The Return of NILF

Add to all that falling nominal and real incomes in April, weak real consumption spending in April (+0.2%), falling real spending on goods in April, a further sharp fall in pending home sales, the housing recession getting worse, the mortgage credit crunch getting worse, home prices falling, home equity withdrawal shrinking, gasoline prices rising, a trillion dollars of ARMs being reset this year. Then, in spite of the recovering supply side factors (a rising ISM in manufacturing, some modest increase in capex spending by the corporate sector, consumer confidence holding in spite of lower real incomes and higher gasoline prices), the outlook for the US economy remains weak.

While the consensus expects a significant recovery of growth in Q2 and the rest of 2007, that recovery is conditional on a saving-less, debt-burdened and housing-wealth-shrunk consumer to hold up. While the consensus expects the US consumer to hold up there are now initial indications – starting with falling real incomes, mediocre consumption spending growth and increasingly negative households savings in April – that the US consumer may be on the ropes.

Nouriel,

Taking into account what you said, how does globalization, generally low interest rates, weak dollar, and tons of liquidity factor in to the equation when analyzing the current macro environment?

Also, would you agree that corporate management and structure is way more disciplined/efficient since living through the dot com bust?

What about the role hedge funds and private equity play in providing liquidity and M & A activity?

I hear all the bad things you are saying, but I just want to play the other side of the coin and discuss how the current environment has changed since say 5-6 years ago. Which side will win over?

Forgot the link:

http://en.wikipedia.org/wiki/Unemployment#The_limits_of_the_unemployment_definition

Whatever dude, it’s like, going up.

Put your dough in emerging markets and enjoy.

A quote from Nouriel Ruobini:

“Last year the BLS reported 498K private sector jobs created in Q3 with still positive job growth in construction. But last month the BED (Business Employment Dynamics) survey of the BLS showed that job growth in Q3 was actually 19K and that 77K jobs were lost in construction alone. So, the BED-time fairy tale of half a million jobs created in Q3 (when GDP growth was still a modest 2.2%) turned out to be practically zero (repeat “practically zero”) when a more precise survey of these payrolls was made a few quarters later.”

When you have a flawed model predicting job growth and add the double-whammy of politicized methods of estimating NILF you end up with junk-bond level information.

It doesn’t bother me that some want to rely on the official “stats” and continue to believe in fairy tales; what is irksome is the inept reporting of these numbers as fact.

The legitimate concern is whether or not the overly-optimistic mindsets will drive debt to the point of collapse, and then the question won’t be about how much I made in the market – instead, it will be how much of what I made still holds any value.

Thank goodness the internet is available to find news ignored by MSM. Here are a couple of noteworthy entries.
From the United Nations:
“United States debt, which had now deepened to well over $3 trillion, might turn out to be unsustainable in the rest of 2007 or next..” From: http://www.un.org/News/briefings/docs//2007/070530_Ocampo.doc.htm

And this little nugget from Bloomberg.com:

“Investors snapped up the $340.7 million CDO, a collection of securities backed by bonds, mortgages and other loans, within days of the Dec. 12, 2000, offering. The CDO buyers had assurances of its quality from the three leading credit rating companies –Standard & Poor’s, Moody’s Investors Service and Fitch Group Inc. Each had blessed most of the CDO with the highest rating, AAA or Aaa.

Investment-grade ratings on 95 percent of the securities in the CDO gave no hint of what was in the debt package — or that it might collapse. It was loaded with risky debt, from junk bonds to subprime home loans. During the next six years, the CDO plummeted as defaults mounted in its underlying securities. By the end of 2006, losses totaled about $125 million.”

Massive U.S. debt dependent on foreign investent for sustainability; private equity companies loading down buyouts with massive debt, paying themselves huge fees, then dumping them back on the public; credit rating agencies helping create the CDO and then rating the CDO while at the same time disclaimering away any responsibility for loss…it is a massive game of running with the bulls – who can make the most the fastest and then dance out of the way before being gored.

so what does this imply about the long term growth rate of the economy?

you’d think that a decline in the participation rate would mean that the capacity for growth in the economy has fallen…

how can we grow like gangbusters when no one wants to work?

should we just get used to 2% growth from here on out?

if so, shouldn’t interest rates be lowered to account for this?

The unemployment number is the probably the least of the “lies of ommission” spun by the “ministry of truth”.

The US, and world, economies have been pumped up by leverage for the past six years. Subsidized interest rates have reduced the cost of capital asset purchases while at the same time reducing the incentive to save. The ponzi subsidy has required a commensurate increase in the money supply, which eventually will result in a decrease in the value of money. Don’t look now, America, but your pitiful savings have been devalued by 40 pct or more vis a vis other world currencies.

Bernanke has done a masterful job at initiating the return to reality without a crash. Roubini has done a masterful job at accurately predicting and describing the descent. The economy is a where he said it would be. We generally have to wait for the official numbers revision to validate Roubini’s predictions.

I congratulate those individuals that have ridden this bull and have the fortitude to continue. Personally, I don’t have the stomach or the recovery time left to play the game. I remember the last bubble and am skeptical of what lies ahead. Leverage is leverage, it cuts both ways, enhancing returns on the way up and amplifying losses on the way down.

In large part, the stock bubble of the late 90’s was inflated by phantom corporate profits. I suspect that is currently the case.

I am like most Americans in hoping that the bad guys in the white house, the federal reserve, the supreme court, and the former congress are really not doing what they appear to be doing. In his book, “the Great Unravelling”, Paul Klugman cites the writings of Henry Kissinger as an appropriate description of the baffling lack of response by the American people to the radical onslaught of the Bush administration; ” Lulled by a period of stability which had seemed permanent, they find it nearly impossible to take at face value the assertion of the revolutionary power that it means to smash the existing framework.”

Perhaps America can pull out of the economic hangover that generally follows over-stimulation of demand through excess monetary creation. The rational economic prognotications for most of the Bush swindles have come true. The tax cuts have resulted in massive deficits and failed to provide commensurate economic stimulation. The unprovoked attack on Iraq has resulted in a massive financial drain and a reduction in national security. The medicare drug plan will be an incredible financial hardship for our grandchildren. Off-shoring has reduced famly-level-pay jobs in the US. These are just some of the short-term policy effects. Wait until the lond term medicare fiasco sets in.

Frankie: As for “tech”, there is always a shortage of people 2 years out of college but with 5+ years worth of industrial experience, if you get my drift. And in locations with high cost of living there is always a shortage of “qualified” people of any description in jobs that offer only “regular” compensation that used to be a ticket to a comfortable lifestyle, but no longer is.

As is quite often the case, John Mauldin has an excellent macroeconomic analytical piece this week, and this once certainly helps to tie together much of what Barringo and Nouriel* have said (and the authors Mauldin quotes in his piece), and his general conclusions are the same as mine. We just don’t yet know how the next few months will unfold.

*I’ll assume only the real NR would be allowed to post under that name on TBP.

It’s in his “Thoughts from the Frontline Weekly Newsletter,” titled: ‘A Little Discretionary Spending, Please’
…by John Mauldin, June 1, 2007

I’m sure everyone can find it easily:

http://www.2000wave.com/gateway.htm

Rex Nutting is an excellent observer and reporter and he has a good piece as well. It’s much more balanced than it would seem in the title and leading headline:

http://tinyurl.com/2c6dbm

All of this is related and all of it provides factors that, could we know the continued direction and magnitude of the factors in advance, would tell us what the next 6-18 months have in store.

Either optimism or pessimism, expressed merely as w-i-l-l-f-u-l-n-e-s-s of the observer, are each just alternate forms of b-l-i-n-d-n-e-s-s.

While this is “off topic”, I wanted to point out some interesting work on the whole “personal savings” issue I saw on Carlfutia.com:

In a column by Mark Hulbert in The New York Times May 27 Sunday edition he observes that more than a few people have predicted a multi-decade bear market ahead for US stocks because the baby-boomers will be cashing in their retirement nest eggs.

But Hulbert counters this view with the results of a recently released economic study by three economics professors. They are J. M. Poterba (M.I.T), S. F. Venti (Dartmouth), and D. M. Wise (Harvard).

http://www.nber.org/papers/w13083

In this paper the three authors argue that the total of 401(k) assets plus corporate pension plan assets will in the year 2040 represent a significantly bigger fraction of that year’s Gross Domestic Product than is now the case in 2007. It goes from 38% of GDP in ’05 to 155% of GDP in 2040.

I think this punctures the bear balloon based on any baby-boomers asset bust. ”

Yeah Frankie,
You keep buyin’ them thar US equities. Those of us who put our money, well, pretty much anywhere else in the world over the past few years are crying all the way to the bank.

Tying the off topic pension thing back to the original topic, the NILF stuff really needs to be figured out in a better way.

We all know that the model of Daddy going to work at the same place for 40 hours/week at an hourly rate + overtime + benefits for most of his life is gone. As people float freely between contract work, leisure, continuing education, and community/family work, getting a bead on what’s really happening is going to be a challenge.

Adding to NC Jim’s comment:

I’ve gone to the BED site:

http://www.bls.gov/bdm/

Go to the report and its summary:

http://www.bls.gov/news.release/cewbd.nr0.htm

See Table A, and find net employment change by thousands for the last 2 quarters of 2005 and the first 3 quarters of 2006.

Those number have to be derived by subtracting the gross job losses from the gross job gains for each quarter and the figures are not estimates but rather are real counts from information provided as follows (quoting from BED):

“The microdata used to construct the gross job gains and gross job losses statistics are from the Quarterly Census of Employment and Wages (QCEW), or ES-202, program. These data include all establishments subject to State unemployment insurance (UI) laws and Federal agencies subject to the Unemployment Compensation for Federal Employees program. Each quarter, the State agencies edit and process the data and send the information to BLS in Washington, DC. The data cover approximately 98 percent of all employment; the major exclusions from UI coverage are the self-employed and certain nonprofit organizations. Establishments report employment for the pay period including the 12th of the month. The job flow estimates report employment changes between the third month of each quarter.”
…end quote.

Note that BED *DOES* apply statistical adjustments to both gross job gains and gross job losses (within the sub-categories of the BED study), explained here by BED:

“The seasonally adjusted series for employment and establishments at opening, expanding, closing, and contracting establishments are independently adjusted and the net changes are calculated based on the difference between gross job gains and gross job losses. Seasonal adjustment is run concurrently using X-12 ARIMA.”…end quote.

Still, the adjustments are merely seasonal adjustments and do not involve the same type of adjustments built into the BLS NFP monthly report. That is… they are not like the consequential overstatements of employment at the end of expansions or the understatements of employment at the end of contractions. Instead, these data are the result of actual counts, in the sense that an election is the result of the counting of votes, whereas a poll is the estimate of the winner of a subsequent election when the votes are indeed counted.

I thought it might be useful to do the calculations that BED has only done on the summary for the 5 quarters ending with the 3rd quarter of 2006. Although I won’t guarantee that I haven’t made a mistake, here are the results extended backwards as far as the 1st quarter of 2000 (year listed followed by all 4 quarters if available):

2000 – (+818) (+541) (+146) (+336)
2001 – (-101) (-771) (-1,380) (-781)
2002 – (-1) (-80) (-211) (-175)
2003 – (-404) (-142) (+72) (+344)
2004 – (+435) (+594) (+191) (+869)
2005 – (+325) (+574) (+628) (+551)
2006 – (+784) (+466) (+19) (unavail)

That table appears to me to pretty accurately represent the employment reality we all observed during the period, although I must say that I would never have thought 2005 and early 2006 would have been so strong. Still, it was not until about the 3rd quarter of 2006 that real underlying problems in the housing and mortgage industries grew to a level that could not be denied by the naysayers to those problems, and the sudden drop to 19,000 net new jobs for the quarter was a quite reasonably expected observation.

While everyone can draw their own conclusions from this information, it appears to me that the “over and under” discussions that occurred in the financial media all during subsequent BLS NFP data releases for each month of that 3rd quarter in 2006 allowed many commentators to make erroneous observations about the effects of employment on the economy. Consequently, optimistic observers who may have then denied the likely magnitude of upcoming economic weakness, and attributed their denials to employment strength, were mislead by their own erroneous assumptions that BLS NFP data were presenting an accurate picture of the underlying trend of employment at the time. The final BLS NFP studies for those 3 months of the 3rd quarter of 2006 demonstrated a gain of 606,000 NFP jobs, and now the BED study demonstrates that the net of new job creation was just 19,000 for the entire quarter.

My point here is not to criticize BLS as many of you have done, but merely to recognize the scientific reason why so dynamic a study as NFP can not demonstrate a change in an underlying trend reversal until the data are available to show that the trend has indeed reversed. I’ll again use the analogy I’ve used before: Imagine a blindfolded man as the passenger of a car passing through hills and valleys. All he has to give him clues about his relative points on hills or in valleys are the sounds of the wind passing the car or the sounds of the straining engine and transmission. Often his senses will mislead him.

BLS itself says that when the BED data series becomes more extended, it will become more capable of demonstrating underlying employment dynamics. And, they speak to the point of reliability here:

“Reliability of the data

Since the data series on Business Employment Dynamics are based on admini- strative rather than sample data, there are no issues related to sampling error. Nonsampling error, however, still exists. Nonsampling errors can oc- cur for many reasons, such as the employer submitting corrected employment data after the end of the quarter or typographical errors made by businesses when providing information. Such errors, however, are likely to be distri- buted randomly throughout the dataset.”…end quote.

As I have said here before. The next few months will give us a better understanding of whether the economy will suffer a more sufficient decline in GDP, because we will have more data to observe what is happening to employment now… at the moment this is written, just like we are able to look back at BED data from 2000 and see a picture of what we all now know was the real picture of employment during all those quarters.

I’ll also add that the revised 0.6 on 1st quarter GDP is already quite a significant surprise to the majority of optimistic economists who last year and earlier this year suggested that about 1.2 – 1.6 would witness the bottom.

Now, can someone tell me what the next quarterly update (Q4) to the BED employment study will show?… Will 19K have been the bottom, or are we about to begin to see the delta of the BLS monthly survey worsen by an amount that will prove to exceed the level of BLS’s quoted statistical significance (pardon me but I think that’s approx 460K or so if I remember correctly).

One can easily see from prior BED data that the recently reported 157K NFP increase is simply of no statistical significance in proving employment is increasing, when taken as a single data point.

I will admit that, until now, there had been little statistical evidence of employment turning down. We may have sensed it, and we may have observed that it was almost impossible to believe that the downturn in housing could’ve resulted in any increase in construction jobs during the same period… but there was no real proof, to now.

BED will likely tell us the story of what’s really happened over the last approximately 9 months.

Economic Lies

What is the current state of our economy? Well, if you read the business pages of the US press, it would seem that we are doing quite nicely although it looked a bit dicey earlier this year. As the Chicago Tribune says, The economy got the flu in the f…

Computer Science was such a great field – Lots of fun, learned soo much; graphics, math, patterns, algorithms, puzzle solving, etc. It has helped in everything I do, but, I’m NOT a programmer (with regards to my day job). I was in the top 15% of a UC campus graduating class, living in So Cal., and had tons of drive. NOTHING AGAINST anyone I worked with, but my first two jobs were filled with HS1B visa holders, all making about 50k a year, working LONG hours, in So Cal. It’s definitely not much when you have to lay down for expenses.

Companies were just not inclined to train anybody – they could contact the companies (and lawyers) that would set up visas for programmers from other countries in a heartbeat. To be honest, I’m pretty sure some of their ‘Masters’ degrees couldn’t hold a candle to a BS here.

Anyway, I agree with Barnaby and cm that the technical fields (including medical, law, financial, etc. to greater degrees) were dealt a huge blow. I vowed to work were they need boots on the ground and to find a position that would be very tough to outsource.

Management and board-members never gave a second thought to what their cost-cutting measures would do – only what it did to the bottom line and their stock options. A ‘company’ now is something to pillage and plunder while you get your parachute ready.

It’s not a race to the bottom – it’s a freefall.

I hope graduates can figure something out. When the H1C’s start to hit – we’ll start seeing wage deflation in the medical fields and nursing, which have been propping up the labor numbers quite a bit.

A Service economy creates ‘service’ jobs and service wages.