Author: sgstofka

Obama’s GDP Problem

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In these home stretch months before the election, President Obama and Republican nominee Mitt Romney will be repeatedly challenging each other’s economic performance; Obama as President and Romney as Governor of Massachusetts.  Already the initial attack ads of both campaigns are running and each has plenty of factual ammo they can aim at the other.  Contrary to all common sense, we continue to measure Presidents by the health of the economy.  Although Congress is largely responsible for the laws that govern the economic dynamo of a country, we look to the President to set priorities for Congress – or at least that’s what we tell ourselves.  In truth, we are rather simple minded and prefer to hold one man responsible rather than a group of 535 Congress people and Senators. 

For some background, let’s take a look at a chart showing the real GDP, that is GDP in constant 2010 dollars, per capita over the past five decades.

Then zoom in on the last ten years, showing the severe decline of per capita GDP during this recent recession.

Now let’s look at the total per capita GDP growth by President.  If real GDP per capita was $100 when a President took office and $120 when he left office, then total real GDP growth was 20% during that President’s watch.  We’re not going to look at the annual percentage of growth, only the total.  For the most recent GDP data I have used BEA estimates of $15,454 trillion as of the first quarter of 2012. I have used Census Bureau estimates of a total population of 313 million and a BLS inflation factor of 2.186 since 2010.

Almost by instinct, the voters do not re-elect Presidents who are at the helm of a low growth country.  Below is a chart of the first term total real GDP growth of Presidents who were re-elected.  I have not included Johnson because he only served for a year before he was re-elected.

As you can see, GW Bush was the only President re-elected with a total growth gain less than 10% and Bush won re-election by winning Ohio by two percentage points or 118,775 votes.  Had 60,000 voters cast their ballot for Kerry, GW Bush would have lost Ohio’s 20 electoral votes and the election.  As the first Presidential election after 9/11, the election focused more on national defense and foreign policy, not the economy.  A barrage of attack ads, the Swift Boat campaign, against Kerry in the last weeks leading up to the election proved to be a decisive factor in Bush’s re-election.  Had the election concentrated more on the economy, Bush probably would have lost the election.

I have listened to several conservative pundits who criticize Obama for continuing to run against Bush’s economic policies, contending that it has been 3-1/2 years since Obama took office.  Many conservatives are devotional acolytes of the Ronald Reagan legacy and their devotion often clouds their memory.  Obama is using the same strategy that Reagan did in 1984, who ran against Carter’s former Vice President, Walter Mondale.  I will paraphrase a common refrain of Reagan during his re-election bid: “Do you want someone (Mondale) who helped get us in this mess in the first place?” Reagan asked.  The voters answered a resounding “No” and sent Mondale down to a crushing defeat.  Reagan employed this tactic of running against a former President despite the relatively strong growth during his first term. 

Although Obama’s total GDP growth is better than GW Bush’s total, it is less than former President Carter, a guy who lost his job over relatively weak growth and Obama’s 1st term growth numbers are less than Bush’s first term growth. A strong 1st quarter of economic growth in 2012 has helped pull up the President’s economic growth numbers but the first reading of 2nd quarter GDP growth that comes in July may further weaken his chances just before the election.  By the time 3rd quarter GDP numbers come out in October, many voters will have already made up their minds.

For his part, Romney’s tenure as governor of Massachusetts was hardly exemplary.  We will have two contenders for the Presidency running on an economic platform and neither one of them has a strong record of economic growth while in office.  Both campaigns will have plenty of arrows in their quivers and each candidate presents an inviting target.  Enjoy the show!

Manufacturing Rising

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Manufacturing Employment has been increasing since the recession officially ending in mid 2009 but it remains at historically low levels. (Click to enlarge in separate tab)

As a percentage of the Civilian Labor Force (those working and those looking for a job), there has been a decades long decline.  Almost 1 in 4 employees worked in manufacturing in the 1960s.  Today, the ratio is 1 in 12. 

When China joined the World Trade Organization (WTO) in 2001, it began taking a lot of what are called “low value added” manufacturing jobs.  These are jobs which do not require specialized skills or knowledge.  Many rural and urban U.S. workers with high school degrees or less lost their jobs to mainly rural Chinese workers who migrated to large cities in China and staffed the recently built factories.

While employment in manufacturing has gone down, sales have climbed, enjoying positive year over year gains except for the two recessions in the 2000s.

Adjusted for inflation over the past twenty years, each manufacturing worker is producing almost twice the value of goods. 

Investment in factories and production equipment, more streamlined processes and a higher skilled workforce have led to these productivity gains.  Since 2006, workers have seen a 16% increase in earnings, almost as much as the 18% real productivity gains during those years.

Democratic politicians and commentators often criticize business owners and executives for taking all the profits from productivity gains by workers.  In this industry, the facts simply do not support those criticisms.

Economic Overview

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The U.S. Treasury web site has a good slideshow of various components of the economy.  The first couple of slides detail the net budget impact of TARP, Federal Reserve and other government programs.  Subsequent charts illustrate the depth of the recession, the decades long accumulation of household debt, the headline and long term unemployment rates, and auto and home sales.

Auto Sales

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Auto sales have been one of the strong parts of the economic recovery in the past couple of years, as shown in the graph below.

The industry had been beaten down during the recession as consumers got by with whatever they were driving.  Looking back over the last thirty years, we can see that we are still below a healthier annual average of about 14 million cars and trucks sold, and far from the peak levels of 17 million.

But something more fundamental has changed.  We are simply buying fewer new cars per capita.  Below is a graph of the number of new cars sold divided by the population.

We are making our cars last longer.  The quality and safety of cars has certainly improved but we are simply spending less money per capita on automotive transport.  Below is a graph of per capita spending on new autos and auto parts.  In 2012, we are spending about the same amount of money as in 1998, despite 14 years of inflation.  In real inflation adjusted dollars, we are spending a little less than what we did in 1992.

What these figures do not include is a comparison of the cost of repairs, car insurance and, chief of all, the cost of gas to feed our four wheeled beasts of burden.

Below is a chart of the weekly average price of gasoline in the U.S. since 1990.

If a gallon of gas cost $1 in the early nineties and the price of gas went up with the rate of inflation, we would expect to pay about $2.30 today.  Instead we are paying closer to $4 a gallon.  Indexed to inflation, the cost of gas reached its peak under the Bush administration but gas prices are approaching that 2008 peak.

I have already heard several political ads saying that when Obama came into office, gas was $2.50 a gallon and now the price of gas if $4.00 a gallon.  Sure, gas was $2.50 a gallon when Bush left office.  Oil prices had plummeted in reaction to the global financial crisis.  Political ads trust that our memories are short and that we have forgotten just how high gasoline prices had climbed during the Bush administration.  Since the average of gasoline prices are relatively lower during the Obama administration than the 2nd Bush term, should we then conclude that Bush’s energy policies were bad and Obama’s are good?  The fact is that presidential policies have a teeny tiny effect on the price of gasoline.  Political ads and the money machines behind them are like the shell game operators on Times Square in New York City.  They hope we are gullible enough to believe their illusions.

May Labor Report

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May’s monthly Labor Report headlined a seasonally adjusted job gain of about 70K, less than half of the 150K expected.  The stock market response was swift and worsened as the day’s trading progressed.  By the time the dust cleared Friday evening, the broader S&P500 index had lost about 2.5%, it’s worst daily performance since Oct. 3, 2011.

On Feb. 5th, I wrote in response to the January labor report showing a gain of 234,000 jobs: “With the S&P500 index at 1344, some market pundits are whispering the 1500 mark that the S&P could take a run at this year.  Holy moly, macanoli, what a buzz about one labor report!” and later “Any job growth is good, but when I see a better improvement in the employment numbers for [the core work force aged 25 – 54], I will know that we are building a resilient economy, one that can withstand some shocks.”

Remember, the headline numbers are seasonally adjusted.  For the past three years, market watchers and economists have been warning about the seasonal adjustment factors used by the Labor Dept.  The severe job losses in the fall and winter of 2008/2009 have probably skewed the adjustment factors, leading the Labor Dept to overstate job gains during the winter and understate job gains in the spring and summer months.  The unusually warm winter of 2011/2012 further skewed job gains, pushing some normal spring hiring forward into the winter months.  That’s why I look at year over year gains in unseasonally adjusted numbers, particularly in the core work force aged 25 – 54.

Below is a graph of the percent gains of the core work force, which accounts for about 2/3 of the total work force.  The FED has conveniently saved me the trouble of running the graphs from the Labor Dept – but mine are more colorful :-).

The headline numbers of monthly job gains of more than 200K led many investors to bid up stock prices a bit more than the job gains in the core work force warranted.  Friday’s stock market reaction was probably a bit much but many investors simply bailed.  The same stock price and labor market patterns of 2010 and 2011 are emerging again this year.  Last June, I wrote about a backtest of investing based on the old “Sell In May and Go Away” mantra. While that investment strategy underperformed regular monthly investing, it has been disturbingly profitable for the past two years and looks to repeat again this year.  The disappointing labor figures only compounded the worries about the ongoing recession and financial woes in Europe, causing many to bail out of the market.

Let’s “zoom out” on the core work force, looking at the past year and a half.  There is a definite positive trend in place.

Let’s fly up like little birdies and look at the core work force for the past 12 years to see this recent upward trend in perspective.

Let’s look at the larger work force, those aged 25+, which accounts for 88% of employment in this country.  The year over year gains have leveled off at about 1.6% in the past few months.

Looking back the past 12 years, we see that this gain is moderately healthy.  The housing bubble produced employment gains of over 2% – gains concentrated in construction.

Now let’s look back to the “roaring nineties,” before China joined the WTO in 2001, leading to a loss of 4 million manufacturing jobs in this country.  The country enjoyed a tech boom in that decade, eventually leading to the dot-com bubble as we approached the millennium mark.

The job gains these past 6 – 8 months are respectable, averaging what they were in the nineties; core work force numbers are still growing.  The job losses of this past recession were historic.  Most of the 8.13 million jobs lost happened before Obama took office and the job losses were staggering when compared to other recessions.  The 1982-84 recession, for comparison, suffered total job losses of 2.84 million, about a third of the job losses of this past recession. Below is a graph of the year over change in employment levels since 1948.  This past recession makes all the past recessions look like small wrinkles.  Job losses of this size severely weakened the structure of our economy.

The employment growth of the past few years has been respectable, even more so given the deep hole our economy is climbing out of.  We are a people who have become accustomed to instant gratification.  We want change and we want it now, dammit.  The political and media machines of both parties know this and play to it.  George Bush played to it in the 2000 campaign, promising to bring the parties closer together, only to drive them further apart.  Obama played to it in his 2008 run for the White House, promising to usher in a new era of honest and accessible government, of community of government and the middle classes, where everyone enjoyed a more even playing field.  Romney’s run for the Presidency will highlight his business experience, promising unspecified growth policies.  What all of these people and their advisors know is that the American public is a sucker for change, reaching for the brass ring of change as we whirl around on the political merry-go-round.  We can be easily lied to because we trust our guts, not our brains.  If we trust someone or agree with their ideology, we will believe almost any data they throw at us.  Most of us don’t check the data.  We’re too busy for that or we don’t know how to check the data.  It all becomes a blur of he said this and the other guy said that and we get confused and vote with our guts.  The parties play to our prejudices.  Think you don’t have any?  Think again.

This election season we will hear a lot of claims, accusations and refutations.  Moderators of the upcoming Presidential debates rarely challenge a candidate with data.  The moderators ask policy questions; the candidate responds with mostly rehearsed answers.  Then on to the next question.  It is up to us to do our homework but most of us won’t.  Too many of us may be like the caller to a talk show recently.  When confronted with government statistics that refuted the caller’s opinion, he responded “That can’t be right” and countered that the government data is wrong.  We do love our opinions and that is the number one prejudice we all share. 

Job Openings – March

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A couple of weeks ago, the Bureau of Labor Statistics (BLS) issued their March JOLTS (Job Opening and Labor Turnover Survey) report showing a continuing increase in job openings. Below is a Federal Reserve historical graph incorporating the latest March data.

Graphing the quarterly data evens out the monthly fluctuations and shows the upward trend.

While the trend is upward, we have come from a deep trough and we still have a long way to go to get to a healthy job market.  The number of job openings is about the same as in 2004 but the population has grown by 20 million since 2004.

The stock market is inextricably chained to the labor market.  In the graph below, we can see the similarity in trends between the S&P500 and the job openings.

The stock market attempts to anticipate the health of the job market.  In the spring of 2006, job openings halted their decline then rose and the market resumed upward in anticipation of a continued climb in job openings.  As job openings reversed and resumed their decline in 2007, it was a harbinger of the coming economic cliff.

Obama’s Fiscal Prudence

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Two months ago I compared federal debt by Presidential administration.  Obama’s administration leads the pack.  This would lead one to assume that President Obama is a big spender.  He’s not.  In a WSJ MarketWatch article (I don’t think you need a subscription to see this article), Rex Nutting examined the historical data of federal spending from the Office of Management and Budget (OMB) and Congressional Budget Office (CBO). The data shows that the big spenders were Reagan and G.W. Bush.  What has plagued the Obama administration is a lack of revenue, particularly income tax revenue, because of the recession. 

In a balanced approach, Nutting gives proper due to the role Republicans in Congress have played, checking Congressional spending approvals.

Regardless of the data, we can expect that Republican pundits and political ads will continue to paint the Obama administration as the big daddy of  “tax and spend” Democratic Presidents.  To partisans of either party, when facts don’t conform to their ideology or preconceived notions, there must be something wrong with the facts.  Both parties rely on the fact that many voters vote with their guts, not their heads.

JPMorgan Hedge Update

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This weekend the Wall St. Journal had more details about the large gamble/hedge that JPMorgan (JPM) has taken in a derivative index called IG9 that tracks the overall health of corporate bonds. The full value of JPM’s position is about $100 billion or about 78% of the firm’s entire market cap.  Other hedge funds are waiting for JPM to start unwinding their position, aiming to profit at JPM’s expense.  Some estimates are that JPM’s losses could run as high as $6 – $7 billion.

In my blog yesterday, I stated that JPM had about 150 regulators working on site, supposedly supervising JPM’s operations to ensure the public safety.  The Office of the Comptroller of the Currency (OCC) revealed that they had 60 regulators who did nothing but monitor JPM’s trades and were aware of these highly aggressive trades.  As of late April, those regulators evidently saw nothing unsafe in JPM’s trading positions.  Do those regulators still have their jobs?  Probably.

The Federal Reserve and the FDIC also have onsite regulators who monitor JPM’s activities.  So many regulators and no cause for alarm before this blew up?  The Senate Banking Committee has started an investigation into this debacle.  In the political merry-go-round, we can expect more hearings, more regulations, more regulators, more cost to the taxpayer and less safety, less effectiveness from our government.

JPMorgan Hedge

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The recent scandal involving JP Morgan’s hedging loss of $2.3 billion (and is growing by $100 to $150 million per day),  has refocused attention on the Volcker rule, a key provision of the 2010 Dodd-Frank bill that initiated a new set of regulatory restrictions on the banking industry.  At more than 800 pages, the law spawns millions of new regulations, many of which won’t be finalized until July of this year, when the Federal Reserve is to start supervising the banking industry to bring them into full compliance with all the regulations by 2014.  The Volcker rule was ostensibly designed to curb the gambling type of hedging that brought the banking industry and the economy to its knees in 2008.  The JPMorgan fiasco has ignited a debate among politicians and pundits, bankers and regulators as to whether this trading strategy would have fallen under the purview of the Volcker rule.

As always, the devil is in the details.  Section 619 of a draft version of the bill stated that banks might initiate hedging trades “in connection with and related to individual positions.”  The banking lobby wanted to insert two small words “or aggregated” so that the final version of the bill would read “in connection with and related to individual or aggregated positions.”  They may have argued that banking and/or investment firms do aggregate a position over time through a series of trades, a common practice to avoid “moving the market” with a single large trade.  This, in fact, is the final language of the Dodd-Frank law (pg. 249)
Some argue that these two simple words effectively negates the effect of the Volcker rule because it allows an investment bank to engage in any hedging strategy as a tool to ameliorate the risk of any portion of the banks portfolio of investments.  The entire bank’s portfolio is, after all, an aggregated position in the market.  In effect, the language of the law allows investment banks to engage in the same kind of risky bets that the Dodd-Frank law is supposed to curtail. Jamie Dimon, the Chairman and CEO of JP Morgan, insists that the failed hedge would not have fallen under the Volcker rule.  There are about 150 bank regulators who work in the home offices of JP Morgan, constantly monitoring the operations of the largest bank in the U.S.  Either those regulators did not know of the hedge or did not understand the risks involved.  The trades were initiated in London so it might be feasible that the regulators did not know of the trades – except that both Bloomberg and the Wall St. Journal had called attention to the risky trades in April and Jamie Dimon had dismissed any concerns about the risks.  This example should refute the arguments of those who champion ever more regulation and more regulators of all business activity as the solution to keep the public safe.  The housing, securities, banking and insurance industries are all heavily regulated yet the confluence of poor risk management in these industries led to the debacle of 2008.  Regulations too often morph into a job programs for regulators and lawyers without achieving the desired goal of protecting the public from grievous harm.

The voters elect representatives to go to Washington to write competent laws.  Instead, the voters get poorly written laws written by a mish-mosh of inexperienced lawyers, industry lobbyists and passionate but impractical partisans.

JPMorgan gives the impression that Bruno Iksil, the London trader responsible for these aggressive trades, was a rogue trader  –  that the bank’s risk management team should have supervised him more closely.  What JPMorgan doesn’t readily disclose is that Mr. Iksil made the bank almost a half billion in profit just six months ago using equally aggressive trades.  Why supervise someone who apparently has the golden touch?

Where does JPMorgan get the money to engage in this risky gambling?  Your money.  JPMorgan had about $1.3 trillion in deposits from small depositors and large customers on its books but only about $700 billion in loans, leaving it with a lot of extra money, insured by the taxpayer, to gamble with.  They lost.  For now, the stockholders are the ones who have paid the price.  The stock has lost 24% of its value since the trading loss was confirmed by Jaime Dimon.  The amount of money lost so far is less than 1% of JPMorgan’s assets.  But it raises the question raised so alarmingly just a few years ago:  WTF????!!!  When I put my money in a bank, I expect them to keep it safe.  I don’t want the bank to take my money and gamble it.

Employment – April 2012

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This past friday, the Bureau of Labor Statistics (BLS) released their monthly assessment of labor conditions in this country and the headline figure was a disappointment.  The survey of businesses showed a seasonally adjusted 115,000 net jobs added in April, below the 150,000 expected by economists.  The unemployment rate dropped to 8.1% as almost 350,000 people simply dropped out.  Some of this was due no doubt to early retirees but the Federal Reserve estimates that retirees account for about 25% of the drop out rate.

As I have done in the past, I’ll take a deeper look at some numbers behind the headline numbers.  The core work force of people aged 25 – 54 continues to show gains but the chart below shows the comparative weakness of this segment of the work force.  This age demographic is the “middle”, when people accumulate both earning and buying power and form the primary demand of a consumer economy like the U.S.

The year over year job gains continue to climb upwards.

Late last summer, the larger work force of those aged 25 and older began showing year over year job gains several months before the core work force, revealing an underlying structural weakness of both the workforce and the recovery.

Some of the workforce is graying, moving from the core 25 – 54 age demographic into the older 55+ demographic, where workers are trying to save for retirement or taking jobs because their social security and retirement income is not adequate.  With a natural propensity for saving, older workers do not create the needed demand for the economy to grow strongly.  In the chart below is the year over year job gains for those aged 55+ and this is a key metric for it shows which age group have enjoyed the bulk of job gains in this recovery.

Throughout this recession and the massive loss of jobs, older workers have continued to show gains.  Strengths in the labor force statistics have been in retail, business services and health care.  Experienced older workers can be attractive to employers offering business services.  In retail and health care, it may be that older workers have less family responsibility, show a greater reliability and are thus more attractive to employers who enjoy a “buyers” market.  This past month was the first month that gains slowed while the gains of the core work force continued to climb.

As I have noted before, the demographic bell curve of the past three decades is coming to a close.  The participation rate, the number of workers as a percent of the working age population, has declined to 1981 levels, nearing the closing of an upswell brought on as the post WW2 boomer generation entered their prime working years.

The 1980 Census shows that, there were 25.5 million people 65 and older in 1980 (11.3% of the total population), an increase of 5 million from the 20.0 million count (12.3% of total) in 1970.  While the numbers climbed, the percentage stayed stable in that 10 year period.  Those aged 50 – 64 numbered 33.4 million, or 14.7% of the population.  In 1970, it was 29.7 million or 14.6%.  Again, the numbers were stable.  The median age of the U.S. population was 30.

Fast forward to the 2010 census and the percentage of those aged 65+ is still relatively stable at 40.3 million or 13.0% of the population.  Despite all the medical advances of the past 30 years and the trillions of Medicare dollars spent on the elderly, the percentage of older people is still about the same as it was in 1970 and 1980.

But the juggernaut of Boomers is waiting in the wings.  The 2010 Census shows that those aged 50 – 64, the “meat” of the Boomer generation, numbered 58.8 million, or 19% of the total population.  In thirty years, they have increased from 15% to 19% of the population.  The median age of the population is now 37 years, an increase of seven years.

The 25 – 54 age group funds the social contract that provides health insurance and retirement income for older Americans.   For this core work force, the increasing job gains of the past four months have been a welcome sign but, as the chart above shows, this core has suffered huge job losses in the past 3+ years and are climbing out of a deep hole.  I hope that April is the beginning of new trend, where the job gains increasingly go to the core younger segment of the work force and not to older Americans.  Only then will we see sustainable economic growth.