 30 decembrie 2010

Mish's Global Economic Trend Analysis

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