January JOLTS

As a followup to my blog on the February jobs report and the job openings for December, here is the job openings report – JOLTS – for January from the Bureau of Labor Statistics:

The number of job openings in January was 3.5 million, unchanged from
December. Although the number of job openings remained
below the 4.3 million openings when the recession began in December
2007, the number of job openings has increased 45 percent since the
end of the recession in June 2009.

These are seasonally adjusted figures. As the graph shows there is steady but stuttering progress.

Federal Debt By President

There are several “factoids” running around the internet that Obama has run up more debt than all past presidents combined.  According to the Treasury Dept that claim is not true but the run up in debt has been outstanding since Obama took office in January 2009.  When Bush left office, the total debt was 10 trillion.  It was 15.5 trillion at the end of February 2012.

As the graph below illustrates, we have been borrowing lots of money for the past thirty years.

Then I wondered:  after adjusting for inflation,what is the annual increase in federal debt for each President?  Adjusting for inflation allows us to compare apples to apples.  The Federal Reserve supplies us with both data on the debt and a deflator to adjust current dollars to real 2005 dollars.  Obama’s average is computed up to Dec 2011.

Remember, these are inflation adjusted dollars.  The big spending started with Reagan but both parties have become very practiced at developing good explanations for why we have to spend a lot of money. 

Like many, I have thought that the severe downturn has dramatically reduced federal receipts.  As a percentage of GDP, it has – receipts have been coming in at 15 – 16% of GDP, when the long term average is 18 – 19%.  But … bigger government spending has inflated GDP about 10%. What have receipts been over the past decade?  During the Bush years, the Federal government pulled in an average of 2.13 trillion dollars a year in 2005 real dollars.  During the Obama years, the average is 2.0 trillion.  The drop in receipts has been relatively slight.  80 – 85% of the responsibility for the big run up in the debt is spending.

Last week, Senator McCain acknowledged the true cost of defense spending at $1 trillion and it is defense spending that led the Bush administration to run up a $5 trillion dollar deficit in eight years despite four years of robust growth, fueled largely by a real estate bubble.  The bubble burst and the severe fallout from that debacle has prompted even more defense spending – social support programs to defend Americans against lost jobs, lost health insurance and lost home equity.

“Too much spending!” Republicans cry but do not want to cut back on defense spending or agricultural subsidies in rural areas where their support is strongest.  Income tax subsidies are another form of spending, one highlighted by the Simpson-Bowles commission.  In this broken, contentious political climate, neither side of the political aisle can agree on any meaningful reductions in tax subsidies because the voters who put them there can not agree. 

Since neither side can agree on spending cuts, there is only one other solution – higher revenues.  Yes, that’s the punch line.  Funny, isn’t it?  If neither side can agree on spending cuts, they surely can’t agree on where to get higher revenues.

Bleeding heart Democrats cry out for tax justice for the poor while Republicans stand strong for tax justice for the rich.  The Tax Policy Center can find no studies showing that taxes on the rich influence job creation, either positively or negatively.  To conservatives who believe that they do, facts are unimportant.  Conservatives are like football fans – all you gotta do is believe.

Democrats suffer from the same “fact blindness,” disregarding several studies showing that long term unemployment subsidies undercut the confidence and skills of the unemployed, making them less employable the longer they are out of work.  Car and home buying subsidies of the past few years have done little but push forward the buying of cars and homes.  When the subsidy programs expired, so too did the buying of cars and homes.  Despite the demonstrated ineffectiveness of these social subsidies, Democrats continue to propound that they are for the working person.  Another month and another proposal of yet another program for the “vulnerable.”

The moderates of either party have either been voted out of office or left in frustration.  Olympia Snowe, a Republican Senator from Maine, is the latest to quit the carnival show of Congress.  She wrote, “I do find it frustrating, however, that an atmosphere of polarization and ‘my way or the highway’ ideologies has become pervasive in campaigns and in our governing institutions.”

We can not agree on spending cuts and we have two large spending items looming in the near future which will only exacerbate the debate.  The Boomers are just beginning to collect on their deferred annuity program – we know it as Social Security.  They are one kind of bondholder expecting the government to make good on the promises it has made.  The really big bond leviathan is that world wide group of holders of U.S. debt – over $10 trillion in treasury bonds and notes.   We have benefited from the “flight to safety” over the past few years as investors around the globe have bought U.S. debt at ridiculously low rates.  Investors will want a more normal return for their money eventually and when that happens, the annual interest expense on our debt will rise.  These two groups of bondholders with demands and expectations will light the fuse.

If you think the past decade has been contentious, you ain’t seen nothin’ yet.

The Long Run

Now the really big picture.  Reflecting the severity of the market downturn that began in late 2007, the 4 year average (50 month) of the S&P500 index is getting close to crossing below the 17 year (200 month) average.  Remember, this is years.  In the normal course of affairs, inflation tends to keep the shorter average above the longer average.  The crossing or “nearing” of these two averages reveals just how sick the past decade has been.  The last time the market showed this indicator of prolonged market weakness was in the first half of 1978, after a 43% market drop in the bear market of 1973-74 and a 19% drop in 1977.

In the last 60 years, was the October 2008 market drop of 17% the deepest monthly plunge in equity prices?  No, that honor goes to the almost 22% dive in October 1987.  For a consecutive 3 month drop, 2008 does barely nudge out 1987, both falling 30%.

Although headlines will speak of the downturn in the Fall of 2008 as the worst since the depression, it is important for Boomers to remember that our parents’ generation suffered through some pretty severe market declines as well.  In 1987, most Boomers were in their thirties and probably had relatively few dollars in the stock market.  We may remember “Black Monday”, October 19, 1987, for the headlines but it was not as personal as the 2008 decline because we were decades before retirement and had less at stake.  What particularly distinguishes the two years is that the unemployment rate continued to fall during the 1987 decline.

Young people don’t remember market crashes the way that older people do.  When we are young, we have – like forever – before we are going to be old.  For the echo boomer generation born in the eighties and nineties, also known as the  “millennials”, or Generation Y, the crash of 2008 will be a faint or non-existent memory when they reach their fifties decades from now.  They will probably get to have their own crash – one that they will remember because they will have more at stake.

When we are in our twenties, someone should prepare us.  We are going to work hard and save money.  We are probably going to put some of that hard earned money in the stock market.  Then, when we are in our fifties, sixties or seventies, we are going to flip out when our stock portfolio drops by 40%.  Would we listen to or remember that sage advice?  Probably not.

Labor Report – February

This past Friday, the Bureau of Labor Statistics (BLS) released their monthly assessment of the labor market, reporting a net increase of 227,000 jobs during the month of February.  This marked the third consecutive monthly increase of more than 200,000 jobs, giving many hope that the tepid economic recovery is gaining a firmer foothold.  Consumer spending accounts for more than 2/3 of the economy.  Any improvements in the overall economy are fragile without a strengthening labor market.  Almost 1/2 million people who had previously given up looking for work became available for work again.  This influx of job seekers offset the rise in jobs, causing the unemployment rate to remain unchanged at 8.3%.

The monthly survey of businesses showed job gains in many industries:  Business services, leisure and hospitality, health care, mining and manufacturing. In 2011, government jobs disappeared at the rate of 22,000 per month.  That job attrition has slowed to zero, indicating that the cut backs in government are largely over and will no longer weigh down any growth in the private sector.

The bad news is that there are many critical elements of the jobs report that were unchanged.  The long term unemployed remained about the same at 5.4 million.  The participation rate of the 155 million civilian labor force is a bit less than what it was a year ago but the employment population ratio is slightly above Feb. 2011’s rate.  The average workweek remained unchanged at 34.5 hours.  Involuntary part time workers, those who would like a full time job but can’t find one, remained the same at 8.1 million. 

As encouraging as February’s data is, the 5.4 million who have been unemployed for 27 weeks or more is a troubling sign of the underlying weakness of the job market.  Below is a BLS historical comparison of the unemployment rate and the long term unemployment rate.  The 70 year timeline of the graph illustrates the ongoing crisis levels of long term unemployment.

On Monday, March 12th, the BLS will release the monthly JOLTS job openings report for January 2012.  In December, there were 3.4 million seasonally adjusted job openings, an increase of almost 10% from the previous month.  This is better but – always that but – the graph below shows non-seasonally adjusted (NSA) December job openings from the previous ten years to show the improving but still weak number of job openings.

As I have mentioned in past blog posts, there is some concern that the seasonal adjustments that the BLS uses may have some weaknesses due to the severe downturn in the fall of 2008 which affected the winter seasonal adjustments.  The BLS makes one set of seasonal adjustments for the six months from May through October and another set of adjustments for the November through April period.  With advances in statistical modeling that the Census Bureau has introduced over the past 50 years, the BLS has refined their methodology of making seasonal adjustments.  The concern is not with their methodology but with the data itself of late 2008 and early 2009, an “outlier” that was so extreme that it “contaminates” the data set in subsequent years. The BLS incorporates 5 years of data in their projections of seasonal adjustments, so this “hangover” will last into the spring of 2014.  You can read an overview of the adjustment methodology used by the BLS here.  Without seasonal monthly adjustments, January’s job data each year would look dismal, with job losses regularly in the 2.5 to 3 million range, as employers lay off workers who were hired for the Christmas season.

A comparison of the raw numbers for job gains in February of each year do give an indication of labor market momentum.  As the chart below shows, the gains in February have been one of the strongest of the past decade.

But we saw strong gains last year throughout the spring only to see the momentum fade, explaining why the reaction to this month’s gains have been one of “cautious optimism”.  Some attribute the loss of momentum last year to the tsunami, the unrest of the Arab spring and rising gas prices, the ongoing sovereign debt problems in Europe, and the embarrassing budget battle.  But there may be more to it than the events of last year.  I contend that there is a structural weakness in our labor market that makes us more susceptible to the “winds” of current events.

As I have done before, let’s look at the core working population, 25 – 54 years old.  These are non-seasonally adjusted figures for February in each of the past ten years.

These are the “middlers”, those of us who are buying homes for the first time, raising families, buying appliances and cars and they are the backbone of a consumer economy.  The job growth of this population backbone has been flat and remains at levels below those of the early part of the decade, as this country pulled out of the 2001 – 2003 downturn.

The largest part of the increase in employment have come from those who are older than 54, as shown in the chart below of the larger data set of those 25 and older who are employed. Partially this is due to an aging population – the graying of the Boomers – but it shows a structural weakness in the labor market which undercuts the resilience of the economic recovery.

The takeaway is that we are once again seeing improvement but our economy and labor force suffers from a brittleness that the labor data exposes.  Part of that brittleness is due to an aging population; part is due to the continued de-leveraging and slow recovery typical of major financial crises; part is due to political indecision in government which reflects the indecision and disagreement among the voters; part is due to a very “accommodating” (translation: low interest rates) Federal Reserve policy that attempts to distribute financial pain, reward and risk throughout the economy using the few monetary tools that it has.

The stock market is encouraged but stuck. After rising for the past two years, the 200 day moving average of the SP500 has leveled off for the past 6 months, a phenomenon not seen since April to October of 1994.  October 1971 to March 1972 and May through September 1957 saw a similar 6 month plateau.  The Indians in the market are hunched over with their ears to the ground, not certain whether the distant sounds they hear are buffalo or thunderstorms.