Central Perk: Mish's Global Economic Trend Analysis

vineri, 7 ianuarie 2011

Mish's Global Economic Trend Analysis

Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate
BLS Job Report: December Nonfarm Payrolls +103,000, November Revision +32,000, October Revision +38,000; Workforce DROPS by 260,000
Italy The Invisible Elephant

Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate

Posted: 07 Jan 2011 08:42 PM PST

In response to BLS Job Report: December Nonfarm Payrolls +103,000, November Revision +32,000, October Revision +38,000; Workforce DROPS by 260,000, reader "Aleph" wants to know how someone drops out of the workforce.

Aleph writes ...

Hello Mish

Can you explain to your readership how the government determines that a person has dropped out of the labor force, as opposed to running out of unemployment benefits and becoming desperate (or homeless) with no job and no decent prospects? Or do they make no distinction between voluntarily leaving the work force and involuntarily leaving it?

"Dropping out" sounds much less dire than being unemployed because there aren't enough jobs to go around.

Thanks,

Aleph

Ways of Dropping Out

Hello Aleph, someone drops out of the workforce in one four general ways.

1. They stop looking for work
2. They retire
3. They go back to school full time and are unavailable for work
4. They are institutionalized (prison for example)

The big numbers come from 1, 2, and 3 with #1 leading the pack.

If a person wants a job, is available for a job and keeps looking for a job, that person is unemployed. I suspect most retirees, stop looking.

Note that number 2 may be voluntary or involuntary. An example of an involuntary retirement is someone who wants work to work but retires because he has expired all his 99 weeks of benefits and desperately needs to start collecting social security before he goes homeless.

All of this is determined by a phone survey. The BLS attempts to determine the following

1. Are you employed full time?
2. Are you employed part time?
3. Do you want a job?
4. Are you available for a job?
5. Have you looked for a job in the last four weeks?

A Yes to #1 or #2, no matter how few hours someone worked (exceptions apply for unpaid family workers) puts someone in the "EMPLOYED" category.
A No to #3, #4 (except for temporary illness), or #5 would put someone in the "NOT IN THE WORKFORCE" category.
A No to #1 and #2, and a Yes to #3, #4 (except for temporary illness), and #5 puts someone in the "UNEMPLOYED" category.
Those employed or unemployed are considered "IN THE WORKFORCE"

However, the BLS does not ask those questions directly. Rather the phone interview attempts to figure the answers to those questions.

How the Government Measures Unemployment

Please consider How the Government Measures Unemployment

There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people. The CPS sample is selected so as to be representative of the entire population of the United States.

Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. This practice avoids placing too heavy a burden on the households selected for the sample. After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months, and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.

Each month, 2,200 highly trained and experienced Census Bureau employees interview persons in the 60,000 sample households for information on the labor force activities (jobholding and jobseeking) or non-labor force status of the members of these households during the survey reference week (usually the week that includes the 12th of the month). At the time of the first enumeration of a household, the interviewer prepares a roster of the household members, including their personal characteristics (date of birth, sex, race, Hispanic ethnicity, marital status, educational attainment, veteran status, and so on) and their relationships to the person maintaining the household.

Each person is classified according to the activities he or she engaged in during the reference week. Then, the total numbers are "weighted," or adjusted to independent population estimates (based on updated decennial census results). The weighting takes into account the age, sex, race, Hispanic ethnicity, and State of residence of the person, so that these characteristics are reflected in the proper proportions in the final estimates.

Because these interviews are the basic source of data for total unemployment, information must be factual and correct. Respondents are never asked specifically if they are unemployed, nor are they given an opportunity to decide their own labor force status. Unless they already know how the Government defines unemployment, many of them may not be sure of their actual classification when the interview is completed.

Similarly, interviewers do not decide the respondents' labor force classification. They simply ask the questions in the prescribed way and record the answers. Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

People with jobs are employed.
People who are jobless, looking for jobs, and available for work are unemployed.
People who are neither employed nor unemployed are not in the labor force.

Unpaid Family Workers

But what about the two following cases?

George Lewis is 16 years old, and he has no job from which he receives any pay or profit. However, George does help with the regular chores around his father's farm and spends about 20 hours each week doing so.
Lisa Fox spends most of her time taking care of her home and children, but she helps in her husband's computer software store all day Friday and Saturday.

Under the Government's definition of employment, both George and Lisa are considered employed. They fall into a group called "unpaid family workers," which includes any person who worked without pay for 15 hours or more per week in a family-owned enterprise operated by someone in their household.

Interview Questions

The questions used in the interviews are carefully designed to elicit the most accurate picture of each person's labor force activities. Some of the major questions that determine employment status are: (The capitalized words are emphasized when read by the interviewers.)

1. Does anyone in this household have a business or a farm?
2. LAST WEEK, did you do ANY work for (either) pay (or profit)?
If the answer to question 1 is "yes" and the answer to question 2 is "no," the next question is:
3. LAST WEEK, did you do any unpaid work in the family business or farm?
For those who reply "no" to both questions 2 and 3, the next key questions used to determine employment status are:
4. LAST WEEK, (in addition to the business,) did you have a job, either full or part time? Include any job from which you were temporarily absent.
5. LAST WEEK, were you on layoff from a job?
6. What was the main reason you were absent from work LAST WEEK?
For those who respond "yes" to question 5 about being on layoff, the following questions are asked:
7. Has your employer given you a date to return to work?
and, if "no,"
8. Have you been given any indication that you will be recalled to work within the next 6 months?
If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:
9. Have you been doing anything to find work during the last 4 weeks?
For those who say "yes," the next question is:
10. What are all of the things you have done to find work during the last 4 weeks?
If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked:
11. LAST WEEK, could you have started a job if one had been offered?
If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

Who is not in the labor force?

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

To summarize, employed persons are:

All persons who did any work for pay or profit during the survey week.
All persons who did at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.
All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons, whether or not they were paid for the time off.

Unemployed persons are:
All persons who did not have a job at all during the survey reference week, made at least one specific active effort to find a job during the prior 4 weeks, and were available for work (unless temporarily ill).
All persons who were not working and were waiting to be called back to a job from which they had been laid off (they need not be looking for work to be classified as unemployed). -

One More Exception

Based on an example in the article, those out of work because of a labor dispute are considered employed even if they are looking for another job during the dispute.

Finally, please note that the official unemployment rate is solely based on the household phone survey as described above. It may not bear any resemblance to the weekly unemployment claims numbers or the monthly establishment jobs report.

Participation Rate, Employment Population Ratio, and Unemployment

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The above chart from The Declining Participation Rate by Calculated Risk.

The falling participation rate reflects the number of people dropping out of the workforce. It is falling for two reasons. People have given up looking for a job and also because of demographics (people retiring as the boomer population ages). The predominant reason is people have stopped looking for a job.

Here are my posts on Creative Destruction, referenced in the chart above.

The workforce should be expanding by 100,000 to 125,000 jobs a month. Instead it is falling like a rock. This is a very deflationary event. It stops credit expansion, and it reflects retirees needing to draw down on their savings, pulling money out of the stock market.

Stock market pressures are negative when people need to get out or they fear further loses in their retirement accounts.

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

BLS Job Report: December Nonfarm Payrolls +103,000, November Revision +32,000, October Revision +38,000; Workforce DROPS by 260,000

Posted: 07 Jan 2011 10:42 AM PST

Following ADP's report of private-sector employment at +297,000, the BLS reported private sector employment at +113,000 and an overall nonfarm total of +103,000 well under expectations of about +175,000 jobs. However, there were substantial backward revisions to note.

Revisions

November nonfarm payroll revised from +39,000 to +71,000 a gain of +32,000.
November private payroll revised from +50,000 to +79,000, a gain of +29,000.
October nonfarm payroll revised from +172,000 to +210,000 a gain of +38,000.
October private payroll revised from +160,000 to +193,000, a gain of +33,000.
Combined nonfarm payroll revision +70,000.
Combined private payroll revision +62,000

If those back revisions were instead added into today's numbers, nonfarm payrolls would be +173,000 and private sector jobs at +175,000. Those would have been good, but not amazing numbers.

However, a better way of looking at things is via the revisions. We had a better than expected seasonal ramp of jobs in October followed by subpar job growth in November (even after the revisions), and subpar growth in December as well.

This is along the lines that I have suggested several times: limited hiring following seasonal retail hiring.

260,000 Drop Out of Work Force

The reported unemployment rate fell a substantial .4% to 9.4%. However, much of that that gain is a statistical mirage. The BLS reports a whopping 260,000 people dropped out of the work force. As a result the participation rate fell to a new low of 64.3%.

BLS December Report

Please consider the Bureau of Labor Statistics (BLS) December 2010 Employment Report.

The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today. Employment rose in leisure and hospitality and in health care but was little changed in other major industries.

Unemployment Rate - Seasonally Adjusted

Bear in mind, were it not for millions of people allegedly dropping out of the labor force over the last year, the unemployment rate would be over 11% right now.

Nonfarm Payroll Employment - Seasonally Adjusted

Note the effect of temporary census hiring earlier this year. For all the hype about the improving economy, there has only been one good jobs report all year, in October.

Establishment Data

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Index of Aggregate Weekly Hours

The average workweek for all employees on private nonfarm payrolls held at 34.3 hours in December. The manufacturing workweek for all employees declined by 0.1 hour to 40.2 hours, while factory overtime remained at 3.1 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls increased by 0.1 hour to 33.6 hours.

In December, average hourly earnings for all employees on private nonfarm payrolls increased by 3 cents, or 0.1 percent, to $22.78. Over the past 12 months, average hourly earnings have increased by 1.8 percent. In December, average hourly earnings of private-sector production and nonsupervisory employees rose by 2 cents, or 0.1 percent, to $19.21.

BLS Birth-Death Model Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals).

Birth Death Model Revisions 2009

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Birth Death Model Revisions 2010

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Birth-death adjustments remain in the solar system for an unprecedented four consecutive months. November was negative. I cannot recall the last negative number in any month but January or July.

Birth/Death Model Methodology

The big news in the BLS Birth/Death Model is the BLS is going to move to quarterly rather than annual adjustments.

Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

It is possible that the BLS model is now back in sync with the real world. Moreover, quarterly rather than annual adjustments can only help the process.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Household Data

In the last year the civilian population rose by 1,965,000. Yet the labor force rose by a mere 518,000. Those not in the labor force rose by 1,447,000. In December alone, a whopping 260,000 people dropped out of the workforce. The one bright spot in the entire report: employment rose by 297,000.

Households Stats

The number of unemployed persons decreased by 556,000 to 14.5 million in December, and the unemployment rate dropped to 9.4 percent.
The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 6.4 million and accounted for 44.3 percent of the unemployed.
The civilian labor force participation rate edged down in December to 64.3 percent, and the employment-population ratio was essentially unchanged at 58.3 percent.
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged in December at 8.9 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.
About 2.6 million persons were marginally attached to the labor force in December, little different than a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

In January 2010 the number of people working part time for economic reason was 8.3 million. 12 months later the total has gone up by 631,000.

Table A-8 Part Time Status

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There are now 8,931,000 workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

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Grim Statistics

The official unemployment rate is 9.4%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.4%, U-6 is much higher at 16.7%. Moreover, both the official rate and U-6 would be much higher were it not for huge numbers of people dropping out of the workforce.

Things are much worse than the reported numbers would have you believe.

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

Italy The Invisible Elephant

Posted: 07 Jan 2011 04:54 AM PST

In regards to the escalating sovereign debt crisis in Europe, most eyes have been focused on Greece, Ireland, Spain, and Portugal, the so-called PIGS.

Dr. Evil, a former government bond trader for a very prominent bank pinged me regarding my post PIGS Exposure Table, Explaining the Panic by Numbers. Her message was to pay more attention to the second "I" in PIIGS, namely Italy, the "invisible elephant".

Dr. Evil writes ...

Hello Mish

I just saw your table on the PIGS and I see the biggest one of all missing, ITALY. I traded Euro Government bonds for 11 years and know this market inside out. Spain is a big one should it go but Italy has a cool 2 Trillion EUR in debt and has much worse debt statistics than Spain.

Italy's debt-to-GDP ratio is 118% (2009). Greece got in trouble at 116%. Italy's deficit is smaller and has a high savings ratio. However, nobody focuses on that as Spain is in the limelight with a debt-to-GDP ratio under 60%. Should austerity measures result in a nominal GDP contraction in Italy, its debt stats will worsen very rapidly.

Italy is the elephant in the room not Spain.

Regards
Dr. Evil

Let's take a closer look at sovereign bonds spreads in Europe, comparing German 10-year government bonds to Italian 10-year government bonds.

German 10-Year Government Bonds

Italian 10-Year Government Bonds

Since mid-October, German 10-Year Government bond yields are up .64%. In the same timeframe, Italian 10-Year Government bond yields are up 1.04%.

The flight-to-safety divergence increased starting around December 16, 2010. Since then, German bonds yields are off .16% while Italian bond yields rose .14%.

Government Bond Spreads as of January 7, 2011

On January 7, 2011 the German-Italian spread government bond spread is 1.88% and rising. Table is courtesy of the Financial Times.

Web of Debt

Here is an interesting chart courtesy of the New York Times regarding Europe's Web of Debt that helps explain the picture.

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The graphic is from May, 2010 so it's a bit dated. However, it does explain the interrelationships quite nicely.

Note that Italy owes France a whopping $511 billion, 20% of the French GDP. Moreover, nearly 1/3 of Portugal's debt is held by Spain. Meanwhile Spain owes huge amounts to Germany, France, and the UK.

Do you think all of that will be repaid? I don't.

Critical Court Ruling Coming Up

In Feb 2011 the German court gives its verdict on the constitutionality of the bail-out. Fifty academics and politicians sued the government over it. February is crunch time. For more details please see EU Commission Plans Haircuts on Bank Debt; Greek Yields Hit New Record; China Buys Spanish Debt; German Courts to Decide Bailout Constitutionality.

If the German courts uphold the constitutionality of these various bailouts, the crisis is merely pushed a bit further down the road.

New Irish Government Likely To Demand Haircuts

In March a new Irish government will take over and it is highly likely that government questions the hundreds of billions Ireland owes German, French, and UK banks.

I believe Ireland should tell the ECB and IMF to go to hell and default. For my rationale, please see To Ireland With Love. Here is the "Trojan Horse" image I used with the article.

Italian Snowball and Off-Balance Sheet Derivatives

In a subsequent email, Dr. Evil elaborated on Italy's off-balance sheet debt.

Hello Mish,

If Italy were to go into a nominal GDP recession on account of its austerity programs, its debt-to-GDP ratio would likely be 130% by 2012. It's difficult to see how the market would ignore that.

Also check out Italy's debt compared to Germany. Here is the official EU Gross Government Debt Figures by country. Note that as of 2009, Italy's Debt is 1.763 Trillion EUR, about the same as Germany. Obviously the German economy is far bigger.

Moreover, I assure you that Italy has a lot of off-balance sheet debt. Some European countries took some very creative measures to reduce interest payments on debt. Italy was one of those countries.

I have seen Italy do HUGE (10+ billion USD) derivative transactions. Those transactions were all off-balance sheet but the cash flows behind the transactions were very real.

Italy was the number 1 customer for big investment banks in London for years. You won't find anything about that in the press.

In 2011, Italy will need to rollover a pile of debt. It will be interesting to see how that goes. I believe that if the 10-year yield hits 6%, an irreversible snowball effect similar to what Greece and Ireland went through is likely.

That's when gold hits $2000

Dr. Evil

2011 Italian Debt Issuance

Inquiring minds are reading Italian Public Securities By Maturity to see how much debt Italy will need to rollover in 2011.

A quick look at page 3 totals approximately 281 billion in euro debt rollovers. Assume a 5% budget deficit on a GDP of roughly 1.5 trillion euros and you end up with 281 + 75 billion or roughly 356 billion euro total debt issuance.

Will the market accommodate that issuance at a good interest rate? If not, the "Invisible Elephant In The Room" will quickly make its presence known in a rather rude manner.

Addendum:

Flashback July 23,2006: Citigroup Haunted by Dr. Evil, Fails to Gain Governments' Trust

Almost two years after Citigroup Inc. riled the dozen countries in Europe's government bond market with secret trades code-named Dr. Evil, the debacle is hurting shareholders of the world's largest financial institution.

Citigroup arranged just 2.3 percent of the 155 billion euro ($196 billion) in debt sold by the governments since it unleashed Dr. Evil on Aug. 2, 2004. That's little more than a fifth of its market-leading 10.1 percent share in 2003, data compiled by Bloomberg show. And while the $26 million fine Citigroup paid was the equivalent of a rounding error on annual earnings, the New York-based bank has lost the chance to win lucrative fees for handling sales of state assets, such as France's $7 billion stake in Groupe Caisse d'Epargne; Citigroup is now 14th among advisers on European privatizations, down from third.

German financial market regulator Bafin referred the case in January 2005 to a public prosecutor, who decided against pursuing the case "for legal reasons," said Anja Neukoetter, a Bafin spokeswoman in Bonn. France's Autorite des Marches Financieres passed its evidence to the U.S. Securities and Exchange Commission, said Sabine Baudin, a Paris-based spokeswoman at the AMF.

Thomas Maheras, 43, Citigroup's head of global capital markets, acknowledged in a memo to employees that the bank's conduct wasn't above reproach.

"We regret having executed this transaction," Maheras said in the memo, which was distributed to news organizations in September 2004. "We failed to fully consider its impact on our clients, other market participants and our regulators."

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