Caution: Strong Growth Ahead

This week, the Congressional Budget Office (CBO) released their estimate of the fiscal impact of the AHCA, the draft version of the Republican health care reform plan. I’ll take a look at the CBO methodology later in this post. For those who may be tiring of the almost constant focus on the AHCA, let’s turn our attention to some economic indicators.

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CWPI (Constant Weighted Purchasing Index)

February’s survey of purchasing managers (PMI) indicated a broad base of confidence among purchasing managers in most industries. New orders in manufacturing are surging, an expansion more typical in the early stages of recovery after recession. Regardless of how one feels about Trump, there is a sense of renewal in the business community. Consumer Confidence is at record highs. Confident of finding another job, the number of employees who are quitting their jobs is at a 16 year high.

The CWPI is a composite of both the manufacturing and non-manufacturing PMI surveys and is weighted toward the two strongest indicators of future growth, employment and new orders. Since October, the composite has been rising from mild to strong growth.

CWPI201702

For most of 2016, new orders and employment were below their five year average.  Since October, they have been above that average.

EmpNewOrders201702

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Housing

The Housing Market Index released by the National Assn of Homebuilders just set a multi-year record. Housing starts are strong and single family homes under construction are the best in ten years. A popular ETF of homebuilders, XHB, is nearing a recovery high set in August 2015. 58,000 construction employees found work during a particularly warm February. Now the big picture. As a percent of the working age population, housing starts are still at multi-decade lows.

HouseStartsPctWorkPop201702

There has been an upshift toward multi-family units in some cities but, in a broad historical context, these are also near all time lows as a percent of the working age population.

MultiFamPctWorkPop201702

A primary driver of new housing construction, both single and multi-family, is the growth in new households, which is still soft. In 2016, households grew by 1%, below the 30 year average of 1.2%, and far below the 70 year average of 1.7%.

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Consumer Credit

Here’s an interesting data series from the FRED database at the Federal Reserve: the percent of people with subprime credit in each county. Click on the link and zoom in to see the data for a particular county. In New York City, Manhattan has a 16% subprime rate, less than half the 35% rate of the nearby Bronx. Give the link a few seconds to load the data and display the map.

Subprime

On July 1st, the credit rating agencies will remove tax liens and judgments from their records if liens do not include the full name, address, SSN or date of birth of the debtor. This will raise the credit scores of hundreds of thousands of subprime consumers.

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Real Estate Pricing Tool

Trulia has a heat map, by zip code, of the median home price per square foot. I will include this handy tool on the tool page.

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IRS Data

Of the 145 million returns filed, 46 million itemized deductions. Under the Republican draft of tax reform (PDF), almost all deductions would be eliminated in favor of a standard deduction that is almost twice as large as current law, $12,000 vs. $6300. (Deductions, Child Credits ). Half of capital gains, interest and dividends would not be taxed. For most filers, the dreaded 1040 tax form is only 14 lines. Publishers of tax software like Intuit are sure to lobby against such simplicity.

BetterWayTaxForm.png
Health insurance reform is the prerequisite to tax reform.  If House Speaker Paul Ryan encounters strong resistance in his own party to health insurance reform, his tax reform plan will be stymied as well.

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AHCA

This past Monday, the Congressional Budget Office released their “score” (summary report and full PDF report) of the American Health Care Act, or AHCA. Score is a euphemism for the 10 year cost estimate that the CBO customarily gives on proposed legislation.

The CBO was careful to stress the uncertainty of their estimate. A critical component is the human response to changing incentives and the tentativeness of future state legislation. With most major legislation, the CBO estimates the macroeconomic effects. They did not include such an analysis in this report and note that fact. In short, the CBO is saying “take this estimate with a grain of salt.”

The headline number was the amount of people estimated to lose their health insurance over the next ten years – a whopping 24 million. Democrats used this ballpark estimate as a defining fact as they bludgeoned the plan. How did the CBO come up with their numbers?

Medicaid is the health insurance program for low income families and individuals.  When the program was introduced in 1965, enrollment was 1/4 million.  Today, 74 million are on the program.  The federal government and states share the costs of the program; the federal share averages 57%. Under the ACA’s Medicaid expansion, low income individuals younger than 65 without children could enroll.  An increase in the income threshold enabled more people to qualify for the program.  The federal share was guaranteed to not fall below 90% of those individuals enrolled under the expansion guidelines.

Medicaid (CMS) reports that 16.3 million people were added to Medicaid under the ACA expansion program and represent almost 75% of all enrollment under ACA. California has 12% of the U.S. population, but accounts for more than 25% of additional enrollees under Medicaid expansion. (State-by-state Medicaid enrollment ) Only 31 states adopted Medicaid expansion. The CBO estimates that those 16.3 million are 50% of the total pool of individuals that would be eligible if all states adopted the expansion program. So the CBO estimate of the total pool is almost 33 million.

Undere current law, the CBO estimates that additional states will adopt expansion so that 80% of the estimated total pool, or 26.4 million, will be enrolled under Medicaid expansion by 2026.  Under the AHCA, the CBO estimates that only 30% of that eligible population of 33 million, about 10 million, will be enrolled as of 2026. 26.4 million (under ACA) – 10 million (under AHCA) equals 16 million whom the CBO estimates will lose coverage under Medicaid. Note that this is a lot of blue sky math.

To summarize the ten year loss estimate under the rollback of Medicaid expansion: 6 million current enrollees and 10 million anticipated enrollees.

Medicaid expansion accounts for 16 million fewer enrollees. Where are the remaining 8 million missing? In the non-group private market. Currently, there are 11.5 – 12 million enrolled in these individual plans, an increase of about 5 million over the 6.6 million enrollees in 2007 (Health and Human Services brief) . The CBO estimates that, in 2018 and 2019, 2 million additional enrollees would take advantage of the ACA subsidies to buy policies. That results in a potential pool of about 14 million. Under the AHCA, the CBO estimates that the non-group private insurance market will return to its former level of 6 – 7 million, a loss of about 8 million.

Voila! 16 million under Medicaid expansion + 8 million in non-group private insurance = 24 million loss.

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Side Note

How do people get their health insurance?
74 million people, about 25% of the population, are enrolled in Medicaid. Half of Medicaid enrollees are children.
55 million, about 16% of the population, are on Medicare.
Over 150 million, or 50% of the population, are enrolled in an employer group plan (Kaiser Family Foundation).
Approximately 27 million, or 9% of the population, are uninsured.

Before the ACA, almost 50 million, or 16% of the population, were classified as uninsured. About 6 million of these uninsured had high deductible insurance plans called catastrophic plans. Offered by large insurance companies, they contained exclusions for pre-existing conditions, did not cover pregnancy, or mental disease, but were adequate for many self-employed tradespeople, contractors, consultants and farmers. (Info) In late 2013, the ACA redefined catastrophic plans by specifying the minimum benefits that a catastrophic plan must offer and, in 2014, began offering these plans through the state health care exchanges.

Optimism Reigns

Dec. 11, 2016

For the second week since the election the SP500 index rose more than 3%, reversing a slight loss the previous week.  The SP500 has added 160 points, or 7.6%, in total since the election.  Barring some surprise, the market looks like it will end the year with a 10+% annual gain, all of it in the 6 – 7 weeks after the election. Small cap stocks have risen 17% in the past five weeks.  Buoyed by hopes of looser domestic regulations, and that international capital requirements will be relaxed, financial stocks are up a whopping 20% in the same time.

Having held their Senate majority, Republicans now control both branches of Congress and the Presidency but lack a filibuster proof dominance in the Senate.  They are expected to pass many measures in the Senate using a budget reconciliation process that requires only a simple majority. The promise of tax cuts and fewer regulations has led investment giants Goldman Sachs and Morgan Stanley to increase their estimate of next year’s earnings by $8 – $10.  Multiply that increase in profits by 16x and voila!  – the 160 points that the SP500 has risen since the election.  The forward Price Earnings ratio is now 16-17x.

Speculation is about what will happen.   History is about what has happened. The Shiller CAPE10 PE ratio is calculated by pricing the past ten years of earnings in current year’s dollars, then dividing the average of those inflation adjusted earnings into today’s SP500 index.  The current ratio is 26x, a historically optimistic value.  The Federal Reserve is expected to raise interest rates at their December meeting this coming week.

As buyers have rotated from defensive stocks and bonds to growth equities, prices have declined.  A broad bond index ETF, BND, has lost 3% of its value since the election.  A composite of long term Treasury bonds, TLT, has lost 10% in 5 weeks.  For several years advisors have recommended that investors lighten up on longer dated bonds in anticipation of rising interest rates which cause the price of bond funds to decline.  For 6 years fiscal policy remedies have been thwarted by a lack of cooperation between a Democratic President and a Republican House that must answer to a Tea Party coalition that makes up about a third of Republican House members.  The Federal Reserve has had to carry the load with monetary policy alone.  Both former Chairman Bernanke and curent Chairwoman Yellen have expressed their frustration to Congress.  If Congress can enact some policy changes that stimulate the economy, the Federal Reserve will have room to raise interest rates to a more normal range.

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Purchasing Manager’s Index

The latest Purchasing Manager’s Index (PMI) was very upbeat, particularly the service sectors, where employment expanded by 5 points, or 10%, in November.  There hasn’t been a large jump like this since July and February of 2015.  For several months, the combined index of the manufacturing and service sector surveys has languished, still growing but at a lackluster level.  For the first time this year, the Constant Weighted Purchasing Index of both surveys has broken above 60, indicating strong expansion.

The surge upward is welcome, especially after October’s survey of small businesses showed a historically high level of uncertainty among business owners.  This coming Tuesday the National Federation of Independent Businesses (NFIB) will release the results of November’s survey.  How much uncertainty was attributable to the coming (at the time of the October survey) election?  Small businesses account for the majority of new hiring in the U.S. so analysts will be watching the November survey for clues to small business owner sentiment.  Unless there is some improvement in small business sentiment in the coming months, employment gains will be under pressure.

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Productivity

Occasionally productivity growth, or the output per worker, falters and falls negative for a quarter.  Once every ten or twenty years, growth turns negative for two consecutive quarters as it has this year. Let’s look at the causes.  Productivity may fall briefly if businesses hire additional workers in anticipation of future growth.   Or employers may think that weak sales growth is a temporary situtation and keep employees on the payroll.  In either case, there is a mismatch between output and the number of workers.

During the Great Recession productivity growth did NOT turn negative for two quarters because employers quickly shed workers in response to falling sales.  The last time this double negative occurred was in 1994, when employment struggled to recover from a rather weak recession a few years earlier.  For most of 1994, the market remained flat.  In Congressional elections in November of that year, Republicans took control of the House after 40 years of Democratic majorities.  The market began to rise on the hopes of a Congress more friendly to business.  Previous occurrences were in the midst of the two severe recessions of 1974 and 1982.   As I said, these double negatives are infrequent.



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The Next Crisis?

The economies of the United States and China are so large that each country naturally exports its problems to the rest of the world.  The causes of the 2008 Financial Crisis were many but one cause was the extremely high capital leverage used by U.S. Banks.  A prudent ratio of reserves to loans is 1-8 or about 12% reserves for the amount of outstanding loans.  Large banks that ran into trouble in 2008 had reserve ratios of 1-30, or about 3%.

Now it is China’s turn.  Many Chinese banks have reported far less loans outstanding to avoid capital reserve requirements.  How did they do this?  By calling loans “investment receivables.”  It sounds absurd, doesn’t it?  Like something that kids would do, as though calling something by another name changes the substance of the thing.  70 years ago George Orwell warned us of this “doublespeak,” as he called it.  Reluctant to toughen up banking standards for fear of creating an economic crisis, the Chinese central bank is planning a gradual move to more prudent standards that will take several years.  However, it is a crisis waiting for a spark.  Here’s a Wall St. Journal article on the topic for those who have access.

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Third Quarter Rebound

October 9, 2016

Last month I reviewed the background and history of the CWPI index based on the monthly survey of purchasing managers.  I was a bit concerned that this index might continue to decline.  Instead it showed a big upsurge in new orders and employment in the service sectors, sending an index of these two components above its five year average. This may be a sign of a third quarter rebound after a lackluster first half of the year.

September’s stronger manufacturing survey lifted its index from the contractionary reading of the previous month. The CWPI composite of the manufacturing and non-manufacturing surveys is a smoothed average to dampen any month-to-month erraticness and give a truer picture of trend. Although the CWPI indicates strong growth, this is the longest period of time since 2011 that the CWPI has registered below 60, a mark of fairly robust expansion.

The height of this last wave was over a year ago, in August 2015.  The downward trend is stil in place but this month’s survey gives some hope of a turnaround.

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Households

A Pew analysis of Census Bureau data shows that 18-34 year olds are living with their parents in even greater numbers – 32% – than during the Great Recession. This bests the previous record set in 1940, between the Great Depression and World War 2. In the EU, almost half of 18-34 year olds are living with their parents. In a consumer driven economy, growth depends on children moving out of their parents’ home to form new households, to buy furniture and home furnishings, to consume electricity and water, to pay property taxes and all the many expenses involved in running a household.  Here is a recent paper published by the Federal Reserve.

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Infrastructure
There is not much that Hillary Clinton and Donald Trump agree on.  However, both candidates are calling for a big infrastructure spending program to repair roads, bridges, airports, dams, water pipes, schools, etc.  The American Society of Civil Engineers has given a D+ grade to this country’s  infrastructure and has estimated that $3.6 trillion of repairs are needed by 2020.  $3.6 trillion is the entire Federal budget, or about $12,000 per person.

A Liberal Idea Adopted by A Republican Candidate

It is unlikely that either candidate can get a bill through a Republican Congress.  In 2011, Robert Frank, Paul Krugman and several liberal economists called for a $2 trillion infrastructure spending bill.  The goverment could borrow at rock bottom interest rates, the repairs were needed and the spending would have been good for employees and businesses at a time when unemployment was 9% and real GDP had finally reached the same pre-recession level four years earlier.  Citing large budget deficits and a Federal debt that had increased 50% in three years, Republicans squelched any infrastructure bill.

The Current Distribution of Highway Trust Fund Dollars

Included in the price of each gallon of gas is a Federal excise tax that is paid into the Highway Trust Fund (HTF) to pay for repairs to the interstate highway system. The allocation of tax revenue is currently based on the amount of gallons of gasoline that each state sells but that presents another set of complications.  Exclusions to the allocation computation are jet fuel, fuel used by tribal lands and a host of other exceptions that are peculiar to each state.  This results in a spider’s web of adjustments to the gallons reported by each state. As you can imagine, the instructions for the adjustments are complicated.

Alternative Distribution Models

 An easy formula for distributing the tax revenues to the states could be a simple one: allocate the money based on the number of miles of interstate highway in each state.  But that would treat a low traffic route like U.S. 90 through Montana the same as the heavily traveled U.S. 495 running through part of New York City.  One suggestion has been to count only the interstate highways that pass through more than one state, and to exclude secondary highway routes designated by a three digit number.  For instance, US 495 is a route from US95 through New York City.  US 635 is a highway that goes around Dallas, Texas and connects with the primary north-south highway US 35.

An allocation scheme based on actual mileage driven has been proposed but would require the reporting of one’s travels to a government agency via a transponder, a step too far for many.  While newer cars and many trucks already have a GPS locator in the vehicle, the logistics and cost  of upgrading older commercial and passenger vehicles are daunting.

Twenty Years Without An Increase in the Highway Tax

The last increase in the Federal exice tax occurred in 1993 and efforts to rate the rate have met fierce resistance from Republicans, most of whom have taken an oath not to raise taxes of any sort.  Even though gas prices have come down in recent years, there seems to be little enthusiasm for bringing this subject back from the dead. (More info on the gas tax)

Every four years we have a Presidential election, a contest to choose the next Peter Pan who will magically overcome an entrenched bureaucracy, a recalcitrant Congress and a horde of fat cat lobbyists feasting on the power and money flowing into Washington.

The Supply Chain Sags

September 11, 2016

Fifteen years ago almost three thousand people lost their lives when the twin towers crumpled from the kamikaze attack of two hijacked airplanes.  Over the fields of rural Pennsylvania that morning, the passengers of a another hijacked plane sacrificed their own lives to rush the hijackers and prevent an attack on Washington.  We honor them and the families who endured the loss of their loved ones.

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Purchasing Managers Index

Each month a private company ISM surveys the purchasing managers at companies around the country to assess the supply chain of the economy. Are new orders growing or shrinking since last month?  Is the company hiring or firing?  Are inventories growing or shrinking?  How timely are the company’s suppliers?  Are prices rising or falling? ISM publishes their results each month as a  Purchasing Managers Index (PMI), and it is probably the most influential private survey.

ISM’s August survey was disappointing, especially the manufacturing data.  Two key components of the survey, new orders and employment, contracted in August. Both manufacturing and service industries indicated a slight contraction.

For readers unfamiliar with this survey, I’ll review some of the details The PMI is a type of index called a diffusion index. A value of 50 is like a zero line.  Values above 50 indicate expansion from the previous reading; below 50 shows contraction. ISM compiles an index for the two types of suppliers, goods and services, manufacturing and non-manufacturing.

The CWPI variation

Each month I construct an index I call the Constant Weighted Purchasing Index (CWPI) that blends the manufacturing and non-manufacturing surveys into a composite. The CWPI gives extra weight to two components, new orders and employment, based on a methodology presented in a 2003 paper by economist Rolando Pelaez.  Over the past two decades, this index has been less volatile than the PMI and a more reliable warning system of recession and recovery, signaling a few months earlier than the PMI.

Weakness in manufacturing is a concern but it is only about 15% of the overall economy.  In the calculation of the CWPI, however, manufacturing is given a 30% weight.  Manufacturing involves a supply chain that produces a ripple effect in so many service industries that benefit from healthy employment in manufacturing. Because there may be some seasonal or other type of volatility in the survey, I smooth the index with a three month moving average.  Sometimes there is a brief dip in both the manufacturing and non-manufacturing sides of the data. If the downturn continues, the smoothed data will confirm the contraction in the next month.  This is the key to the start of a recession – a continuing contraction.

History of the CWPI

The contraction in the survey results was slight but the effect is more pronounced in the CWPI calculation. One month’s data does not make a trend but does wave a flag of caution. Let’s take a look at some past data.  In 2006 there was a brief one month downturn. In January 2008, the smoothed and unsmoothed CWPI data showed a contraction in the supply chain, and more important continued to contract. The beginning of the recession was later set by the NBER at December 2007. ( Remember that these recession dates are determined long after the actual date when enough data has been gathered that the NBER feels confident in its determination.)  The PMI index did not indicate contraction on both sides of the economy until October 2008, seven months after the signal from the CWPI.  During that time, from January to October 2008, the SP500 index lost 30% of its value.

The CWPI unsmoothed index showed expansion in June 2009 and the smoothed index confirmed that the following month. The PMI did not show a consistent expansion till August 2009.  The NBER later called the end of the recession in June 2009.

The Current Trend

Despite the weak numbers, the smoothed CWPI continues to show expansion but we can see that there is a definite shift from the wave like pattern that has persisted since the recovery began.

With a longer view we can see that an up and down wave is more typical during recoveries.  A flattening or slow steady decline (red arrows) usually precedes an economic downturn.  The red arrows in the graph below occurred a year before a recession.  The left arrow is the first half of 2000, a year before the start of the 2001 recession.  The two arrows in the middle of the graph point to a flattening in 2006, followed by a near contraction.  A rise in the first part of 2007 faltered and fell before the recession started in December 2007.  The current flattening (right arrow) is about six months long.

New Orders and Employment

Focusing on service sector employment and new orders, we can see the weakness in this year’s data.

With a long view, a smoothed version of this-sub indicator signals weakness before a recession starts and doesn’t shut off till late after a recession’s end.  The smoothed version has been below the 5 year average for seven months in a row.  If history is any guide, a recession in the next year is pretty certain.

The 2007-2009 Recession

 In August 2006 this indicator began consistently signaling key weakness in the service sectors of the economy (big middle rectangle in the graph below). Stock market highs were reached in June 2007 and the recession did not officially begin till December 2007, a full sixteen months after the signal started.  That signal didn’t shut off till the spring of 2010, about eight months after the official end of the recession.

The 2001 Recession, Dot-Com Bust and Iraq War

The recession in 2001 lasted only six months but the downturn in the market lasted three years as equities repriced after the over-investment of the dot-com boom.  The smoothed version of this indicator first turned on in January 2001, two months before the start of the recession in March of that year.   Although, the recession officially ended in November 2001, the signal did not shut off till June 2003 (left rectangle in the graph above).  Note that the market (SP500) hit bottom in September 2002, then nosedived again in the winter.  Weak 4th quarter GDP growth that year fueled doubts about the recovery.  Concerns about the Iraq war added uncertainty to the mix and drove equity prices near that September 2002 bottom.  In April 2003, two months before the signal shut off, the market began an upward trajectory that would last over four years.

No one indicator can serve as a crystal ball into the future, but this is a reliable cautionary tool to add to an investor’s tool box.

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Stocks, Interest Rates and Employment

There are 24 branches of the Federal Reserve. This week, presidents of two of those banches indicated that they favored an interest rate hike when the Fed meets later this month (Investor’s Business Daily article).  On Friday, the stock market dropped more than 2% in response.  One of those presidents, Rosengren, is a voting member on the committee (FOMC) that sets interest rates.  I have been in favor of higher interest rates for quite some time so I agree with Rosengren that gradual rate increases are needed. However, Chairwoman Janet Yellen relies on the Labor Market Conditions Index (LMCI) to gauge the health of the labor market.

Despite an unemployment rate below 5%, this index of about 20 indicators has been lackluster or negative this year.  There are a record number of job openings but employees are not switching jobs as the rate they do in a healthy labor market.  This is the way that the majority of employees increase their earnings so why are employees not pursuing these opportunities?

The Federal Reserve has a twin mandate from Congress: “maximum employment, stable prices, and moderate long-term interest rates.” (Source) There is a good case to be made that there are too many weaknesses in the employment data, and that caution is the more prudent stance.  The FOMC meets again in early November, just six weeks after the upcoming September meeting. Although the Labor Report will not be released till three days after the FOMC meeting, the members will have preliminary access to the data, giving them two more months of employment data. Yellen can make a good case that a short six week pause is well worth the wait.

Stuck in the Mud

In 18 months, the SP500 is little changed.  A broad index of bonds (BND) is about the same price it was in January 2015.  The lack of price movement is a bit worrying.  There are several alternative investments which investors may include in their portfolio allocation.  Since January 2015, commodities (DBC)  have lost 15%, gold (GLD) has gained a meager 1%, emerging markets (VWO) are down 5%, and real estate (VNQ) is literally unchanged.  A bright note: international bonds (BNDX) have gained almost 6% in that time and pay about 1.5%.  1994 was the last time several non-correlated assets hit the pause button.  The following six years were good for both stocks and bonds.  What will happen this time?  Stay tuned.

Caution: Under Construction

June 12, 2016

As we travel the highways this summer we are likely to encounter many construction zones as crews repair wear and tear, and the damage that results from the temperature cycle of freeze and thaw. There are a few hitches on the economic road as well.

CWPI

I look to the Purchasing Manager’s (PM) Survey each month for some advance clues about the direction of the economy.  Like the employment report, this month’s survey contains some troubling signs.  I had my doubts about the low numbers in the employment report until I saw the results from this survey.  PMs in the services sectors reported a 3.3% contraction in employment growth so that it is now neutral, matching the lack of growth in manufacturing employment.

New orders in both manufacturing and services are still growing but slowed considerably in the services sectors.  The slowdown in both employment and new orders in the services sectors is apparent from the graph below.  While this composite is still growing (above 50), it has been below the five year average for four out of five months.

This recovery has been marked by, and hampered by, a familiar peak and trough pattern of growth. Last month I wrote:

 “A break in this pattern would indicate some concern about a recession in the following six months. What is a break in the pattern? An extended trough or a continued decline toward the contraction zone below 50.”

The CWPI, a custom blend of the various parts of the ISM surveys, shows a continued weakening that is more than just the periodic trough.  If there are further indications of weakness this summer, get concerned.

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LMCI

A few years ago the Federal Reserve introduced the Labor Market Conditions Index, or LMCI, a composite analysis of the labor market based on about twenty indicators published each month by several agencies. Because the report is released a week after the headline employment report, this composite does not receive much attention from policy makers, which is a bit of puzzle.  Janet Yellen, chair of the Fed, has indicated that she and others on the rate setting committee of the Fed, the FOMC, rely on this index when determining interest rate policy.

One business day after the release of this month’s unexpectedly weak employment report, the LMCI showed an almost 5% decrease and is the 5th consecutive monthly decrease in the index.

Although this composite is fairly new, many of the underlying indicators have long histories and enable the Fed to provide several decades of this index.  As a recession indicator, the monthly changes in this index tend to produce a number of false positives.  However, if we shift the graph upwards by adding 7 points to the changes, we see a familiar 0 line boundary.  When the monthly change in the index drops below 0 on this adjusted basis (actually -7), a recession has followed shortly.

We are not at the zero boundary yet, but we are getting close and the pattern looks ominously familiar.  Don’t play the Jaws music yet, though.

Pickup and Letdown

May 8, 2016

Based on ISM’s monthly survey of Purchasing Managers, the CWPI blends both service and manufacturing indexes and gives additional weight to a few components, new orders and employment.  Last month we were looking for an upward bend in the CWPI, to confirm a periodic U-shaped pattern that has marked this recovery. This month’s reading did swing up from the winter’s trough and we would expect to see further improvement in the coming few months to confirm the pattern. A break in this pattern would indicate some concern about a recession in the following six months. What is a break in the pattern? An extended trough or a continued decline toward the contraction zone below 50.

Since the services sectors constitutes most of the economy in the U.S., new orders and employment in services are key indicators of this survey.  A sluggish winter pulled down a composite of the two but a turn around in April has brought this back to the five year average.

Rising oil prices have certainly been a major contributor to the surge in the prices component of the manufacturing sector survey. The BLS monthly labor report (below) indicates some labor cost increases as well.  Each month the ISM publishes selected comments from their respondents.  An employer in the construction industry noted a severe shortage of non-skilled labor, a phenomenon we haven’t seen since 2006, at the height of the housing bubble.

Last week the BEA released a first estimate of almost zero growth in first quarter GDP, confirming expectations.  Oddly enough, the harsh winter of 2015 provided an even lower comparison point so that this year’s year over year growth, while still anemic, is almost 2%.

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Employment

April’s employment data from the BLS was a bit disheartening.  Earlier this week, the private payroll processor ADP reported job growth of 150,000 in April and lowered expectations for the BLS report released on Friday.  While the BLS estimate of private job growth was slightly better, the loss of about 10,000 government jobs, not included in the ADP estimate, left the total estimate of jobs gained at 160,000. The loss of government jobs is slight compared to the total of 22 million employed at all levels of government but this is the fourth time in the past eight months that government employment has declined.

A three month average of job growth is still above 200,000, a benchmark of labor market health that shows job growth that is more than the average 1% population growth  With a base of 145 million employees in the U.S, a similar 1% growth rate in employment would equal 1.5 million jobs gained each year, or about 125,000 per month.  To account for statistical sampling errors, the churn of businesses opening and closing, labor analysts add another 25,000 to get a total of 150,000 minimum monthly job gains just to keep up with population growth.  The 200,000 mark then shows real economic growth.  In March 2016, the growth of the work force minus the growth in population was 1.2%, indicating continued real labor market gains.

Job growth in the core work force aged 25 -54 remains above 1%, another good sign.  It last dipped briefly below 1% in October.  This core group of workers buys homes, cars, and other durable goods at a faster pace than other age groups; when this powerhouse of the economy weakens, the economy suffers. In the chart below, there is an almost seven year period, from June 2007 through January 2014 where growth in this core work force group was less than 1%.  From January 2008 through January 2012, growth was actually negative.  The official length of the recession was 17 months, from December 2007 through June 2009.  For the core work force, the heart of the economic engine, the recession lasted much longer.

In 2005, a BLS economist estimated that the core work force would number over 105 million in 2014.  In December 2014, the actual number was 96 million, a shortage of 9 million workers, or almost 10% of the workforce.  In April 2016, the number was almost 98 million, still far less than expectations.

Some economists and pundits mistakenly compare this recovery from a financial crisis with recoveries  from economic downturns in the late 20th century.  For an accurate comparison, we must look to a previous financial, not economic, crisis – the Great Depression of the 1930s.

The unemployment rate in April remained the same, but more than a half million people dropped out of the labor force, reversing a six month trend of declines.  It is puzzling that more people came back into the labor force during the winter even as GDP growth slowed.

Average hourly earnings increased for the second month in a row, upping the year over year increase above 2.5%.  For the past ten years, inflation-adjusted weekly earnings of production and non-supervisory workers have grown an anemic .75% per year.  In the sluggish winter of January and February 2015, earnings growth notched  a recovery high of 3%, leading some economists and market watchers to opine that lowered oil costs, on the decline since the summer of 2014, would finally spur worker’s pay growth in this long, subdued recovery.  A year later, earnings growth is about 1.2%, a historically kind of OK level, but one which causes much head scratching among economists at the Federal Reserve.  When will worker’s earnings begin to recover?

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Hungry

A reader sent me a link to a CNBC article  on food insecurity in the U.S. The problem is widespread and not always confined to those who fall below the poverty benchmark. Contrary to some perceptions, food insecurity is especially prevalent in rural areas, where food costs can be 50% higher than urban centers.  How does the government determine who is food insecure? The USDA publishes a guide with a history of the project, the guidelines and questions.  To point out the highlights, I’ll include the page links within the document. The guidelines have not been revised since this 1998 revision.

In surveys conducted by the Census Bureau, respondents are asked a series of questions.  The answers help determine the degree of household food insecurity.  The USDA repeatedly emphasizes that it is household, not individual, insecurity that they are measuring.  The ranking scale ranges from 0, no insecurity, to 10, severe insecurity and hunger. An informative graph of the scale, the categories and characteristics is helpful.

In 1995, a low .8 percent were ranked with severe food insecurity (page 14) . To be considered food insecure, a household must rank above 2.3 (household without children), or above 2 .8 (with children) on the scale.  Above that are varying degrees of insecurity and whether it is accompanied by hunger. (Table)

The USDA admits that measuring a complex issue like this one can provoke accusations that the measure either exaggerates or understates the number of households.  What are they measuring?  Page 6 contains a formal definition, while page 8 includes a list of conditions that the survey questions are trying to assess, and that a condition arose because of financial limitations like “toward the end of the month we don’t have enough money to eat well.”

Page 9 describes the rather ugly pattern of progressively worse food insecurity and hunger.  At first a household will buy cheaper foods that fill the belly.  Then the parents may cut back a little but spare the kids the sensation of hunger.  In its most severe stage, all the family members go hungry in a particular day.

Those of you wanting additional information or resources can click here.

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Earnings

Almost a month ago the giant aluminum manufacturer Alcoa kicked off the first quarter earnings season.  87% of companies in the SP500 have reported so far and FactSet calculates a 7% decline in earnings.  They note “the first quarter marks the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.”  Automobile manufacturers have been particularly strong while the Energy, Materials and  Financial sectors declined.  Although the energy sector gets the headlines, there has also been a dramatic decrease in the mining sector.  The BLS reports almost 200,000 mining jobs lost since September 2014.

The bottom line for long term investors: the economic data supports an allocation that favors equities.  The continued decline in corporate earnings should caution an investor not to go too heavily toward the equity side of the stock/bond mix.

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(Edited May 11th in response to a reader’s request to clarify a few points.)

Oh My Gawd!

November 8, 2015

There is the famous Tarzan yell by Carol Burnett and the iconic “Oh my Gawd” exclamation of Janice Lipman in the long running TV series “Friends.”  That’s what Janice would have said when October’s employment report was released this past Friday.

Highlights:

271,000 jobs gained – maybe. That was almost twice the number of job gains in September (137,000).  Really??!! ADP reported private job gains of 182,000.  Huge difference.  Job gains in government were only 3,000 so let’s use my favorite methodology, average the two and we get 228,000 jobs gained, awfully close to the average of the past twelve months.  Better than average gains in professional business services and construction.  Both of these categories pay well.  Good stuff.

At 34.5 hours, average hours worked per week has declined by 1/10th of an hour in the past year.  The average hourly rate rose 2.5%, faster than headline inflation and giving some hope that workers are finally gaining some pricing power in this recovery.

For some historical perspective, here is a chart of monthly hours worked from 1921 to 1942.  Most of those workers – our parents and grandparents – have passed away.  At the lows of the Great Depression people still worked more hours than we do today.  They were used to hard work.  There were few community resources and social insurance programs to rely on.

The headline unemployment rate fell slightly to 5%.  The widest unemployment rate, or U-6 rate, finally fell below 10% to 9.8%, a rate last seen in May 2008, more than seven years ago.  This rate includes people who are working part time because they can’t find a full time job (involuntary part-timers), and those people who have not actively looked for a job in the past month but do want a job (discouraged job seekers).  Macrotrends has an interactive chart showing the three common unemployment rates on the same chart.

The lack of wage growth during this recovery, coupled with rising home prices, may have made owning a home much less likely for first time buyers.  The historical average of new home buyers is 40%.  The National Assn of Realtors reported that the percentage is now 32%, almost at a 30 year low.

2.5% wage growth looks a bit more promising but the composite LMCI (Labor Market Conditions Index) compiled by the Federal Reserve stood at a perfect neutral reading of 0.0 in September.  The Fed will probably update the LMCI sometime next week.  This index uses more than twenty indicators to give the Fed an in-depth reading of the labor market.

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Bonds and Gold

The strong employment report increased the likelihood that the Fed will raise interest rates at their December meeting and this sent bond prices lower.  A key metric for a bond fund is its duration, which is the ratio of price change in response to a change in interest rates.  Shorter term bond funds have a smaller duration than longer term funds. A short term corporate bond index like Vanguard’s ETF BSV has a duration of 2.7, meaning that the price of the fund will decrease approximately 2.7% in response to a 1% increase in interest rates.  Vanguard’s long term bond ETF BLV has a duration of 14.8, meaning that it will lose about 15% in response to a 1% increase in rates.  In short, BLV is more sensitive than BSV to changes in interest rates. How much more sensitive?  The ratio of the durations – 14.7 / 2.7 = 5.4 meaning that the long term ETF is more than 5 times as sensitive as the short term ETF.

What do we get for this sensitivity, this higher risk exposure?  A higher reward in the form of higher interest rates, or yield.  After a 2.5% drop in the price of long term bond funds this week, BLV pays a yield close to 4% while BSV pays 1.1%.  The reward ratio of 4 / 1.1 = 3.6, less than the risk ratio.   On September 3rd, the reward ratio was much lower, approximately 3.27 / 1.3 = 2.5, or half the risk ratio.

Professional bond fund managers monitor these changing risk-reward ratios on a daily basis.  Retail investors who simply pull the ring for higher interest payments should be aware that not even lollipops at the dentist’s office are free.  Higher interest carries higher risk and duration is that measure of risk.

The prospect of higher interest rates has put gold on a downward trajectory with no parachute since mid-October.  A popular etf  GLD has lost 9% and this week broke below July’s weekly close to reach a yearly low.  Investors in gold last saw this price level in October 2009.  Back then  gold was continuing a multi-year climb that would take its price to nosebleed levels in August 2011, 70% above its current price level.

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CWPI (Constant Weighted Purchasing Index)

Manufacturing is hovering at the neutral 50 mark in the ISM Purchasing Manager’s Index but the rest of the economy is experiencing even greater growth after a two month lull.  No doubt some of this growth is the normal pre-Christmas hiring and stocking of inventories in anticipation of the season.

The CWPI composite of manufacturing and service sector activity has drifted downward but is within a range indicating robust growth.

Employment and New Orders in the non-manufacturing sectors – most of the economy – rose up again to the second best of the recovery.

Economists have struggled to build a mathematical model that portrays and predicts the rather lackluster wage growth of this recovery in a labor market that has been growing pretty strongly for the past few years.

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Social Security

The Bipartisan Budget Act of 2015, passed and signed into law this past week, curtails or eliminates a Social Security claiming strategy that has become popular.  (Yahoo Finance – can pause the video and read the text below the video).  These were used by married couples who were both at full retirement age.  One partner collected spousal benefits while the “file and suspend” partner allowed their Social Security benefits to grow until the maximum at age 70.  On the right hand side of this blog is a link to a $40 per year “calculator” that helps people maximize their SS benefit.

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Tax Cuts Anyone?

Former Senator, Presidential contender and actor Fred Thompson died this past week.  The WSJ ran a 2007 editorial by Thompson arguing that the “Bush tax cuts” that the Republican Congress passed in 2001 and 2003, when he was a Senator, had spurred the economy, causing tax revenues to increase, not decrease, as opponents of the tax cuts claimed.  Like others in the tax cut camp, Thompson looked at a rather small slice of time to support his claim: 2003 -2007.

Had tax cut advocates looked at an earlier slice of time – also small – in the late 1990s they would have seen the opposite effect.  Higher tax rates in the 1990s caused greater economic growth and higher tax revenues to the government, thereby shrinking the deficit entirely and producing a surplus.

Tax cuts decrease revenues.  Tax increases increase revenues.  That tax cuts or increases as enacted have a material effect on the economy has been debated by leading economists around the world for forty years.  At the extremes – a 100% tax rate or a 0% tax rate – these will certainly have an effect on people’s behavior.  What is not so clear is that relatively small changes in tax rates have a discernible impact on revenues.  A hallmark of belief systems is that believers cling to their conclusions and find data to support those conclusions in the hopes that they can use that to help spread their beliefs to others.

The evidence shows that economic growth usually precedes tax revenue changes; that tax policy advocates in either camp have the cart before the horse.  A downturn in GDP growth is followed shortly by a decline in tax revenues.

Thompson’s editorial notes a favorite theme of tax cut advocates – that the “Kennedy” tax cuts, initiated into law in memory of President Kennedy several months after his assassination in November 1963, spurred the economy and increased tax revenues. Revenues did increase in 1964 but the passage of the tax act occurred during that year so there is little likelihood that the tax cuts had that immediate an effect.  Revenues in 1965 did increase but fell in subsequent years.  A small one year data point is all the support needed for the claims of a believer.

The question we might ask ourselves is why do tax policy and religion share some of the same characteristics?

Labor Trends

June 8th, 2014

This week I’ll look at some long term trends in the labor market, short term economic indicators and an unusual move by the European Central Bank.

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May Labor Report

On Friday, the BLS reported job gains of 217K, in line with expectations.  The big headline is that we have finally recovered all the jobs that were lost during the recession.

That headline obscures the weakness in the recovery of the labor market.  The number of jobs gained comes from the monthly survey of businesses.  The household survey shows that the economy is still short about 1 million jobs from its mid-2007 high.  A million jobs is less than 1% of the workforce but we’ll see in a minute that the household survey may be giving us a truer sense of the labor market.  Like a fighter who has been knocked down a few times, the labor market is back on its feet but still maintains a defensive posture.

The number of involuntary part-time workers, those who want full time work but can’t find it, has declined in small increments over the past few years but remains stubbornly high.  Gone are the upward spikes in part-time employment, indicating that the labor market is at least more predictable.

7.3 million involuntary part-timers is about 2.3 million more than a more normal level of 5 million.  Half of that number means that there are effectively 1.2 million jobs still “missing.”  Add to that 1.2 million or more jobs needed each year just to keep up with population growth.  1.2 million x 6 years = 7.2 million.  Add in the 1.2 million jobs to reduce part-timers to normal levels and that is 8.4 million jobs still missing.  Let’s deduct a million jobs or so that were gained before the recession because of an overheated housing market and we still have a 7.5 million jobs gap, or 5% of the potential workforce.  As I will show next week, this job gap puts downward pressure on wages, on personal income, on consumer demand, on…well, just about everything.

This month marked the fourth month in a row that job gains have been higher than 200K.  Two of those four months of  consistently strong job gains came during a weak quarter of economic growth and particularly weak corporate profit growth.  More on that next week.

The narrow measure of unemployment remained unchanged at 6.3% but the widest measure, the U-6 rate, continues to decline from a high of (gulp!) 17% to a current level of 12.2%.

The number of long-term unemployed edges downward.

Although there is much variation in the monthly count of people who are classified as discouraged, the trend is downward from the hump in 2011 and 2012.

After breaking above the 95 million mark earlier this year and rising, the number of workers aged 25 – 54, what I call the core work force, has declined back toward the 95 million mark.

According to the monthly survey of businesses, half of all employees are women.  My gut instinct tells me that this is more out of necessity than desire.  Women do what they have to do to meet the needs of their families and many of those jobs may be part-time to accommodate family needs.

The decline in male-dominated employment in the manufacturing and construction sectors can be seen in the declining participation rate of men in the work force.

Earlier in the week, ADP reported private job gains of 180K, below the consensus estimate of 210K.  A graph of the past decade shows that private job growth has steadied during the past year.

We should probably keep this longer-term perspective in mind to balance out the monthly headlines. Zooming in on the past few years shows the dips, one of which was the recent winter lull.  The trick is to keep a balance between the short-term and the long-term.

The market is expecting growth this quarter that will offset the winter weakness and will probably react quite negatively if prominent indicators like employment, auto sales or housing should disappoint.

Over 10,000 boomers a day reach retirement age.   Not all of them retire but some back of the envelope estimates are that 100K or more do drop out of the labor force each month.  For the past eight months or so, new entrants and re-entrants into the job market has offset these retirees and the number of people not in the labor force has leveled off in the range of 91 to 92 million.

Construction employment finally crossed the psychological 6 million mark this month and for the past year or so has been on the rise from historic lows.  As a percent of the work force, however, employment in this sector is near all-time lows.  Let’s zoom out and look at the past fifty years to get some perspective on this sector.  A more normal percentage of the work force would be about 5%.  The difference is 1 to 1.2 million jobs “missing” in a sector which pays better than average.

In summary, there is a lot to like in the labor reports of the past few months.  But we should not kid ourselves.  The long-term trends show that the challenges are steep.  The question is not whether the glass is half empty or half full.  The question is how many small holes there are in the bottom of the glass.

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Central Banks

Helping to fuel the upward climb in the market this week was the message that central banks are willing to adopt whatever policies they can to support the economy.  In response to the threat of deflation in the Eurozone, the European Central Bank (ECB) made an unprecedented move this week, charging banks 1/10% to park their excess reserves with the central bank.  What does this mean?  Customary policy is that member banks must keep on deposit with the central bank a certain percentage of their outstanding loans and other securities to guard against losses.  For larger banks, this is about 10%.  In a simple example, let’s say that a bank makes another loan for $100.  It must keep an additional $10 on deposit with the central bank.  Let’s say it already has $12 extra on deposit with the central bank.  The central bank would then pay interest to the bank for the extra $2.  The policy change this week by the ECB reverses that policy:  member banks must now pay the central bank for any excess reserves.  Essentially the central bank is charging banks for not making more loans,  a policy which some monetary economists have encouraged the Federal Reserve to adopt.

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CWPI (Constant Weighted Purchasing Index)

On Monday, the Institute for Supply Management released their monthly survey of purchasing managers, then revised it shortly after the release, then revised it again later in the day.  This should remind us that economic gauges are not  like measuring a 2×4 stud with a tape measure.  Seasonal adjustments and other algorithms are applied to most raw data to arrive at a published figure.

The CWPI index I have been tracking for about a year showed further gains in May, rising up from the winter doldrums.  The composite index of the manufacturing and services sectors stands at a bit over 57, solidly in the middle of the strong growth range of 55 to 60.  If the pattern holds, we should expect to see this economic gauge rise during the next few months, peaking at the end of the summer.

An average of two key components of the economy, employment and new orders in the services sector, rose back above 55 this month, a level that hasn’t been seen since last October.

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Key Takeaways

The numbers from the labor market are cause for optimism – job gains are rising while new claims for unemployment are falling.  Auto sales are strong, an indication that consumers have more confidence.  New orders and employment are rising.  Weakness in the housing market bears a close watch.

Employment, New Orders, CWPI

CWPI (Formerly CWI)

The Constant Weighted Purchasing Index (CWPI) that I introduced last summer was designed to be an early or timely warning system of weakening elements of the economy.  It is based on a 2003 study by economist Rolando Pelaez on the monthly Manufacturing Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM).  ISM also produces a Non-Manufacturing index for service industries each month but this was not included in the 2003 study.

The CWPI focuses on five factors published by ISM:  employment, new orders, pricing, inventory levels and the timeliness of supplier deliveries.

The CWPI assigns constant weights to the components of both indexes, then combines both of these indexes into a composite, giving more weight to the services sector since it is a larger part of the economy.  Both the CWPI and PMI are indexed so that 50 is neutral; readings above 50 indicate growth; readings below 50 indicate contraction.  In previous months (here and here), I anticipated that the combined manufacturing and services sector index would move into a trough at this time before rising again in March and April of this year.

A longer term chart shows the wave like formation in this expansionary phase that began in the late summer of 2009.

February’s ISM manufacturing index climbed slightly but the non-manufacturing, or services, index slid precipitously, more than offsetting the rise in manufacturing.  Particularly notable was the huge 9% decline in services employment, from strong growth to contraction.  The service sector portion of the CWPI shows a contraction which some blame on the weather.  A slight contraction – a reading just below 50 – can be just noise in the survey data.  The past two times when the employment component of the services sector has dropped below 48, as it did in this latest report, the economy was already in recession; we just didn’t know it till months later.

A close comparison of the current data with the previous two episodes may sound a cautionary tone.   At this month’s reading of 48.6, the CWPI services portion is not showing as severe a contraction as in April 2001 (43.5) and January 2008 (33.1), when the employment component also dropped below 48.

New orders and employment in both portions of the CWPI are given extra weight. In January 2008, new orders and employment both fell dramatically.  The current decline is similar to the onset of the recession beginning in early 2001, when employment declined severely in April but new orders remained about the same.  Let’s isolate just these two factors and weight them proportionate to their respective weights in the services portion of the CWPI.

Notice that the decline below 50 signaled the beginning of the past two recessions.  Here’s the data in a different graph with a bit more detail.

Some cite the historically severe weather in the populous eastern half of the country as the primary cause for the decline in the services sector employment indicator and it well may be.  If so, we should expect to see a rebound in this component in March.  Basing a prediction on one month’s reading of one or two components of an indicator is a bit rash.  However, we often mistakenly attribute weakness in some parts of the economy to temporary factors and discount their importance because they are temporary – or so we think.

In the early part of 2008, many thought that a healthy correction in an overheated housing market was responsible for the slowdown in economic growth.  In the spring of that year, the bailout of bankrupt Bear Stearns, an undercapitalized investment firm which had made some bad bets in the housing market, confirmed the hypothesis that the corrective phase was nearing its end. As weakness continued into the late spring of that year, some blamed temporarily high gasoline and commodity prices for exacerbating the housing correction.  In the fall of 2008, the financial crisis exploded and only then did many realize that the problems with the economy were more than temporary.

In the early part of 2001, a healthy correction to the internet boom was responsible for the slowdown – a temporary state of affairs.  When the horrific events of 9-11 scarred the country’s psyche, the recession was almost over.  Many were not listening to the sucking sound of manufacturing jobs leaving for China or giving enough importance to the increasing competitiveness of the global market.  Employment would not reach the levels of early 2001 till the beginning of 2005.

This time the slowdown in employment and new orders in the services sector may be a temporary response to the severe winter weather.  Let’s hope so.

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Private Sector employment and new unemployment claims

ADP released their February employment report this week and eyes rolled.  January’s benign reading of 175,000 private job gains was so at odds with the BLS’ reported gains of 113,000.  “Oh, wait,” ADP said this week, “we’ve revised  January’s gains down to 127,000.”  In a work force of some 150 million, 50,000 jobs is rather miniscule.  As the chief payroll processor in this country, ADP has touted its robust data collection from a large pool of employers.  A revision of this magnitude leads one to question the robustness and reliability of their methodology, and the timeliness of their data collection.  For its part, the BLS admits that its current data is based on surveys and that each month’s estimate of job gains is largely educated guesswork.  ADP is actually processing the payrolls, which should reduce the amount of guesswork.

Private job gains in February were 10,000 below the consensus 150,000 but this week’s report of new unemployment claims dropped 27,000, bringing the 4 week average down a few thousand.  As a percent of workers, the 4 week average of continuing claims is below the 33 year average and has been since March 2012.  In this case, below average is good.

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Employment – Monthly Labor Report

This week’s labor report from the BLS carried a banner caveat that the cold weather in February may have affected employment data.  With that in mind, the headline job gains of 175K were above expectations for 150K job gains.  The unemployment rate ticked up a bit.  If we average the ADP job gains with the private sector job gains reported by the BLS, we get 150K plus 13K in government jobs added for a total of 163K total jobs.  The year over year growth in the number of workers is above 1%, indicating a labor market healthy enough to preclude recession.

A big plus this year is the growth in the core work force, those aged 25 – 54, which finally surpassed the level at the end of the recession in the summer of 2009. 

However, there are some persistent trends independent of the weather that underscore the challenges that the current labor market is struggling to overcome.

As I pointed out last week, there are several unemployment measures, from the narrowest measure – the headline unemployment rate – to wider measures which include people who are partially employed.  The U-6 rate includes discouraged workers and those who are working part time jobs because they can’t find full time jobs.  For a different perspective, let’s look at the ratio of the widest measure to the narrowest measure. The increase in this ratio reflects a growing disparity in the economic well being of the work force.

Contributing to the rise in this ratio is the persistently high percentage of workers who are involuntary part timers.  Looking back over several decades, we can see that the unwelcome spike in this component of the work force can take a number of years to decline to average levels.  Following the back to back recessions in the early 1980s, levels of involuntary part timers took 8 years to recover to average, then quickly climbed again as the economy sputtered into another recession.  We are almost five years in recovery from this recession and have still not approached average.

There are more discouraged workers today than there were at the end of the recession in the summer of 2009.  Discouraged workers are included in the wider measure of unemployment but not in the narrow headline unemployment figure.

The median duration of unemployment remains at levels not seen since the 1930s Depression.  Someone who becomes unemployed today has a 50-50 chance of still being unemployed four months from now.  That would make a good survey question:  “In your lifetime, have you ever been involuntarily unemployed for four months?”

Despite all the headlines that the housing market is rebounding, the percent of the work force working in construction is barely above historic lows.

A recent report by two economists at the New York branch of the Federal Reserve paints a disappointing job picture for recent college graduates.  On page 5 of their report is this telling graph of a higher percentage of recent college graduates accepting low wage jobs.

Low wage and part time jobs do not enable a graduate to pay back education loans.  Almost two years ago, the total of student loans surpassed the trillion dollar mark.  According to the Dept. of Education, the default rate in 2011 was 10%.  I’ll bet that the current default rate is higher.

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Takeaways

As is often the case, data from one source partially contradicts data from a different source.  The employment decline reported by ISM bears close watching for further signs of weakness.  The yearly growth in jobs reported by the BLS indicates a relatively healthy job market.