April 26, 2020

by Steve Stofka

In the name of public safety, our elected officials are picking winners and losers. In the process, they are selectively destroying businesses. Their job is to protect lives, they claim. Faceless legislative staff craft regulations that destroy some lives while they protect others.

In my neighborhood there is a Sprouts grocery store in a strip mall. That’s open. Next to it are several clothing stores, all closed now. A nail salon – closed. A mattress and bedding store is closed. The liquor store is open.

Across the street is a Walmart with a grocery store inside. The parking lot is almost full. Wal-Mart restricts access to the store entrance to safely stagger customers. There are a lot of signs and tape on the floor to remind people to stay six feet back when waiting in line. Most people are wearing masks.

The chiropractor across the boulevard is temporarily closed. We elect state and local politicians who delegate the work of governing to office staff. A committee decided that people with pinched nerves in their necks and backs are not important. Can’t work because you are having muscle spasms? Too bad. Some bureaucrat has decided that your pain is not essential. Stay home and ease the pain with marijuana or alcohol. Those store are essential. It is a slap in the face to those with chronic pain.

A month ago, the mayor’s office of Denver issued a stay-at-home order that did not include liquor stores and pet stores as essential businesses. What will be closed next? By mid-afternoon, just two hours after the edict was issued, cars crowded the streets of Denver and adjoining counties. People lined up inside liquor stores. Two bottles of Seagram 7. A few quarts of vodka. Four cases of Bud. Panic buying or those looking to profit from the coming shutdown. Social media alerted the mayor’s office and they immediately amended the order.

In some office buildings, therapists cannot get into their office because the building is locked. They are non-essential. Where are their patient notes? In the locked building. Got problems? Try Zooming your therapist. Remember – your government committee is trying to keep you safe.

Therapists and chiropractors not essential. Oil and gas extraction is essential because, well, it just is. The drop in demand for gasoline has produced a glut in oil. Companies are storing the extra in super tankers on the world’s oceans. Got back problems? Rub some crude oil on it.  

President Trump suggested that “medical doctors” – not the other kind of doctors like PhD doctors – but medical doctors could inject disinfectant like Lysol into people infected with the coronavirus. It’s OK if medical doctors do it. The maker of Lysol was quick to issue a warning. Do not inject Lysol into your body, they warned.   

Mr. Trump has become the country’s voodoo doctor. The warm weather was going to kill the virus. Then it was a malaria drug. Now it is Lysol. Put on your voodoo doctor headdress, Mr. Trump. Get your cauldron fired up and cook us up one of your special potions. The folks at Fox News will endorse your medicine. 

The President is the visible menace. The folks who work in our state and local offices are the invisible threat. A select few decide which businesses are essential, whose pain gets treated and who is important. They decide who gets unemployment insurance and who does not.  Many small businesses will not recover. It can take ten years or more to build up enough savings to start a small business. A second mortgage on a house is often used to capitalize a business. A faceless committee in a government building says your business is not important. Bye-bye business. Bye-bye savings. You can give up your dream and find work somewhere. Hope you can keep your house. It’s not essential. You are not important.

If – when – businesses reopen, business owners have a lot of questions. Will the state exempt businesses from liability if a customer or employee gets sick? Does the state have that power, the governor asks. The state has the power to issue edicts that crush small businesses but not the power to help business owners recover. You are not important.

After three deaths due to corona virus, the health department shut down a Wal-Mart store in our area (Butzer, 2020). Wal-Mart has deep pockets and legions of lawyers. Will an insurance company insure a small business against a coronavirus lawsuit? How much extra premium will it cost? What is the protocol? Should a business owner hire someone to screen customers before they come into the establishment? Does anyone have an answer?

The supply chain is an invisible river of goods and services that enables local businesses to service their customers. Is that supply chain broken? We will find out. The pandemic has caused a surge in orders for computers, but China has shuttered computer factories (Brandom, 2020).

Let’s turn to the faces of those we elected. Congress hurriedly passed an 800-page bill to provide $350 billion in loans and grants to small businesses – the Paycheck Protection Program (PPP). 28% of the funds were grabbed up by publicly held companies (Beltran, 2020).  The original provision in the bill was that any business with more than 500 employees was not eligible for the funds. Faceless lobbyists pressured the faceless staffs of lawmakers to make a small change. Just a few words. Change the wording to exclude companies with 500 employees at any one location. Done. No problem. The senator appreciates your support.

Senator Marco Rubio is the chairman of the Senate’s Committee on Small Business and Entrepreneurship. When the Wall St. Journal contacted his staff about large businesses scooping up the funds intended for small business, reporters were told they were mistaken. Mr. Rubio would not allow such language. The staff later admitted their error (The Journal, 2020). Lawmakers routinely vote for legislation without knowing what is in it. Prior to passage of the ACA (Obamacare) bill in 2010, House Speaker Nancy Pelosi replied that legislators wouldn’t know what was in the bill until it passed. Legislative sausage making by faceless staff and anonymous lobby groups. No, we’re not for sale, lawmakers insist. Yes, thank you for your support, they reply to the campaign contributions of the lobbyists.

The pandemic response of government has exposed our vulnerability. With great power and an incomprehension of the effect of their edicts, faceless legislative staff act as the executioners of the French Revolution.  Some small business owners must kneel down at the guillotine and await the fall of the blade.



Photo by Simon Migaj on Unsplash

Beltran, L. (2020, April 23). Restaurant Chains Received Many of the Biggest PPP Loans. Retrieved from https://www.barrons.com/articles/restaurant-chains-received-many-of-the-biggest-ppp-loans-51587573556

Brandom, R. (2020, March 27). Electronics companies are getting gridlocked by coronavirus lockdowns. Retrieved from https://www.theverge.com/2020/3/27/21195953/tech-manufacturing-companies-coronavirus-lockdown-apple-electronics-china

Butzer, S. (2020, April 24). Health department closes Aurora Walmart amid COVID-19 deaths, positive cases connected to store. KMGH. Retrieved from https://www.thedenverchannel.com/news/coronavirus/health-department-closes-aurora-walmart-amid-covid-19-deaths-positive-cases-connected-to-store

The Journal. (2020, April 22). How Big Businesses Got Small Business Relief Money. [Audio, 21 mins]. Retrieved from https://www.wsj.com/podcasts/the-journal/how-big-businesses-got-small-business-relief-money/7C5DAB5C-71C0-4D50-9D13-9D9633E633AC

The Pace of Growth

May 19, 2019

by Steve Stofka

We are living in an economy that is fundamentally different than the ones our parents and grandparents grew up in. Some of us want a return to those days. More goods were made in the U.S.A. Each family spent more on food, clothing, furniture and the other necessities of life but the money circulated in our economy, not among the workers of Asia. Union membership was stronger but there were crippling strikes that affected the daily lives of many families. In 2016, the current President promised a return to those days of stronger but more erratic growth. Almost half of voters bet on him to undo the changes of the past several decades. Let’s look at some data that forms the bedrock of consumer confidence.

GDP is the most frequently used measure of the nation’s economic activity. Another measure, Final Sales of Domestic Product excludes changes in business inventories. In the graph below is a chart of the annual change in Final Sales after adjusting for inflation (Note #1). Compare the right and left rectangles. The economy of post-WW2 America was more erratic than the economy of the past thirty-five years (Note #2).

The two paces of growth

In the first 35 years following WW2, growth averaged 3.6%. Since the Financial Crisis there have only been five quarters with growth above 3%. Let’s include the annual change in disposable personal income (Note #3). That’s our income after taxes. Much of the time, the two series move in lockstep and the volatility in each series is similar.

However, sometimes the change in personal income holds steady while the larger economy drops into recession. A moderate recession in 1970 is a good example of this pattern.

1982 was the worst recession since the 1930s Great Depression. Unemployment soared to more than 10% but personal incomes remained relatively steady during the downturn.

In the 1990, 2000 and 2008 recessions, personal incomes did not fall as much as the larger economy. Here’s the 2008 recession. While the economy declined almost 3%, personal income growth barely dipped below zero.

In the last 35 years, annual growth in Final Sales has averaged only 2.8%, far below the 3.6% average of the first 35-year period. After the recession, the growth of the larger economy stabilized but the change in personal incomes became very erratic. In the past eight years, income growth has been 2.5 times more volatile than economic growth (Note #4). Usually the two series have similar volatility. In the space of one year – 2013 – income growth fell from 5% to -2.5%, a spread of 7.5%. In the past sixty years, only the oil crisis and recession of 1974 had a greater swing in income growth during a year! (Note #5)

When income growth is erratic, people grow cautious about starting new businesses. Banks are reluctant to lend. Despite the rise in home prices in many cities, home equity loans – a popular source of start-up capital for small businesses – are about half of what they were at the end of the financial crisis (Note #6). The Census Bureau tracks several data series for new business applications. One of these tracks business start-ups which are planning to become job creators and pay wages. That number has been flat after falling during the Great Recession (Note #7).

Census Bureau – see Link in Notes

Businesses borrow to increase their capacity to meet expected demand. Since the beginning of 2016, banks have reported lackluster demand for loans from large and medium businesses as well as small firms (Note #8). For a few quarters in 2018, small firms showed stronger loan demand but that has turned negative this year. This indicates that business owners are not betting on growth. Here’s a survey of bank loan officers who report strong demand for loans from mid-size and larger firms. While few economists predicted the last two recessions, the lack of demand for business loans forecast the coming downturns.

There is an upside to slow growth – less chance of a recession. Periods of strong growth promote excess investment into one sector of the economy. In the early 2000s, the economy took several years to recover from the money poured into the internet sector. The Great Financial Crisis of 2008 and the recession of 2007-2009 was a reaction to over-investment and lax underwriting in the housing sector. On the other hand, weak growth can leave our economy vulnerable to a shock like the heightening of the trade war with China, or a military conflict with Iran.

Can a President, a party or the Federal Reserve undo several decades of slow to moderate growth? None of us want a return to the crippling inflation of the 1970s and early 1980s, but we may long for certain aspects of those yesteryears. An older gentleman from North Carolina called into C-Span’s Washington Journal and lamented the shuttering of the furniture and textile plants in that area many decades ago (Note #9). Many of those areas have still not recovered. Another caller commented that the Democratic Party long ago stopped caring about the jobs of rural folks in the south. Contrast those sentiments about the lack of opportunity in rural America with those who live in crowded urban corridors and struggle to keep up with the feverish pace and high costs of urban housing, insurance and other necessities.  Two different realities but a similar human struggle.



  1. Real Final Sales of Domestic Product FRED series A190RO1Q156NBEA
  2. Standard Deviation of first 35 years was 2.44. In the second 35-year period it was only 1.56.
  3. Real Disposable Personal Income FRED series DPIC96
  4. Since 2010, the standard deviation of economic growth has been .7 vs 1.75 for income growth.
  5. In the decade following WW2, people had similar large swings in income growth as the country and the Federal Reserve adjusted to an economy dominated by domestic consumption.
  6. Home Equity Loans FRED series RHEACBW027SBOG totaled $610 billion in the spring of 2009. It was $341 billion in the spring of 2019, ten years later
  7. Census Bureau data on new business start-ups
  8. Senior Loan Officer Surveys: Large and medium sized businesses FRED series DRSDCILM. Small businesses FRED series DRSDCIS.
  9. C-Span’s Washington Journal. C-Span also has a smartphone app.

Small Business Uncertainty

November 6, 2016

Small Business Survey

The uncertainty index in the recent NFIB (National Federation of Independent Businesses) surveys has been at its highest in the past forty years.  Except for one high point in 2012, every high in this reading has been followed by a recession.

This index is compiled from responses of “I don’t know” to six questions about future sales, employment, economic conditions, and business expansion. Small businesses typically pause in the face of uncertainty, holding off on hiring and capital outlays. They must be alert to the underlying climate of their particular market or go out of business.

The previous highs in uncertainty were set in late 2006 and early 2007 as the housing bubble was cooling off.  A recession followed in late 2007 that lasted till June 2009. In the late part of 2000, near the end of the dot com bubble, a high in this uncertainty index preceded a recession in the early part of 2001, and a two year downturn in the market.

A high uncertainty reading in late 2012 was a combination of concerns about slow growth. Starting in September 2012, the Federal Reserve responded with QE3, a monthly program of bond buying to spur growth and avoid recession.

When the canary sings, pay attention.


Retail Sales

Weak sales growth underlies current business concerns.  September’s year over year (y-o-y) growth was 2.2%.  After adjusting for inflation and population growth, sales growth was negative and has been less than 1% for two years.  As I noted last week we are at the edge of a plateau.  We either fly or fall from here.

The chart below shows retail sales less food services like bars and restaurants, and is adjusted for inflation and population growth.  In 2015, analysts attributed the y-o-y growth to the decline in gasoline prices, which began in the middle of 2014. Economists were asking why people were not spending the money they were saving on gas. This year’s y-o-y growth rate has little influence from gas prices, which have been higher for part of this year.  People are not confident enough to increase their spending.


Individual Stocks

Casual investors are encouraged to invest in broad categories of stocks rather than individual stocks, in order to minimize the effect, good or bad, of any one stock.  We are in the middle of earnings season for the 3rd quarter and I thought I would point to an example of the price volatility that an earnings announcement can generate.

We expect volatility from smaller companies so I will look at a “hyuge” (as Donald would say) company like Microsoft, the third largest company in the world.  During the past year or so, owners of Microsoft shares have seen some gut wrenching price moves on the day when Microsoft announces its quarterly results.  On April 24, 2015 the stock jumped 10% in reaction to first quarter results.  Disappointing second quarter results led to a price drop of almost 4% on July 22, 2015. Another 10% jump in response to third quarter results on October 23, 2015.  April 22, 2016 saw a 7% drop, July 20th a 5% gain, and a 4% gain on October 21st.

The tech sector can be more volatile than the Consumer Staples (Proctor and Gamble) sector, for example. An investor who owns shares in a company should be prepared for occasional volatility.  A good rule of thumb is that the value of one company’s stock should be no more than 5% of an investor’s portfolio. A safer rule might be 5% of one’s stock allotment.  If stocks were 50% of an investor’s portfolio, then 5% of that would be 2.5% of the total portfolio.

A broader view

Here’s an interesting viewpoint by someone who argues that the stock market has plenty of room to run.  However, the SP500 index has gained an average of 11% annually for the past seven years. This is far above the 6.5% annual price gains of the past twenty years, and the 7.4% yearly gains of the past thirty years.  Reaching back even further, a forty year time span shows 7.85% yearly gains. However, we should take into account the much higher inflation rates of those earlier decades.  Adjusted for inflation those annual gains would be much lower, making the comparison with the past seven years even more dramatic.

We like to think that “this time is different,” that the rules have changed.  After a sobering decline in equities, we resolve not to be fooled again and then…we forget once again.  We tell ourselves yet again that it really is different this time.  Shakespeare made his living reminding us of our follies.  We read his tragedies, his comedies and we think yes, but that was so long ago and so much has changed since then.  What hasn’t changed, what remains persistent is the nature of human beings and the eternal constant, the Law of Averages.

Constant Weighted Purchasing Average (CWPI)

October’s surveys of Purchasing Managers across the country, the PMI, edged down slightly from last September’s upward surge.  The CWPI composite of the manufacturing and non-manufacturing PMI surveys remains at the bottom end of healthy expansion and barely below the index’s five year average. This index has had a cyclic peak and trough pattern for most of the recovery, peaking at a strong growth level, then falling to a trough that was still above the neutral line between expansion and contraction.  Since February, the index had drifted in a plateau of healthy growth.  We wait and see.

Timing Models

May 22, 2016

Long term moving averages can confirm the shifting trends of market sentiment and market watchers customarily watch for crossings of two averages.  The 50 week (1 year) average of the SP500 index just crossed below the 100 week (2 year) average, indicating a  broad and sustained lack of confidence.  Falling oil prices since mid-2014 have led to severe earnings declines at some of the large oil companies in the SP500.  The index is selling for about the same price as the two year average.

What to do?  These crossings or junctions can mark a period of some good buying opportunities – unless they’re not – and that’s the rub with indicators like this one.  Downward crossings typically occur after there has already been a 5 – 15% decline from a recent high.  If an investor sells some stocks at that time, they wind up selling at an interim low, and regret  their action when the market rises shortly thereafter.  They should have bought instead of sold.  AAAARGHHH, a false positive!  Twice in the 1980s, the sentiment shift was less than a year long and an investor who did act lost 10 – 20% as the market climbed after several months.

Conversely, after a 10-15% decline, some investors do buy more stocks, figuring that the excess optimism, or “fluff,” has been shaken out of the market.  Then comes that sinking feeling as the market continues to decline, and decline, and decline.  In April 2001 and July 2008, the 50 week average crossed below the 100 week average.  Investors who lightened up on stocks at those times saved themselves some pain and a lot of money as the broader market continued to lose another 30% or so.

There are not one but two problems with timing models: timing both the exit from and entry back into the market.  Over several decades the majority of active fund managers – professionals who study markets – did not get it right.  They underperformed a broad index like the SP500 because the index is actually a composite of the buying and selling decisions of millions of market participants.  John Bogle, the founder of the now gigantic Vanguard Funds, made exactly this point in his dissertation in the 1950s.  A half century later, this “wacky idea” of index investing has taken over much of the industry.

Consistently successful timing is very difficult and has tax consequences in some accounts.  Investors are encouraged to focus instead on their investment allocation to match their tolerance for risk and volatility, and to consider any prospective income that they might need from a portfolio.

Since 1960, the average annual price gain of the SP500 index has been 6.7%.  Add in an average yield (dividend) of 3% and the total return is almost 10% that an investor gains by doing nothing, a formidable hurdle for any timing model.

Within an allocation model, though, is the idea that an investor might shift a small portion of a portfolio from stocks to bonds and back in response to market signals.  In several previous articles I have looked at a Case-Shiller CAPE10 model (here, here, here, and here) as well as another crossing model using the 50 day and 200 day moving averages, dramatically named the Golden Cross and Death Cross (here, here, and here.)  As already mentioned, we want to avoid some of the false signals of crossing averages.

Instead of a crossing, we can simply use a change in direction of both averages.  When not just one, but both, long term averages turn down, we would move a portion of money from stocks to bonds, and in the opposite direction when both averages turned up.

Over the course of several decades, this strategy has been suprisingly successful.  The market sometimes experiences a decade when prices may be volatile but are essentially flat.  From 2000 – 2012 the SP500 index went up and down but was the same price at the beginning and end of that 12 year period.  1967 to 1977 was another such period, a stagnant period when an investor’s money would be better put to use in the bond market rather than the stock market.

In recent decades, this long term weekly model would have favored stocks from 1982 to March 2001 while the market gained 850%, an annual price gain of 11%.  The model would have shifted money back to stocks in August 2003 at a price about 25% less than the exit price in March 2001. In March 2008, the model would have favored an exit from stocks to bonds.  The stock market at that time was about the same price that it had been 7 years earlier in March 2001.  The model captured a 30% gain while the index went nowhere.

In the 1967 – 1977 period, the model did signal several entries and exits that produced a cumulative 8% price loss over the decade but the model favored the bond market for half of that period when bonds were earning 8% per year, a net gain.

In almost two years, the SP500 has changed little; the yield is less than 2%, far lower than the 3% average of the past 50 years.  However, the broader bond market has also changed little in that time and is paying just a little over 2%.  There are simply periods when strategies and alternatives have little effect. Although the 50 week average crossed below the 100 week average earlier this month, they are essentially horizontal.  The 100 week average is still rising, but barely so, a time of drift and inertia.  In hindsight, we may say it was the calm before a) the storm (1974), or b) the surge (1995). Usually the calm doesn’t last more than two years so we can expect some clear direction by the end of the summer.


It’s the economy, stupid!

One of the myths of Presidential politics is that Presidents have a lot to do with the strength or weakness of the economy, a superhero narrative carefully cultivated by the two dominant parties.  Here’s a comparison of GDP growth during Democratic and Republican administrations. The Dems have it up on the Reps since 1928, chiefly because the comparison starts near the beginning of the Great Depression when the Reps held the Presidency.

For several reasons, GDP data is unreliable during the Depression and WW2 years.  First, the GDP concept wasn’t formalized till just before the start of WW2 so data collection was new, primitive and after the fact.  Secondly, this 14 year period includes an extraordinary amount of government spending which warped the very concept of GDP.  The WPA program that put so many to work during the depression years was a whopping 7% of GDP (Source), like spending $2 trillion dollars, or half the Federal budget, in today’s economy.

The Federal Reserve begins their GDP data series after WW2 when data collection was much improved. If you’re a Dem voter, don’t mention this unreliable data.  Just tell friends, family and co-workers that the Dems have averaged 4% GDP growth since 1927; the Reps only 1.7%.  If you’re a Republican voter, exclude the 20 year period from 1928 to 1947 and begin when the Federal Reserve trusts the data. Starting from 1947,  Republicans have presided over economies with 2.75% annual growth during 36 Presidential years.  During the 30 years Dems have held the Presidency, there has been a slighly greater growth rate of 3.1%.

In short, economic growth is about the same no matter which party holds the Presidency.  Shhhh! Don’t tell anyone till after the election is over.  Legislation by the House and Senate has a much greater impact on the economy.


Small Business

“If America is going to dominate the world again, the country has to fix the spirit of free enterprise. Small-business startups are in serious decline.”

“Gallup finds that one-quarter of Americans say they’ve considered becoming business owners but decided not to. ”

These foreboding quotes are from a recent Gallup poll.  Small businesses employ more than 50% of employees and are responsible for the majority of job growth yet many politicians and most voters pay little attention to the concerns of small business owners.  The giant corporations get most of the press, praise and anger.  Could the lack of small business growth be responsible for the lackadaisical growth of the entire economy during this recovery?  As the population  continues to age, growth will be critical to fund the dedication of community resources to both the old and young.

The BLS routinely tracks the Employment-Population Ratio, which is the percentage of people over 16 who are working, currently 60%.  But this ratio does not fully capture the total tax pressures on working people since it excludes those under 16, who require a great deal of community resources.  When we track the number of workers as a percent of the total population, we see a long term decline.  As this ratio declines, the per-worker burdens rise for it is their taxes that must support programs for those who are not working, the young and the old.

Regulatory burdens hamper many small businesses. A recent incident with a Denver brewery highlights the sometimes arbitrary rulemaking that business owners encounter.  Agencies protest that their mission is to ensure public safety.  An unelected manager or small committee in a department of a state or local agency may be the one who decides what is the public safety.  As the rules become more onerous and capricious, fewer people want to chance their savings, their livelihood to start a small business.  As fewer businesses start up, tax revenues decline and the debate grows ever hotter: “more taxes from those with money” vs “less generous social programs.”  Policy changes happen at a glacial pace, further exacerbating the problems until there is some crisis and then the changes are instituted in a haphazard fashion. Since we are unlikely to change this familiar pattern, the issues, anger and contentiousness of this election season are likely to increase in the next decade.  Keep your seat belts buckled.

Building Or Not

March 13, 2016

There are some upcoming changes to claiming rules for Social Security (SS) that take effect at the end of April.  A few weeks ago, Vanguard posted an article explaining some of the changes.

1) The end of “file and suspend,” the strategy where one half of a married couple, “John” we’ll call him, files for SS, then requests that those benefits be suspended.  The spouse, “Mary”, claims a spousal benefit while John’s benefits continue to grow at 8% per year until John is 70 years old.

2) The end of the “restricted application” strategy that allowed a person between the ages of 62 and 70 to collect benefits based on either their work history or their spouse’s history.  This allowed married couples to suspend taking benefits so that they could grow as under the file and suspend strategy.


You Didn’t Build That
In a 2012 campaign speech, President Obama infamously said, “If you’ve got a business — you didn’t build that. Somebody else made that happen.”

With the aid of teleprompters (only $2700) Mr. Obama  is a stirring orator, unlike his predecessor, Mr. Bush, who struggled with pronunciation, cadence and tone.  In contrast to his sweeping rhetoric, impromptu remarks by Mr. Obama are notoriously equivocal or inartful.  This remark was one of those.  Later on in the speech, Obama clarified his sentiments, “we succeed because of our individual initiative, but also because we do things together.”

In the 2012 election, Republican nominee Mitt Romney used Obama’s own words against him many times.  Many small business start-ups fail and when they do, the bank does not say, “you don’t need to pay your business loan back.  Somebody else made that failure happen.”  In Obama’s philosophy, failure is our personal responsibility but success is not?  It doesn’t play well in the small business community.

In response to February’s job report released last week, Mr. Obama is quite willing to take credit for the jobs created in the past seven years: “the plans that we have put in place to grow the economy have worked.” (Video and transcript) Mr. Obama doesn’t specify what plans.  The President and Congress, Democratic and Republican, have failed to enact fiscal policies that will help American businesses grow.  These leaders, these lifeguards of the economy, can not swim.  The Federal Reserve has had to implement extraordinary monetary policy to keep Americans from drowning.  0% interest rates for SEVEN years and $4 trillion of asset purchases by the Fed have reinflated the stock market and housing prices, the life raft of wealth for most Americans.

A fundamental theme of many elections is “It’s the economy, stupid,” a core mantra of the 1992 Clinton campaign coined by strategist James Carville.   Race and bigotry, defense and security play a part in a candidate’s appeal, but jobs, wages, benefits and taxes motivate voters to pull the lever in a voting booth.  The two outsider candidates, Bernie Sanders and Donald Trump, play to these economic concerns by promising jobs, or free college and medical care. Both candidates have been accused of being unrealistic and dangerous.

Once in office, most Presidents come to realize the reduced power they have in a Constitutional framework of checks and balances.  Each President must cooperate with a Congress easily swayed by lobbying interests, and fifty state legislatures with varying priorities and interests.

FDR exerted king-like powers during the multiple tenures of his Presidency thanks to the unprecedented majorities in both the House and Senate during the 1930s.  In the 1937-38 session, the Senate was dominated by 76 Democrats out of 100 members.  334 Democrats overwhelmed the 88 Republican members in the House.  During those years, the Supreme Court radically shifted the permissible Constitutional role of the Federal government in our lives.  The four generations that have lived since those policies were enacted continue to struggle with the social and financial consequences of those policies.

We are unlikely to repeat the lopsided majorities of that era simply because we recognize that unrestrained legislative power is dangerous and unhealthy for both our society and economy.  The Parliamentary systems of other developed countries allow a minority of citizens to have it their way, to dominate the policy choices of the majority.  The republican (small ‘r’) and federalist values embedded in the U.S. Constitution make it so much more difficult for a group of American citizens to get their way.  While this is often a source of frustration to policy advocates, we don’t veer off center as easily as other countries.

Focused on the 2016 election, voters may not notice the creeping dangers implicit in the extraordinary monetary measures and debt accumulation of the past twenty years.

Summer Signs

July 13, 2014

Small Business

Optimism has been on the rise among small business owners surveyed monthly by the National Federal of Independent Businesses (NFIB).  Anticipating a growing confidence, consensus estimates were for a reading of 97 to 98, topping May’s reading of 96.8.  Tuesday’s disappointing report of 95 dampened spirits.  The fallback was primarily in expectations for an improving economy.  Mitigating that reversal of sentiment was a mildly positive uptick in hiring plans. The majority of job growth comes from small and medium sized companies.

Job Openings and Labor Turnover Survey (JOLTS)

Speaking of job growth…There is a one month lag in the JOLTS report from the Bureau of Labor Statistics so this week’s report summarized May’s data.  The number of job openings continues to climb as does the number of people who feel confident enough to voluntarily quit their job.  Job openings have surpassed 2007 levels. If I were President, I would greet everyone with a hand shake and “Hi, job openings have surpassed 2007 levels.  Nice to meet you.”

Still, the number of voluntary quits is barely above the low point of the early 2000s downturn.  Let’s not mention that.

We can look at the number of job quits to unemployment, or the ratio of voluntary to involuntary unemployment.  This metric reveals a certain level of confidence among workers as well as the availability of jobs.  That confidence among workers is relatively low.  The early 2000s look like a nirvana compared to the sentiment now.  The country looks positively depressed using this metric.

If I were President, if I were a Congressman or Senator, I would post this chart on the wall in my office and on the chambers of Congress where it would remind myself and every other person in that chamber that part of my job is to help that confidence level rise.  Instead, most of our elected representatives are voicing or crafting a position on immigration ahead of the midterm elections.  Washington is the site of the largest Punch and Judy show on earth.  Like the little train, I will keep repeating to myself “I think I can, I think I can…stay optimistic.”


Government Programs

Most social benefit programs are on autopilot, leaving Congress with little discretion in determining the amount of money that flows out of the U.S. Treasury.  These programs include Social Security, Temporary Assistance to Needy Families, Food Stamps, Unemployment Benefits, etc.   Enacted over the past eighty years, the ghosts of Congresses past are ever present in the many Federal agencies that administer these programs.

During the recent recession, payments under social programs shot up, consuming more than 70% of all revenues to the government.  Political acrimony in this country switched into high gear as the U.S. government became the largest insurance agency in the world. As the economy improved, spending fell below the 60% threshold but has hovered around that level.

 That percentage will surely rise as the boomer generation retires, taking an ever increasing share of revenues to pay out Social Security, Medicare and Medicaid benefits.  As the percentage rises again toward the levels of the recession, we can expect that social benefit spending will take center stage in the 2016 Presidential election.


Back in ye olden days, soothsayers used chicken bones and tea leaves to foretell the future.  We now have powerful computers, sophisticated algorithms and statistical techniques to look through the foggy glass of our crystal ball.  Less sophisticated algorithms are called rules of thumb.  In the board game Monopoly, a good rule of thumb is that it is wiser to build hotels on St. James, Tennessee and New York Ave than on the marquee properties Park Place and Boardwalk.

I heard a guy mention a negative correlation between early summer oil prices and stock market direction for the rest of the year. In other words, if one goes up the other goes down. I have a healthy skepticism of indicators but this one intrigued me since it made sense.  Oil is essentially a tax on our pocketbooks, on the economy.  If oil goes up, it is going to drive up supplier prices, hurt the profits of many companies, reduce discretionary income and drag down economic growth. The market will react to that upward or downward pressure in the next few quarters. But a correlation between six weeks of trading in summer and the market’s direction the rest of the year? Is that backed up by data, I wondered, or is that just an old saw?   I used the SP500 (SPY) as a proxy for the stock market, the U.S. Oil Fund (USO) as a proxy for the oil market and threw in Long Term Treasuries (TLT) into the mix.  I’ll explain why the treasuries in a minute.

A chart of recent history shows that there is some truth to that rule of thumb.  When oil (gray bars) has dropped in price in the first six weeks of summer trading, the stock market has gained (yellow bars) during the rest of the year in five out of the past seven years.   A flip of a coin will come up heads 50% of the time, tails 50% of the time. An investor who can beat those 50/50 chances by a margin of 5 wins to 2 losses will do very well.

Whether this negative correlation is anything but happenstance is anyone’s guess.  If you look at the chart again, you’ll see that there is also a negative correlation between long term Treasuries (TLT) and oil the the first half of summer trading. When one is up, the other is down.  The last year these two moved in tandem was – gulp! – in the summer of 2008.  Oh, and this year.  We know what happened in the fall of 2008.  So, is this the sign of an impending financial catastrophe?  Let me go throw some chicken bones and I’ll let you know.



Small business sentiment eased back from its recent optimism.  Spending on government social programs exacerbates political tensions and aging boomers will add fuel to the fire.  Job openings and confidence continue to rise from historically low levels.  Do summer oil prices signal market sentiment?

Follow The Money

June 14th, 2014

This week I’ll take a look at some near-term trends in small business, labor, oil and housing and a few long-term trends in income and debt.

Small Business

Huzzah, huzzah!  The monthly survey of small business owners by the National Federation of Independent Businesses (NFIB) broke through the 96 level after cracking the 95 level last month.  Sentiment has not been this good since mid-2007.  Hiring plans have been on the rise for the past several months and owners are reporting rising sales.


JOLTS (Job Openings and Labor Turnover Survey)

The Job Openings report from the Bureau of Labor Statistics (BLS) has a one month delay so the data released this past week was for April.  The number of job openings was 40,000 higher than expected, coming in close to 4.5 million.  As a percent of the workforce, job openings are approaching pre-recession highs.

The decline in construction job openings is a disappointment.  We are near the same level as 2003, a weak year of economic growth.  We should expect to see an uptick in job openings in next month’s report, confirming that projects put on hold during the severe winter in the eastern part of the country are again on track.  Further declines would indicate a spreading malaise.


Gross Domestic Income

On a quarterly basis Gross Domestic Income, GDI, and Gross Domestic Product, GDP, differ somewhat but over the long run closely track each other.  Following up on two previous posts on Thomas Piketty’s book Capital in the 21st Century, I wondered what percent of GDI goes to pay employee compensation.  As we can see in the chart below, total compensation for human labor has been dwindling to post WW2 levels.

This is total compensation, including benefits.  Wage and salary income as a percent of total national income has declined steadily.

As a percent of total income, employee benefits have more than tripled since the end of World War 2 and now comprise more than 10% of the country’s income.

Demographic shifts have contributed to the decline of labor income.  The post war boomer generation, 80 million strong and 25% of the population, contributes to the trend as they save for retirement. As capital gains, interest and dividend income increase, this reduces the share of wage and salary income.

Economic changes have been a major factor in the decline of labor income.  Capital investments in technology, both in hardware and software, have reduced the need for labor for a given level of production.  Capital investment demands income to pay back the investment. For most of the 20th Century, machines replaced human muscle in farming, manufacturing and construction.  In the past two decades, machines are increasingly replacing mental muscle.

How we count labor income has changed.  Tax law changes in 1986 and 1993 reduced the amounts that are included as compensation but the overall effect of these changes is relatively minor.

If we divide the country’s total employee compensation by the number of employees, we might ask “What recession?”  Average annual compensation has climbed from $38-54K in a dozen years.  That’s almost a 50% raise for every employee!

Of course, everyone has not had a 50% increase in income over the past 12 years.  Human capital, the educational and technical training that an employee has to offer, has earned an increasing premium in the past three decades. Those with more of this capital have captured more benefit from the dwindling pool of labor needed for the nation’s production.

Average disposable income tells a more accurate story of the majority of people in this country.  Disposable income is what’s left over after taxes.  The trend is downward.

How do we cope with flat income growth?  Charge it!  It’s the Amurikin way! Per capita Household Debt has increased 75% in the past 13 years.  After a decline from the rather high levels before the recession began in late 2007, per capita debt has leveled off in the past two years.

Rising house prices and stock market values have increased net worth.  As a percent of net worth, household debt has declined to the more sustainable levels of the 1990s.

The percentage of disposable income needed to service that debt is at thirty year lows, meaning that there is room for growth.

In response to the hostilities in Iraq, oil prices have been on the rise.  Historically, a rise in oil prices leads to a rise in prices at the pump which takes an extra bite out of disposable income and puts a damper on consumer spending growth.


Oil Prices

A blog by Greg McIsaac at the Washington Monthly in May 2012 presents an interesting historical summary of oil prices and production.  The American love of simplicity leads many to credit one man, the President, for the rise and fall in gasoline prices, although the President has little, if any, influence on oil pricing. McIsaac notes The combination of lower energy prices and increased energy efficiency in the 1980s reduced US expenditures on energy by nearly 6 percent of GDP.  Deregulation of energy prices begun under the Carter Administration were largely credited to the Reagan administration.   He writes “crediting Reagan with falling energy prices of the 1980s exaggerates the roles of both Reagan and deregulation and obscures the larger influence of conservation and increased production outside the US.”  Production actually fell for several years after regulatory controls were lifted.

Further increases in oil prices will no doubt be blamed on this President.  The one thing that each outgoing President bequeaths to the newcomer before the inauguration is the Presidential donkey suit.



Redfin Research Center reports a sharp decline in the number of houses sold through May. After a 7.6% year-over-year decline in April, home sales slid 10% from May 2013 levels.  Real estate agents are reporting a shift from a seller’s market to a buyer’s market.



Small business accounts for approximately 60% of new jobs and optimistic sentiment among small business owners is growing.  The labor market continues to show continuing strength in the number of job openings and a decline in new unemployment claims.  Disposable income growth is flat but the portion of income needed to service debt is very low.  Rising oil prices and a slowing housing market will crimp economic growth.
Next week I’ll look at a complex topic – is the stock market fairly valued?  

Retail Sales, Autos, Sell in May

May 18, 2014

This week I’ll look at sentiment among small business owners, retail and auto sales, and revisit the “Sell in May” idea.

Small Business

Cue the trumpets, clouds part, sun rays stream down upon the green fields.  After almost seven years, sentiment among small business owners broke through the 95 level according to the monthly survey conducted by the National Federation of Independent Businesses (NFIB).  Despite the many positives in this latest survey, hiring plans remain muted.  This unfortunately confirms several other reports – the monthly employment report, JOLTS, disposable income, to mention a few – that indicate a befuddling lack of robust employment gains during this recovery.


Retail Sales

The monthly reports on employment and retail sales probably have the most impact on short term investor sentiment.  Retail sales were flat in April but have rebounded well after the particularly harsh winter.  With a longer term perspective, year over year retail gains are not robust but are still in the healthy zone of 2-1/2%.

Per capita inflation adjusted retail and food service sales are strong.  Rising home prices in the early 2000s drove an upsurge in retail sales, followed by an offsetting plunge as home prices dropped and the financial crisis of 2008 hit consumers hard.  The landslide of employment losses undercut retail sales.

Motor Vehicles sales are particularly strong and are now back to the pre-recession trend line.

However, that recession dip represents millions of vehicles not sold and contributes mightily to the record average age of more than 11 years for vehicles in the U.S. (AutoNews)  As the article noted, better engineering has lengthened the serviceable life of many autos.  There are 247 million registered passenger vehicles and light trucks, more than one for each of the 240 million people in this country over the age of 18 (Census Bureau) According to the industry research firm Motor Intelligence (spreadsheet), April’s year to date passenger car sales have declined 1.8% while sales of light pickups have surged 8.3%.  The particularly harsh winter months probably reduced traffic at car dealerships around the country, but the year-over-year comparison in April was only a 3.6% gain.  The lack of a spring bounce indicates that household income gains are meager.  The rise in sales of light pickups is largely due to a 10% increase in construction spending in the past year.

On an annualized basis, auto sales are approaching 16 million, a level last seen in November 2007 and far above the 10 million vehicle sales in 2009.

The numbers look rather strong but annual sales per capita are at the recession levels of the early 1990s.   Clearly, something has changed.

Better engineering has increased serviceable vehicle life.  Demographic changes may be having an effect. The population is aging and older people who drive less may decide to hang on to their vehicles longer.  A population shift toward urban centers reduces demand for autos.  There is a greater availability of public transportation.  In some areas of the country, an electric scooter or bicycle meets many transportation needs.
Long term shifts in an industry prompt employers to look for opportunities to adjust some part of their strategy or cost structure to meet those changes.  Three weeks ago, Toyota announced that they will move their headquarters from Torrance, CA, in the South Bay area of metro L.A., to Plano, TX.  As the largest employer in Torrance, the city’s economy will surely take a hit. (Daily Breeze)  Toyota joins a list of large employers leaving or reducing their presence in California (article)


Sell in May

The market has flatlined since early March.  Most of the companies in the S&P500 have reported earnings for the first quarter.  68% beat expectations but this has become a highly sophisticated game of managing expectations.  What is notable is that sales growth has slowed.  As I noted a few weeks earlier, labor productivity is poor.  Companies have done a remarkable job of cutting costs to boost profits but it is unclear how much more they can cut.  Last year’s 30% rise in the market has spurred the rise of mergers, or growing profits through economies of scale.

If the market were to decline 10 – 20% from here, some would point to the chart of the S&P500 and say they saw it all along.  “Classic case of a market top,” they would intone.  “Several failed attempts to break through resistance at the 1900 level indicated a major market correction.”  Oh, and they have a newsletter that you can subscribe to.

If the market goes up 10%, a different set of people will proclaim that they saw it all along.  “The market was forming a baseline of support,” they will sagely pronounce.  Each of these people also have a newsletter.

“Sell in May and go away” is an old quip of short term trading.  In 2011, I explored (here and here) the truths and myths behind this old saw. On a long term basis, one earns better returns by disciplined monthly, or quarterly, investing. Still, in a slight majority of the almost 20 years I reviewed, the Sell in May approach had some validity. Let’s look back at the last five years.  Typically an investor would sell the S&P500 and go into long Term Treasuries (TLT).  A more cautious investor might pick a less volatile intermediate bond fund.

In 2013, the SP500 went nowhere from May 1st to September 1st.  Great call by our intrepid investor who took some of her money out of the market and invested in Long Term Treasuries (TLT) in early May.  By early September, however, her investment would have depreciated 13%. Ooops!  Better to have stayed in stocks.

Likewise, in 2012, stocks went nowhere from early May to early September.  Unlike 2013, an investor buying long term Treasuries during that period had a 7% gain BUT if she had waited a week to sell in September, there was no gain.  The gains were a matter of luck.

2011 was the bing-bang year for the Sell in May crowd.  The stock market lost about 12% during the summer while long Treasuries gained 20%.

In 2010, stocks fell 7% during the summer while long Treasuries gained 10%.  During the summer of stocks gained almost 12% while Treasuries changed little.  In short, the strategy worked three summers out of the past five.

Now for a more fundamental approach – investing in companies that are more stable.  Horan Capital Advisors referred to a report from S&P Capital IQ that found that companies in the S&P500 with a low beta offset or reduced any summer market volatility.  Beta is a measure of a stock’s price volatility.  A value of 1 is the volatility of the entire index.  Betas less than 1 mean that a company’s stock price is less volatile than the index.  As volatility of the total market increases, investors tend to seek companies with a more reliable outlook and performance.  The screening criteria produced a mix of companies dominated by those in the consumer discretionary and health care sectors.  Worth a look for investors who buy individual stocks.

Employment, Obamacare and the Market

April 13, 2014

Nasdaq, Biotech and the Market

The recent declines in the market have come despite positive reports in employment and  manufacturing in the past few weeks.  Nasdaq market is off about 7% from its high on March 6th and some biotech indexes have lost 8% in the past few weeks. A bellwether in the tech industry is Apple whose stock is down about 9% since the beginning of the year, and 4% in the past few weeks.

The larger market, the SP500, has declined about 4% in the past six trading days, prompting the inevitable “the sky is falling” comments on CNBC.  The decline has not even reached the 5% level of what is considered a normal intermediate correction and already the sky is falling. It sells advertising.  The broader market is at about the same level as mid-January.  Ho-hum news like that does not sell advertising.

Both the tech-heavy Nasdaq and the smaller sub-sector of biotech are attractive to momentum investors who ride a wave of sentiment till the wave appears to be turning back out to sea.  In the broader market, expectations for earnings growth are focused on the second half of the year, not this quarter whose results are expected to be rather lackluster.  The 7-1/2% rise in February and early March might have been a bit frothy.

The aluminum company Alcoa kicks off each earnings season.  Because aluminum in used in so many products Alcoa has become a canary in the coal mine, signalling strength or weakness in the global economy.  On Tuesday, Alcoa reported slightly less revenues than forecast but way overshot profit expectations.  This helped stabilize a market that had lost 2.3% in the past two trading days.

On Thursday, the banking giant JPMorgan announced quarterly profit and revenues that were more than 8% below expectations.  Revenues from mortgages dropped a whopping 68% from last year, while interest income from consumer loans and banking fell 25%.  Investors had been expecting declines but not this severe.  JPMorgan’s stock has lost 5% in the past week, giving it a yield of 2.8% but it may need to come down a bit more to entice wary investors.  Johnson and Johnson, which actually makes tangible things that people need, want and buy every week, pays a yield of 2.7%.  Given the choice and assuming a bit of caution, what would you do?

The banking sector makes up about a sixth of the market value of the SP500, competing with the technology sector for first place (Bloomberg) The technology sector has enriched our lives immensely in the past two decades and deserves to have a significant portion of market value.  The financial sector – not so much.  They are like that one in the family that everyone wishes would just settle down and act responsibly.


Jolts and New Unemployment Claims 

February’s Job Openings report (JOLTS) recorded a milestone, passing the 4 million mark and – finally, after six years – surpassing the number of job openings at the start of the recession.  The number of Quits shows that there still is not much confidence among employees that they can find a better job if they leave their current employment.

New unemployment claims dropped to 300,000 this week; the steadier 4 week average is at 316,000.  As a percent of the workforce, the number of new claims for unemployment is near historic lows, surpassed only by the tech and housing bubbles.


Full-time Employee

A 1986 study of Current Population Survey (CPS) data by the Bureau of Labor Statistics (BLS) found that “well over half of employed Americans work the standard [40 hour] schedule.”  The median hours worked by full time employees changed little at just a bit over 40 hours. The average hours worked by full time employees was 42.5.  The study noted that between 1973 and 1985 the number of full time workers who worked 35 to 39 hours actually declined.

A paper published in 2000 by a BLS economist noted that the Current Population Survey (CPS) that the Census Bureau conducts is the more reliable data when compared to the average work week hours that the BLS publishes each month as part of their Establishment Survey of businesses.  The Establishment survey is taken from employment records but does not properly capture the data on people who work more than one job.  In that survey, a person working two part time jobs at 20 hours each is treated as though they were two people working two part time jobs. The CPS treats that person as one person working 40 hours a week.  Writing in 2000, the author noted that the work week had changed little from 1964 – 1999.

Fast forward to 2013 and the BLS reports that full time workers work an average of 42.5 hours, the same as the 1986 study.  More than 68% of workers reported working 40 or more hours a week.

The House recently passed H.R.2575, titled the “Save American Workers Act of 2014” – I’ll bet the people who write the titles for these bills love their jobs.  I always envision several twenty-somethings sitting in a conference room with pizza and some poetic lubricant and having a “Name That Bill” contest.  I digress.  This bill defines a full time employee as one who works on average 40 hours a week, not the 30 hours currently defined under the Affordable Care Act.

When I first started doing research on this I was biased toward a compromise of 35 hours as the definition of a full time employee.  My gut instinct was that fewer full time employees work a 40 hour week than they did 30 years ago.   The data from the BLS doesn’t support my gut instinct.



A monthly survey of small businesses by NFIB reported an upswing in confidence in March after a fairly severe decline in February.  That’s the good news.  The bad news is that optimism among small business owners can not seem to break the 95 index since 2007.  According to the U.S. Small Business Administration 2/3rds of new jobs come from small businesses. “Since 1990, as big business eliminated 4 million jobs, small businesses added 8 million new jobs.”

This is the first full year that all the provisions of the ACA, aka Obamacare, take effect.  Millions of small businesses around the country who provide health insurance for their employees are getting their annual business health insurance renewal packages.  For twelve years, my small business has provided health care for employees.  When I received the renewal package a few weeks ago, I was disappointed to find several changes that made comparisons with last year’s costs a bit more difficult.  As an aside, this health insurance carrier has always been the most competitive among five prominent health insurance carriers in the state.

Making the comparison difficult was a change in age banding.  What’s that, you ask?  In my state, business health plans were age banded in 5 year increments; e.g. a 50 year old and a 54 year old would pay the same rate for a particular policy.  Now the age banding is in one year increments.  If I compared the cost for a 45 year old employee last year with the rate for a 46 year old employee this year, the rate increase was a modest 5%.  Not bad.  But if I compare a 48 year old employee’s rate last year with a 49 year old employee this year, costs have risen 11%.   The provider for my company no longer offers the same high deductible ($3000) plan we had, offering a choice between an even higher deductible ($4500) plan or one with a much lower deductible ($1200).  Again, this makes the comparison more difficult.   Changes like this make cost planning more difficult and are less likely to encourage small businesses to bother offering health coverage to their employees.

Out of curiosity, I took a look at 2002 prices. The company long ago abandoned the no deductible plan we had in 2002 simply because it became unaffordable – this was while George Bush was President.  A plan similar to the HMO plan we had in 2002 – $20 copay, $50 specialist, $0 routine physical, no deductible, $2000 Max OOP –  now costs 270% what it did 12 years ago, an annual increase of more than 8%.  An HMO plan as generous as the one we had in 2002 is no longer available, so a more accurate comparison is that health insurance has tripled in twelve years.   It is no wonder that many small businesses either offer no health insurance or cap benefits at a certain amount that reduces the affordability and availability of insurance for many employees.

Until the unemployment rate decreases further, employees and job applicants are unlikely to exert much pressure for benefits from small business employers, a far different scenario than the heady days of the mid-2000s when unemployment was low and employers had to bargain to get decent employees.  There is no one single powerful voice for  many small businesses, other than the NFIB,  which makes it unlikely that Congress or state representatives will get their collective heads out of their butts and address the myriad regulatory and cost burdens that are far more onerous on small business owners.  Because of that we can expect incremental employment gains.

Betraying the lack of long term confidence in the economy and in response to employment burdens, employers increasingly turn to temporary workers, who make up less than 2% of the work force.

As an economy recovers from recession, it is normal for job gains to be distributed unevenly so that the increase in temporary workers is far above their share of the workforce.  Employers are understandably cautious and don’t want to make long term commitments.  Gains in temporary employment as a percent of total job gains should decline below 10%, indicating a stabilizing work force.

For the past two decades of recoveries and relatively healthy growth the average percentage is 7.4% (adjusted for census employment).  The percentage finally fell below this average in early 2012, rose back above it for a few months then stayed under the average till January 2013.  Since February of last year, that percentage has been rising again, crossing above the 10% mark in January, an inexorable evaporation of confidence.

For the past year, repair and maintenance employment has flatlined at 1999 levels, indicating a lack of investment in commercial property and production equipment.

Specialty trade contractors in the construction industries are at 1998 levels despite an increase in population of 40 million.

While not alarming these trends indicate an underlying malaise in the workforce  that will continue to hamper solid growth.  Those ambitious and earnest folks in Washington, eager to make a difference and advance their political careers, continue to create more fixes which make the problem worse.  Imagine a car out of gas.  People out here on Main St. are pushing while the politicians keep hopping in the car to figure out what’s wrong, making the car that much more difficult to push.  At this rate, it is going to be slow going.

Sales, Employment, Social Security

March 15th, 2014

Small business

The monthly survey of small businesses showed an abrupt decline in sentiment, below even the lowest of expectations,  and the sixth report since the beginning of the year to come in below the consensus range.  Two factors led the downward change: lowered sales expectations and hiring plans. The majority of business owners surveyed are reducing, not adding to inventory.  The steady but slowly improving sentiment during 2013 has now weakened.

This reading of optimism among small business owners is indexed to 100 in 1986.  The current survey reading of 91.5 is far above the pessimistic level of 80 that the index sank to in the early part of 2009.  In 2006, sentiment broke below the 95 level and has not risen above that since – eight years of below par sentiment among small business owners.

The lackluster small business report early in the week dampened market activity until the release of February’s retail sales report on Thursday.  The retail sales and employment reports that are released each month probably elicit the most response from the market.  A fall in February’s retail sales might have driven the market down at least 1%.  Instead, the report showed an annualized growth rate of 3.6%, offsetting the weakness in January and December.  Excluding auto sales, which accounts for about 20% of retail sales, total sales have formed a plateau.  Even auto sales were up this past month in spite of the extreme bad weather in parts of the country.  Some see this resilience in the face of the extraordinary weather this winter as an indication of an ever strengthening consumer base, a harbinger of solid economic growth.

The reason for the reduction in inventories indicated by the small business survey was revealed by Thursday’s report of the inventory-sales ratio for January.  Inventories rose at a 4.8% annualized rate versus a 7.2% annualized decline in sales.  January’s ratio of inventory to sales is at the same level as the beginning of the recovery in 2009.  Businesses will be cautious buyers this spring until excess inventories are reduced.


The number of unemployment claims declined again this week, bringing the four week average down to approximately 330,000, considered by many to be in the healthy range.  As a percent of the workforce, new unemployment claims are near all time lows.  Enacted in 1993, NAFTA had some small effect on employment but the more consequential impact was the admittance of China into the WTO.  As the relatively more volatile manufacturing employment decreased, so too did the surge in unemployment claims.  Note the reduced volatility of the work force today compared to the 1980s.

As a rule, employees quit jobs when they feel confident that another job is readily available.  The Quits rate has been rising since the official end of the recession in the summer of 2009 but is still relatively weak and declined in January.  The current level is at the lows of the recovery from the recession of the early 2000s.

As a percent of the workforce, however, the level of quits has not even reached the lows of that previous recession.


Now for a disturbing trend: the decline in disposable income below 1% has always marked the start of a recession.  This annual report from the Bureau of Economic Analysis (BEA) covers the period till the end of 2013 and was not affected by the recent cold weather.

Recent price increases in basic food commodities like milk and cereal nibble away at consumers’ pocketbooks.  An ETF that tracks agricultural commodities is up almost 20% in the last six weeks.

Whenever the growth in real, or inflation-adjusted, personal consumption has declined below 2.5%, the economy has always  gone into recession within the year.  In 2013, consumption growth fell to 2.0%.

Well, maybe this time is different.  Eternal hope, persistent denial. Those of us living in the present too often believe that we belong to an elite club with special rules that those in the past did not enjoy.


Social Security

Several years ago, the Social Security administration (SSA) estimated that 10,000 people would qualify for benefits each day.  Republican Congressman Eric Cantor and Democratic Senator Ron Wyden are two politicians on opposite sides of the political aisle who mention the 10,000 a day factoid.  The actual number of new retirees per day is actually higher.  Using recent data from the SSA, PolitiFact reported that 11,000 new retirees each day qualify for Social Security.  No one mentions the 4,300 who die and drop off the Social Security rolls (2008 data from the Census Bureau).  This number is likely to increase another 15% as the Boomer population swells into old age; the 1.6 million a year who die is likely to grow to 1.8 million who leave the Social Security system while 4 million become eligible for retirement benefits.  The result is an approximate net increase of 2.2 million beneficiaries each year of the next decade.

For now, let’s leave out the growth in the disability and Medicare programs and focus only on retirement and survivor’s benefits, or OASI.

At an average yearly benefit of $14K the benefits paid by the Social Security Administration rise by $31 billion this year, a 4.6% increase on the approximately $670 billion in Social Security and Survivor’s benefits paid out in 2013 (CBO report).  The relatively small deficit of $60 billion last year will grow into hundreds of billions within the decade.  Congress argues at length over $3 billion; efforts at tackling the really big deficits of Social Security are too often met with blowhard rhetoric, not serious negotiation.

The SSA estimates that “By 2033, the number of older Americans will increase from 45.1 million today to 77.4 million.” (SSA Basic Facts) At an inflation rate of 2.5%, less than the 3% average of the past 50 years, the average $14K annual benefit will grow to $23K by 2033.  Multiply that by 77 million people and the total of benefits that will be paid to seniors in 2033 is close to $1.8 trillion, almost triple the benefits paid in 2013.  

The current elderly count of 45 million people is 14% of today’s population of approximately 313 million.  In 2033, 77 million elderly will be 20% of an estimated population of 382 million.  More people getting paid while fewer people will be paying.  The SSA estimates that a little over 40% of the population who are working will be supporting the 20% of the population that is collecting SS benefits.
Independent Senator Bernie Sanders is fond of reassuring us that the Social Security Trust Funds have plenty of money to pay benefits over the next two decades.  What the trust funds have are I.O.U.s from the U.S. Government’s pool of tax revenues.  Where will the money come from?  Increased taxes. 
Politicians rarely lead.  The art of politics is to look like one is a leader, to position oneself at the front of the herd as it flees the pursuing lions.  In this case, the lions are demographics, and decades of promises, unrealistic assumptions and political cowardice.  The question is whether voters will force the leaders to lead before the lions attack.