miercuri, 1 iunie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Mood Swings: Economists Rush to Lower Payroll Estimates; What to Expect on Thursday and Friday

Posted: 01 Jun 2011 09:20 PM PDT

It's a never ending source of amusement that economists can never think in advance. Instead they revise estimates after the fact to be in line with the data.

Weekly Claims Numbers

On Thursday the weekly claims numbers come out. I am writing this Wednesday evening.

The number 4-week moving average of weekly unemployment claims is relatively easy to call. The number to beat is 438,500.

Over or Under?

Expect a drop (an improvement) in that number.

In light of recent data a drop may see counter-intuitive but it is highly likely. The reason is simple. The last four weeks' claims numbers are, in order: 424K, 414K, 438K, and 478K.

478,000 drops off the list. It will be replaced by the numbers for the week ending May 28. Unless that number is greater than 478,000 the moving average will drop. I will take the under on 478,000 and thus the under (expecting a drop) in the moving average.

My guess is the 4-week average will be between 420,000 to 430,000. For an actual guess, I select 427,000.

If the number is lower expect the bulls to trump it up. Instead it will simply reflect an abnormally high number dropping off the average.

Monthly Payroll Report

Gaming the 4-week moving average of unemployment claims is the easy part. The tough part is gaming Friday's monthly payroll report.

Two days ago I would have taken the "way-under" in regards to economic estimate consensus. I meant to mention that in Market Ticker in regards to the Slowing Global Economy, but I forgot. Apologies offered.

However, in light of recent "unforeseen" by economists news, economists' estimates are now far lower.

Economists rush to mark down payrolls estimates

Please consider Economists rush to mark down payrolls estimates
Reflecting one of the largest one-day mood swings in recent memory, the downward revisions now place last month's job growth at 125,000, the weakest since the 68,000 positions created in January and down from the average of 233,000 over the past three months.

As the sun rose on a steamy Wednesday in Washington, economists polled by MarketWatch had been looking for growth of 175,000 in nonfarm payrolls for May, a consensus figure representing a decline from a healthy 244,000 in April but still passing for strength. The nation's unemployment rate was expected to reverse April's slight uptick and fall to 8.9%.

First-time claims for unemployment benefits rocketed to 474,000 in late April — the highest level in nine months — from under 390,000 earlier in the month. Claims have since fallen back, coming in at 424,000 for the latest week.

Analysts tended to dismiss the claims data as an aberration. They saw continued strength in hiring, and some were hopeful that more than 50,000 jobs created by McDonald's Corp. might offset any weakness in other sectors.

But this confidence cracked soon after data based on payrolls handled by Automatic Data Processing Inc. showed that only 38,000 private-sector jobs were created in May — extraordinarily weak given that economists were expecting a gain in the neighborhood of 175,000 jobs.

Adding fuel to the fire, later in the morning, the Institute for Supply Management's May survey of factory supply managers was disappointing. The ISM factory index sank by nearly seven points to a 53.5% reading, the largest drop in nine years.
Who cut forecasts and by how much

  • "We have no choice but to revise down our payroll estimate" in light of the weak ISM and ADP reports, said the economic team at Bank of America Merrill Lynch, in a note announcing they had sliced their forecast to 125,000 nonfarm payrolls for May from the prior estimate of 165,000.
  • "We continue to expect a loss of 25,000 public-sector jobs but have reduced our forecast for private payrolls to 100,000 from 200,000," said Julia Coronado, chief economist at BNP Paribas.
  • Economists at Goldman Sachs cut their forecast for Friday's government employment report to show 100,000 nonfarm jobs added in May, down from 150,000 previously.
  • LaVorgna trimmed his forecast for nonfarm payrolls to 160,000 in May, down from a prior estimate of 225,000
  • Stone & McCarthy cut its forecast in half, to 100,000 jobs.
  • Jim O'Sullivan,chief economist at MF Global, cut his forecast for May jobs growth to 90,000 from 150,000.
  • IHS Global Insight now expects a gain of 135,000 nonfarm jobs in May, down from a forecast of 175,000 before the day's data were released


Did the Lemmings Overshoot?

It is very difficult to know if the lemmings overshot or not. On one hand McDonald's allegedly added 50-70 thousand jobs and those jobs may affect the establishment survey. However, no one knows because the BLS in its infinite "wisdom" will not confirm who is in the survey.

Moreover, burger-flipping jobs tend to increase in summer months so one has to seasonally adjust. Then again, 50-75K is likely to be in excess of seasonal adjustments.

Finally, I do not know if McDonald's is in the ADP survey either. Regardless, picking a number is a crapshoot. It always is, but particularly true now.

The Real Deal

It really does not matter if McDonald's added 50,000 jobs or not. Flipping burgers will not fuel a recovery. Moreover, even if McDonald's did add that number of jobs, it is a one-time affair.

I wonder how many desperate engineers or recent college graduates took those jobs out of desperation. The sad fact of the matter is that unemployment has been dropping for a year based on burger-flipping jobs, part-time jobs, or people dropping out of the labor force.

Since April 2008 6,484,000 dropped out of the labor force. In the last year alone, 2,916,000 dropped out of the labor force.

For a discussion of exactly what questions the BLS asks to determine the unemployment rate, please see Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate

Here's the real kicker. In the last year the number of people employed FELL by 292,000! Yet. miraculously the unemployment rate dropped nearly 1%. On that count, the unemployment rate should have risen at least 1%.

What to Expect on Friday?

Garbage. That's what.

Officially I will take the under on jobs and the over on the expected unemployment rate of 8.9%. For a guess on the latter, 9.2% seems reasonable on the data (and that was my opinion before the ISM and ADP reports). However, Lord only knows how many people the BLS might say dropped out of the labor force.

If burger flipping saves the day, it won't last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

Posted: 01 Jun 2011 12:45 PM PDT

In the second of three videos on the Daily Ticker recorded yesterday, please consider Debt Ceiling Vote a "Political Sideshow", Mish Says: Real Issue Is "Govt. Spending Run Amok"
By a whopping margin of 318-97, the House Tuesday evening overwhelming rejected a proposal to raise the debt ceiling without accompanying spending cuts. The so-called "clean" debt ceiling vote was expected to fail and leaves Congress two months to reach a compromise before U.S. government goes into technical default on its debt. (See: U.S. Hits the Debt Ceiling: What Does It All Mean?)

In recent weeks, a growing number of market participants have said a technical default wouldn't be nearly as "catastrophic" as Tim Geithner and others have warned. As Clusterstock's Joe Weisenthal reports, this seemingly "out-there viewpoint" is becoming mainstream and is shared by a number of market notables, including hedge fund legend Stan Druckenmiller, bond fund maven Jeffrey Gundlach and IRA's Chris Whalen. (On Wednesday morning, House Speaker John Boehner released a letter signed by more than 150 economists, including Nobel laureate Robert Mundell of Columbia, supporting his call to only increase the debt ceiling if accompanied by significant spending cuts.)

You can now add Michael "Mish" Shedlock of Sitka Pacific Capital to this growing list.

"I would like to see the implications" of a technical default, Shedlock tells Henry and me in the accompanying video. "I think all of they hype surrounding this…is a political sideshow and nothing more."

As with the others cited above, Shedlock believes "there is no political willingness by either party to address the real issues here, which is government spending run amok."

While the Republicans are positioning themselves as the party of fiscal responsibility and austerity, Shedlock notes Rand Paul's balanced budget amendment only received 7 votes in the Senate last month. And while that was 7 votes more than President Obama's budget received, Shedlock was "quite frankly disgusted" by the lack of GOP support for Sen. Paul's proposal and fears the Republicans will "at some point in this game of chicken…give up and agree to hike the debt ceiling."

Eventually, the bond market will force the politicians to cut spending and Ben Bernanke to tighten monetary policy, Shedlock says. "All it takes is rapidly rising interest rates," he says. "It's going to happen. I would prefer it happen sooner rather than later to force the hands of Bernanke and the politicians."

By his own admission, Shedlock (among many others) has been warning about this scenario for a long time and Treasury yields have been falling of late, not rising. Still, he is steadfast in a view that cutting spending, while painful short-term, is absolutely critical for America's long-term economic viability. "People like Paul Kurgman think we should just continue on the path we're on until the economy recovers," he says. "The economy is not going to recover until you stop throwing money at it — wasting it on projects that don't need to be done."
Small Correction

I need to make a small correction to the text above. Until the official start of QE2 I was generally bullish on treasuries. I called for record all time low yields across the entire yield curve and we got it. Then new record lows in yield came on 2-year, 3-year, and 5-year treasuries just prior to start of QE2.

10-year and 30-year treasures did not come close to new lows.

That was it for me. At the end of October 2010, just before QE2 started I changed my tune and became bearish on all but very short-term treasuries.

However, we might see yet another "flight-to-safety" trade in the long-end of the treasury curve. Indeed, we may already be in one. Yields have come down substantially. This time, I am on the sidelines of that treasury rally.

Will the Bond Market Force Congress to Act?

If Congress and Bernanke continue on the current path, yields are likely to rise unless there is another serious recession, and they may rise regardless.

Spending is unsustainable and everyone but Keynesian clowns realize it. Even Congress realizes it, they just lack political will to do anything about it. Something will give eventually, or ultimately the bond market will force its will. That could be quite a ways off as Japan proves.

Session Video



A few sharp minds may have noticed this was recorded yesterday yet the discussion was on the failure of Congress to raise the debt ceiling, before the vote took place. However, It was widely understood by everyone involved that Congress would not hike the ceiling.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish on Yahoo Finance Daily Ticker on Slowing Global Economy; U.S. Manufacturing ISM Plunge; Order Backlog and New Orders Barely Above Contraction

Posted: 01 Jun 2011 09:11 AM PDT

I had the pleasure of doing several segments on Yahoo Finance Daily Ticker on the slowing global economy with Aaron Task and Henry Blodget.

Please consider What Recovery? The Economy's Weak And Getting Weaker, Says Mish
This month marks the two-year anniversary of the "recovery" that began in June 2009. But you can easily be forgiven if you haven't noticed.

Why?

Because this recovery doesn't feel like a recovery--in part because it isn't much of a recovery. Normally, after a recession of the depth and length of the one we had in 2008 and 2009, the economy comes roaring back with GDP growth of 5%-7% for a couple of years. In the latest recovery, we've only had one quarter that exceeded 5%, and the growth last quarter was a pathetic 1.8%.

The jobs market, meanwhile, remains weak, with unemployment still at a staggering 9%. Corporate profits are hitting all-time highs, which is helping the stock market, but these profits haven't translated into new hiring.

House prices continue to fall. Wage growth is stagnant. Inflation is picking up. Oil is now back over $100 per barrel. Our debt burden is still massive. And our government is still running shocking deficits of ~$1.5 trillion per year. And the rest of the world is experiencing pretty much the same thing.

Put it all together, says Mike "Mish" Shedlock, an advisor at Sitka Pacific Capital and the author of Mish's Global Economic Trend Analysis, and you can draw only one conclusion: The economy's weak and getting weaker.

Mish, in fact, thinks we may be headed for another recession.

Tell us what you think!


The above video was recorded yesterday, well in advance of the just released Manufacturing ISM numbers. If the video does not play, please click on the preceding link.

May 2011 Manufacturing ISM Report

Please consider the May 2011 Manufacturing ISM Report On Business®

"The PMI registered 53.5 percent and indicates expansion in the manufacturing sector for the 22nd consecutive month. This month's index, however, registered 6.9 percentage points below the April reading of 60.4 percent, and is the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. Slower growth in new orders and production are the primary contributors to this month's lower PMI reading. Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs."

Price, Profit Squeeze Coming



Prices plunged this month along with everything else. However, prices are well above contraction. Orders on the other hand are barely above contraction. Either commodity prices plunge, or manufacturers get hit in a price and profit squeeze with falling customer demand.

Which will happen? I think both.

For more on the slowing global economy please see China's Manufacturing Slowest in 9 Months, New Orders Suggest Manufacturing May Have Already Peaked; Australia Biggest GDP Drop in 20 Years

Addendum:

That was the first of three videos. The second video was a discussion on the debt ceiling.

Please consider Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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