US Payrolls Less Than Meets The Eye

In today's Lunch With Dave Dave Rosenberg shows how US Payrolls Less Than Meets The Eye.

Today’s employment report is being treated as a ‘green shoot’ of major proportions. While it was by far the best jobs performance of the year, much of the better-than-expected tally in nonfarm payrolls reflected the bounce in auto production as well as the distortion from the federal census workers. Combined, these two influences effectively “added” 100,000 to the headline number, so net-net, the consensus view of -325,000 was not as far off the mark as the market believed at first glance.

The auto sector added 28,200 to the industry payroll in July, which was the highest tally in 11 years. To show you just how big that really is, it is a 69% annualized surge. Normally, the industry, which is in secular decline, posts job losses of between 20,000 and 30,000 consistently, so this alone represented roughly a 50,000 swing. We estimate that there was about a 30,000 swing in the rest of the manufacturing sector due to the spillover from the current inventory adjustment in the motor vehicle industry. The 0.3% MoM increase in the workweek was also skewed by the 4.1% MoM jump in the auto sector.

As we mentioned, there have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.

Yes, the income number was also firm; average weekly earnings popped 0.5%, but again, this reflected the bounce in the auto sector as well as the 10.7% increase in the minimum wage to $7.25 an hour. Again, this is a non-recurring item and does not at all reflect an improvement in underlying income fundamentals in the personal sector. We had a similar bounce in the summer of 2008 when the minimum wage was last boosted.



To be sure, the drop in the unemployment rate was a surprise, but it was all due to the slide in the labour force — the employment-to-population ratio gives a more accurate picture of the slack in the labour market and the hidden secret in today’s report was that this metric slid to a 25-year low of 59.4% from 59.5% in June and 61.0% at the turn of the year. Of those unemployed, 33.8% of them have been unemployed now for over 27 weeks — a record amount (was at 29.0% in June and was at 17.5% at the start of this recession).

I talked about the participation rate this morning in Jobs Contract 19th Straight Month; Unemployment Rate Inches Lower to 9.4%

Taking one time auto sector anomalies and manipulation of the participation rate into consideration, today's job report was much weaker than looks at first glance.

As I said earlier, "The BLS stopped counting".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 19th Straight Month; Unemployment Rate Inches Lower to 9.4%

This morning, the Bureau of Labor Statistics (BLS) released the July Employment Report.

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent, the U.S. Bureau of Labor Statistics reported today. The average monthly job loss for May through July (-331,000) was about half the average decline for November through April (-645,000). In July, job losses continued in many of the major industry sectors..




Establishment Data



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Highlights

• 247,000 jobs were lost in total vs. 467,000 jobs last month.
• 76,000 construction jobs were lost vs. 79,000 last month.
• 52,000 manufacturing jobs were lost vs. 136,000 last month.
• 119,000 service providing jobs were lost vs. 244,000 last month.
• 44,000 retail trade jobs were lost vs. 21,000 last month.
• 38,000 professional and business services jobs were lost vs. 118,000 last month.
• 17,000 education and health services jobs were added vs. 34,000 added last month.
• 9,000 leisure and hospitality jobs were gained vs. 18,000 added last month.
• 7,000 government jobs were lost vs. 52,000 last month.

A total of 128,000 goods producing jobs were lost (higher paying jobs). It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Work hours inched up to 33.1 from 33.0. Short work weeks contribute to household problems.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers remain in deep outer space. This month was closer to orbit however, as January and July are revision months. The BLS had a chance to catch up this month but did not. As usual their model added jobs.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence.

The Birth/Death numbers have been a joke for at least two years now.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

In July, the number of unemployed persons was 14.5 million. The unemployment rate was 9.4 percent, little changed for the second consecutive month.

The civilian labor force participation rate declined by 0.2 percentage point in July to 65.5 percent. The employment-population ratio, at 59.4 percent, was little changed over the month but has declined by 3.3 percentage points since the recession began in December 2007.

The number of long-term unemployed (those jobless for 27 weeks or more) rose by 584,000 over the month to 5.0 million. In July, 1 in 3 unemployed persons were jobless for 27 weeks or more.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in July at 8.8 million. The number of such workers rose sharply in the fall and winter but has been little changed for 4 consecutive months.

Persons Not in the Labor Force

About 2.3 million persons were marginally attached to the labor force in July, 709,000 more than a year earlier. (The data are not seasonally adjusted.) These individuals, who were not in the labor force, wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the
survey.

Among the marginally attached, there were 796,000 discouraged workers in July, up by 335,000 over the past 12 months. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.5 million persons marginally attached to the labor force in July had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status



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The chart shows there are 8.8 million people are working part time but want a full time job. A year ago (not seasonally adjusted) the number was 6 million. This series has stabilized for the last 5 months. Perhaps the high is in or at hand.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 9.4% and rising. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.3%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.

Looking ahead, there is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

I have been calling for the rate to hit 9.8% by August. With only one month coming, today's report shows that is not going to happen. However, much of the "improvement" in the numbers today are as a result of the participation rate falling by .2%. In other words, the BLS stopped counting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Pension Crisis Hits Critical Mass In West Virginia

The pension crisis has reached critical mass in West Virginia. Cities like Huntington are out of cash and begging the state (taxpayers) to bail out foolish promises that cannot be met.

Please consider Cities Turn to State for Pension Relief.

City officials from around the state say their communities can no longer afford to cover the benefits of retired police officers and firefighters, so they are asking the state Legislature for help.

If nothing changes, cities such as Huntington could have fewer police officers and firefighters on the streets as they are forced to cut back staffs because of increasing pension obligations. The city’s last six police and fire department retirees will likely draw $1.5 million each in pension benefits over the course of their retirements, even though each person made less than $900,000 during his or her career, according to Deputy Mayor Tom Bell said.

“What happened here is we just can’t afford to dedicate that amount of money” to pensions, Bell said.

Huntington is in the worst shape, but other cities around the state also are struggling to cover their pensions.

State requirements also help drive up the cost of covering pensions.

For example, police and firefighters can retire with full benefits at age 50, the reasoning being both lines of work often involve physical activities that become more stressful the older people get. But people now live much longer than they used to, so it is not uncommon for retirees to live more than three decades past their retirements, Bell said.

“The problem is the state couldn’t add enough money to pay for these lucrative pension benefits,” he said. “What we have to do is close that to new hires and adopt a more conservative pension plan.”

The so-called “Huntington plan” would let cities do just that. It also would give them a 40-year re-amortization of their existing pension debts, meaning they would pay back the debts at higher rates but have more time to do it.

West Virginia is in deep trouble and ridiculous promises such as retirement with full benefits at age 50 is a huge part of the reason.

For starters West Virginia immediately needs to put new hires on the same pension plan as most in private industry receive. In a single word: none.

Then, on a city by city basis, cities should offer pensioners two choices.

1) Approve lower benefits for everyone now
2) Take their chances in bankruptcy court

Finally, cities should also privatize as many services as possible including firefighters.

Raising taxes is not the solution. Nor is redistributing other revenues to fund pension boondoggles. It is time to kill government jobs in general and government pensions plans in particular.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Dismal Unemployment Situation In Chart Form

I have been following a number of unemployment charts showing just how bad the current recession is. Click on any chart to see a sharper image.

Job Loss Recovery



The last three recessions are unlike the eight preceding recessions. For numerous reasons described below we are heading for another job loss recovery.

Job Loss Recovery Detail



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If the pattern holds, unemployment will rise until 2011 or beyond. Moreover, take a look at the first chart again. Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.

Consumer Confidence About Jobs

The Following is by permission from Contrary Investor



Contrary Investor writes:

"The jobs hard to get response is pushing up against 30 year highs seen in the last few months. Likewise the jobs easy to get component of the survey has hit a new low for the current cycle. We'll just have to see how hard the folks at the Bureau of Labor stats can goose the headline payroll numbers for July with further Birth/Death model estimates. We'll be surprised at nothing. But consumers are telling us labor market conditions have worsened, despite the government numbers. And without question this has driven their consumption behavior. "

Decade For Lost Jobs

Please consider the following chart from Lost Decade For Jobs by Michael Mandel of BusinessWeek.



Record Number See Benefits End

The following chart is courtesy of David Rosenberg.



Take a good look at that chart. It's 50,000 now. The expectation is 500,000 by September and 1.5 million by the end of the year. What are the odds Obama creates 1.5 million jobs by the end of the year? Can he really create any? For how long?

While on the subject of claims please consider the following four charts courtesy of Chris Puplava at Financial Sense. I asked him to chart Data from Moodys.

Continuing Claims Since 2000



Continuing Claims Since 1970



Continuing Claims as % of Population Since 2000



Continuing Claims as % of Population Since 1980



Chris notes "The EUC and the extended benefits come out with a lag as Moody’s had data for them only up to 07/11/09 while the continuing claims data is up to 07/18/09. The charts above are through 07/11/09."

I commented on the above series of charts in Weekly Unemployment Claims Portend Disaster.

Here is a snip.

Unparalleled Continuing Claims

On a percentage of population basis this recession is unparalleled.

Making matters worse, the US consumer was nowhere near as leveraged to real estate in 1980 or 1982 as now. Also note that boomers are heading into retirement now, undercapitalized and looking for jobs, in effect competing against their kids and grandkids for jobs.

Look at the average age of baggers in grocery stores or greeters at Walmart. These people are not working because they want to; they are working because they have to. Demand for jobs is at an all time high while the number of available jobs and the pay scales of those jobs have both collapsed. The employment situation is not only an unmitigated disaster, things are about to get worse with pending state cutbacks.

Because of expiring claims, continuing claims data will soon start looking better. The reality however, is things will get worse for another year as unemployment soars into double digits. My forecast in January was 10.8% in 2010 while the Fed's was 8.5%. I see no reason to change mine, but the Fed upped theirs.

The implications for housing and especially commercial real estate are ominous.

Part Time Employment

The following graph from Calculated Risk shows the unemployment rate and the percent of the civilian labor force that is working part time for economic reasons.



New figures come out on Friday but here is the June count of Part-Time Employment.

Table A-5 Part Time Status



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The chart shows there are 9 million people are working part time but want a full time job. A year ago the number was 5.5 million.

Exhausted Benefits

The following graph on the number of workers who have exhausted their regular benefits is also courtesy of Calculated Risk:



Calculated Risk writes:

"The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce. According to the BLS, there are almost 4.4 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 2.8% of the civilian workforce.

Right now very few workers have exhausted their unemployment benefits, but there is tidal wave coming. The Law Project estimates 0.5 million workers will have exhausted their extended benefits by the end of September, and close to 1.5 million by the end of 2009. Unless the unemployment rate starts to decline, the numbers will continue to grow rapidly in 2010."

Incredible Shrinking Boomer Economy

Before many companies start hiring full-time workers, they will first put part-timers back to work full time. This will add significant delays to the hiring process in this "recovery".

Indeed, by the time "stimulus" wears out (and it will), the economy will be slipping back into a double-dip recession.

Note that there is no driver for jobs other than inventory replenishment and various stimulus measures. The latter does nothing but push demand forward. Meanwhile Wages and Salaries Fell 4.7%, Most On Record.

Finally, I want to leave you with a thought from the Incredible Shrinking Boomer Economy.

In his Town Hall Meetings Bernanke said:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades.

If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

No Driver For Jobs

In the 1980's and 1990's an internet boom created massive numbers of jobs. Between 2000 and 2007 a housing boom created massive numbers of jobs. I keep asking what the next driver for jobs will be. Inventory replenishment will not do it. Nor will one-time stimulus efforts like road building.

Nothing on the energy front seems capable at this time of producing such a boom. Commercial real estate is massively overbuilt as is the retail sector. So don't look for Home Depot (HD), Lowes (LOW), Target (TGT), or Walmart (WMT) to lead the way. Forget about banking too as Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) have their hands full and then some.

And although one can never tell in advance when technology breakthroughs will happen, as we have seen, internment booms are not that common. In 2001 everyone was waiting for the next "killer app". Everyone is is still waiting so don't look at Intel (INTC), Microsoft (MSFT), or the technology sector either.

So while everyone is tooting horns and cheering the end of the end of the recession before it has even ended, those graphs and comments from Bernanke himself will put the pending job loss Recovery into better perspective.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wages and Salaries Fell 4.7%, Most On Record

Inquiring minds are reading American Incomes Head Down, Threatening Recovery in Spending.

“Consumers have started to change their behavior and they are going to save more,” said Richard Berner, co-head of global economics at Morgan Stanley in New York and a former researcher at the Fed. “You have pressure on wages, you have employment still declining.”

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.

Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed. Excluding the effects of the stimulus plan, June incomes would have dropped 0.1 percent after no change in May, according to the report. In May, one-time additional payments to Social Security recipients boosted incomes 1.3 percent.

One of every 10 American workers will be without a job by early 2010, economists project, shaking the confidence of those still on payrolls and discouraging spending. It may take as long as 15 years for consumers to fully repair finances battered by the decline in home values, stocks and employment, said Edmund Phelps, winner of the Nobel prize in economics in 2006.

Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.

“Households are going to have to do an awful lot of rebuilding of their wealth,” Phelps, a professor at Columbia University in New York, said this week in an interview on Bloomberg Television. “Even if that rebuilding goes on at a pretty good clip, it will take 12 or 15 years for households to get to the wealth level that they had several years ago. Consumer demand is going to take a long time to rebuild to normal levels.”

As for unemployment, I think we see 10% by September or October at the latest. Right now I am sticking with my forecast of 9.8% by August.

In regards to balance sheet repair, 15 years has ominous implications for jobs and the stock market.

In regards to rebuilding wealth, "never" may be a better estimate than 12-15 years for boomers now retiring. Those boomers need to draw down savings during retirement while stock market gains will likely be hard to come by.

Of course most of that "wealth" was all imaginary in the first place, especially in regards to home prices.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ISM Shows Recession Not Over Yet

The horn tooters have to wait at least another month before the recession is over judging from the non-manufacturing ISM numbers.

Please consider the July 2009 Non-Manufacturing ISM Report On Business®.

The report shows the NMI (Non-Manufacturing Index) dropped .6% in July to 46.4, contracting for the 10th consecutive month at a slightly faster rate.

Manufacturing vs. Service Sector ISM



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The table shows that 8 out of 10 Non-Manufacturing components are worse this month than last month. Only deliveries are in the green while inventories are contracting at a slower rate.

By contrast, 7 out of 10 Manufacturing components are in the green and the other three are contracting at a slower pace.

I compared the 10 numbers that had direct equivalents.

Looking at the data, one has to wonder if the manufacturing numbers are an outlier and/or skewed by auto manufacturing anomalies.

Regardless, the NBER is unlikely to declare the end of the recession on numbers like these. Put away your party hats and horns for at least another month.

David Rosenberg commented this morning in Coffee and Muffin with Dave

"We ran some regressions that suggest that the equity market is already priced for the ISM to hit the 51 mark — as we saw in February 2002 when the index pierced 50 amid visions of a sustained inventory cycle, it was right at that time that the S&P 500 began to sputter. That's the problem when all the good news — and then some — gets discounted so quickly. We still think disappointment will inevitably set in over the sustainability of an inventory re-stocking that fails to be backed up by a revival in consumer demand."

Indeed. The Global GDP Rebound Is Underway, But Who's The Buyer? The answer of course is government, not the consumer, except for inventory rebuilding and "free money" programs like "cash for clunkers".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Global GDP Rebound Is Underway, But Who's The Buyer?

Many are cheering the "recovery". Unfortunately, the recovery is nothing more than unsustainable government spending, not just in the US but globally.

David Rosenberg talks about the GDP in Tuesday's Breakfast With Dave.

The reason why we remain skeptical over the sustainability — the operative word for investors — is because the U.S. economy (or the global economy for that matter) has yet to show any ability that it can stand on its own two feet without the constant use of government steroids. At a time when the U.S. government is running a 13% fiscal deficit-to-GDP ratio, it somehow has enough in the coffers to try and perpetuate a cycle of spending by inducing a populace in which 20% are already three-car families, to go out and buy a new car to support a shrinking industry at future taxpayer (or bondholder) expense.

Look at what happened in that first quarter GDP number — total GDP contracted around $30 billion at an annual rate, but when you strip out all the government activity, ranging from spending, to tax reductions, to benefit payouts, the decline exceeded $300 billion. In other words, without all the government intervention, the decline in GDP in 1Q would have been closer to an 8% annual rate, not 1%.

Motor vehicle sales surged to a 10-month high in July — an annualized 11.2 million units compared with 9.7 million in June. The results largely reflect the “Cash for Clunkers” $1 billion program that ran out of money in barely more than a week.

THIS IS SO REMINISCENT OF WHAT HAPPENED IN LATE 2001/EARLY 2002

In the aftermath of 9-11, the Big Three unveiled 0% financing to rejuvenate auto sales, which were moribund at the time. So what happened was that motor vehicle sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October — a 3,643% surge at an annual rate! Retail sales skyrocketed 6.6% that month (+116% at an annual rate), a record that holds today. We never came close to seeing 20.0 million units on auto sales again.

But what all these gimmicks do is bring forward consumption — they don’t “create” anything more than a brief spending splurge at the expense of future performance — the pattern gets distorted as opposed to there being any real permanent change in the trend.

Even as economists start to pen in 3.0%+ GDP growth for 3Q, we remain of the view that we could end up with something closer to 1.0% growth or a touch better.

As for 4Q, the key will be the consumer, and without more government support, either in the form of stepped-up spending incentives or extension of jobless benefits, the odds of a relapse towards 0% growth is non-trivial. This is beyond the limited time horizon of the equity market, but come Labour Day, attention will turn away from the recession ending (assuming it has — one quarter does not make the difference) towards the contours of the recovery (assuming we have one).

And in Japan, wages (wages, including overtime pay and bonuses) slid 7.1% from a year earlier in June, the 13th consecutive decline but the biggest since the data series started in 1990. The U.S. is suffering from a similar deflation in the labor market, with wages and salaries sliding at a record 4.3% over the year to Q2 (have a look at what is happening to boomers coming back into the workforce on the front page of today’s NYT — Years After Layoffs, Many Still Struggle To Match Old Salaries.

To think we have people concerned about inflation because of what the price of copper is doing.

Indeed, a crack up boom in China, driving commodity prices higher does not constitute inflation or a recovery everywhere else. China is on a solid path to overheat unless global consumption miraculously picks up, which it won't, at least sustainably.

Rosenberg also points out that the 46% rally in 101 days is unmatched dating back to 1933. I suppose the rally could continue given the 1933 rally lasted 249 days taking the stock market up 172%. However, I would not recommend playing for it.

Meanwhile aside from wasting another $2 billion on "cash for clunkers", bickering in Congress over throwing money at problems is starting to heat up. "Blue Dogs" scaled back the health care plan considerably and the fight in the senate is far from certain.

And with an all but certain rebound in GDP of some sort in the third quarter, Congress and the Fed will want to see if the stimulus takes hold. We know the answer already: It won't, because the jobs picture is bleak, consumers are too deep in debt, and boomers headed for retirement are scared to death over lack of savings.

Of course, many claim "jobs are a lagging indicator". In this case, expect jobs to lag, and lag and lag some more, limiting growth to a few quarters max of inventory replenishment for a "Recoverlyless Recovery" that won't get off the ground.

Mike "Mish" Shedlock
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Office Volume Down 50% to 91%; Industrial Space at Decade Low; Retail Vacancies at 7.5%

Retail, office, and industrial real estate are all suffering to various degrees.

Let's take a look at all three, courtesy of CoStar, starting with Rapidly Falling Prices Changing Dynamics of Office Leasing, Ownership.

The second quarter of 2009 saw leasing and sales conditions across the U.S. office market plummet at a rate unforeseen in previous analysis by CoStar Group, Inc. In particular, CoStar confirmed that the value of Class A office buildings has declined by 57% compared with prices paid at the peak of the market in 2007.

In addition, office-leasing activity is off 39% from year-ago levels and all but three U.S. office markets posted negative net absorption over the first two quarters of 2009.

“The degree and speed at which these changes in market fundamentals have occurred are staggering,” noted CoStar Group’s President and CEO Andrew C. Florance." Florance noted that, on an inflation-adjusted basis, the average price per square foot buyers paid for office properties had enjoyed an 11-year run-up beginning at the end of 1996 to their peak in the third quarter of 2007. In the past six quarters, U.S. office buildings have lost more than half their value.

The bigger the transaction, the more emphatic has been the sales volume collapse from their peaks. The number of closed office sales of $5 million or less declined an average of 58% from their peaks, while the number of sales involving office properties for $50 million or more have dropped more than 91% from their peak, Florance said.

Industrial Space Demand At Decade Low

Please consider Demand for U.S. Industrial Space Falls to Decade Low.

The industrial vacancy rate rose to 9.8% at the end of the second quarter of this year, while the amount of negative net absorption approached 100 million square feet in the first two quarters of 2009 -- both highs for the decade.

Gross leasing of industrial property fell from 97 million square feet in first-quarter 2009 to 83 million square feet in the second three months of 2009 -- down nearly 50% from a year earlier -- while inflation-adjusted quoted rents continued a retreat that began four years ago.

Among the 20 largest industrial markets in the nation, only two registered positive absorption in 2009, the relatively small Western Michigan market and Houston. On the other end of the spectrum, Los Angeles, the seat of West Coast trade, has posted the largest negative net absorption at -9.6 million square feet, followed by Chicago, (-8.7 million SF) and the San Francisco Bay Area (-8.6 million SF), South Florida (-6.9 million SF) and Northern New Jersey (-5.3 million SF.)

Industrial sales have also dropped sharply, reflecting the lack of credit available for commercial property sales in general. Total dollar sales volume has fallen 71% and cap rates rising 35% since their 2007 peaks. Among major industrial markets, the drop-off in sales volume compared to the same period last year ranges from 30% in Atlanta to 90% in Dallas-Fort Worth, with the majority of markets have seen sales volume decline between 70%-80%.

Retail Vacancies Hit 7.5%

Rounding out a trio of commercial real estate woes, Retail Markets Continue to Struggle in Q2, but Some Improvement in Sight.

"The retail sector is not seeing as much of a drop off in leasing activity as we've seen in the office and industrial sectors," said Spivey, showing that there was 26 million square feet of leasing activity during second quarter, which is down only 7.4% over second quarter 2008 and 10.7% over second quarter 2007.

However, continuing a trend from the first quarter 2009 when the nation's retail market posted negative quarterly net absorption (20 million square feet) for the first time since CoStar began tracking retail trends in 2006, the U.S. retail market posted another 16 million square feet of negative net absorption during the second quarter. Spivey compared the retail sector's historical quarterly net absorption to job growth statistics, showing the two are highly correlated, which means that once the job market improves, we should expect retail absorption to improve shortly after.

"On average, the retail sector has added about 1.4% [of square footage of total existing retail space] to its inventory each year since the '50s," said Spivey, showing that the exceptions have been the cycles of excess development that occurred in the late '60s-early '70s, late '80s, 1998 to 2001, and 2004 to 2007. Additionally, consider that the level of retail property under construction in nearly every market across the country is below this 1.4% historical average as well.

"The market has not been overbuilt in this most recent cycle. CoStar forecasts there will be about only a .7% increase in retail inventory during 2009, which would be the lowest number ever, so new deliveries are not a part of the problem this time around," said Spivey.

By retail property type, shopping centers have a much higher vacancy rate (9.2%) than general retail (5.5%), which primarily consists of freestanding, single-tenant retail buildings. Within the shopping center category, in line with those centers that have experienced the most negative net absorption, Spivey showed that strip (11.5%), neighborhood (10.3%) and community (10.1%) centers have the highest vacancy rates, which "probably has a bit to do with the 'mom and pop' shops not being able to whether the downturn as well as national and regional tenants," said Spivey. The centers with the lowest vacancy rates are super regional malls (3.7%), outlet centers (6.6%), and regional malls (7.1%).

At the end of second quarter, the national average retail rental rate (based on quoted asking rental rates, triple net) closed at $17.15 per square foot, which, on an inflation-adjusted basis, is down 4% over fourth quarter 2008. Spivey pointed out that the effective rental rate, which takes into account lease concessions, is likely down even more.

Retail Space Saturation

I certainly agree with Spivey in regards to jobs and vacancies being correlated. However, I disagree with Spivey's assertion "The market has not been overbuilt in this most recent cycle."

I claim the market has hit a saturation point after decades of over-building. One gets used to seeing a certain rate, say 1.4% historical growth and concludes it is forever sustainable. It isn't. Moreover, everywhere one looks there are miles of strip malls, Pizza Huts (YUM), Walmart (WMT), Target (TGT), Home Depots (HD), and Lowes (LOW) as noted in The Point of Negative Returns.

With boomers headed into retirement under-funded and deep in debt, don't expect a return to so-called "normal" spending patterns anytime soon. Consumers at long last have come to the painful realization that their home is a place to live and not their retirement plan, while banks continue to tighten lending standards across the board.

As noted in April 2008, the Shopping Center Economic Model Is History.

Pressure will remain on commercial real estate (and real estate in general) for another decade.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Federal Tax Revenues Suffer Biggest Drop Since Great Depression

Recession? What recession? This is a depression. No it's not the great depression, but this is no ordinary recession as measured by housing, jobs, the stock market, the CPI, auto sales, and now federal tax revenues.

Inquiring minds note Federal Tax Revenues Plummet Most Since 1932.

The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

In May the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

The government's projections included best and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

Social Security Fund? What Fund?

There is no fund and there is no trust either. All that exists of Social Security is a bunch of IOUs and unpaid promises that most believe cannot possibly be met.

So now, the biggest socialist since FDR wants to tackle the problem. Rest assured that means more taxes on productive members of society because Obama sure is not going to be calling for reduced benefits.

Reason For Revenue Plunge

Those looking for a reason for the revenue plunge can find it here: Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5%.





This has been the worst 10-year track record for jobs since the great depression. Moreover the losses are likely to continue for another year at least. So while some are tooting their horns loudly on news of the end of "The Great Recession", others have some stark Thoughts On The "Recoveryless Recovery".

In short, the bottom may be in, but lock up those party hats because most will not see it in terms of jobs, wages, home prices, and the stock market. From many angles, the most likely scenario is a "Recoveryless Recovery".

Downward Spiral In Jobs Continues

Unlike the Federal government, states cannot just print money to make ends meet. They have to do one of two things, raise taxes or cut services. Please consider Alabama's Jefferson County makes massive job cuts.

Alabama's debt-ridden Jefferson County laid off about two-thirds of its 3,600 employees on Monday because of plummeting revenues, a move that will sharply curtail services in areas ranging from roads to courthouses.

Jefferson County has been forced to make drastic cuts because of a lawsuit questioning the legality of a county occupational tax, which raised $78 million annually and was vital to the county's operation.

Although the revenue is still being collected, it is being held in escrow under orders from an Alabama Supreme Court justice pending a decision on the tax case. Some members of the state Legislature hope to pass a new tax bill this month to raise revenue for Jefferson County.

Jefferson county should simply declare bankruptcy and get it over with. Instead, it appears the state is going to tax the citizens to death to make up for $4 billion in derivative contacts gone awry.

Every time government raises taxes, small businesses respond by cutting employees, or simply not hiring them in the first place.

Obama's health care plan is going to cost jobs, and no doubt whatever "fix" he comes up with for Social Security is going to cost jobs and raise taxes as well. So if you are looking for more reasons for a "Recoveryless Recovery" you have plenty.

Left alone, it is going to be a long time before federal tax revenues recover. The implications on state spending, services, and taxes on productive members of society are ominous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Frugality Trumps Quantitative Easing

Once again, deflation has a firm grip on Japan. Symptoms include falling wages, rising unemployment, weakening consumer demand, and falling prices.

Please consider Japan Logs Record Wage Fall, Bonuses Sink.

Japanese wage earners' total cash earnings tumbled 7.1 percent in the year to June, the biggest annual drop on record, which could hurt consumer spending and add to deflationary pressure on the economy.

Weakening household demand for goods is playing an increasing part in pushing the world's No. 2 economy deeper into deflation, with core consumer prices falling a record 1.7 percent in the
year to June.

The Bank of Japan is already forecasting two years of deflation, so price falls alone are unlikely to push it back into full-blown quantitative easing, which in Japan involved flooding the banking system with cash to meet a specific monetary target.

But weak wages, coupled with a rise in the jobless rate to a six-year high in June, may heighten uncertainty over the central bank's forecast for a gradual economic recovery towards early next year, and put on hold any exit from its unconventional monetary policy steps.

"This puts downside pressure on prices, and deflation will worsen for the next one year. There is no way the central bank can move in this situation," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.

QE Checkmate

Earlier this decade Japan invoked a policy of Quantitative Easing to inject cash into the economy. It did not work as planned. However, Japan's QE policies did unleash the mother of all carry trades as investors borrowed in Yen to invest in higher yielding currencies.

Now, with US interest rates at 0 to .25%, UK interest rates at .5%, and the ECB with Eurozone interest rates at 1%, borrowing Yen at 0% to invest in other currencies does not make a lot of sense. All Japan succeeded at was driving up national debt via ridiculous Keynesian spending programs.

Moreover, with rising unemployment, and massive government debt, Japan does not want its interest rates to rise (which they would should inflation take hold). Thus, it's checkmate for Japan in regards to QE.

The UK and US are now embarking down that very same road but the result will be the same because Consumer Frugality Trumps Quantitative Easing.

Was the Fed Successful?

David asks:

Mish,

Love your blog, but I’d like to clarify one thing with you.

You often dismiss the notion that inflation is not a plausible scenario in the short / mid-term. You’re right to point out that house and other consumer goods are tanking, thus leading to deflation. But don’t you think the fact that prices don’t fall as much as they should – due to inflationist policies by the Fed – is, in itself, inflation?

Without the actions of the Fed prices of cars, houses, shares, commodities, etc would be lower. They’re not, which means we are currently experiencing inflation.


Don’t you think?

David

The Fed's effort to increase money supply have indeed had short-term impacts (at great long-term costs). However, most of those changes are still of a second derivative nature. Note that in regards to consumer spending, bank lending, jobs, and housing prices, the situation is still worsening, albeit at at a decreasing pace.

Note that Obama has promised to save 3.5 million jobs. But even if he has (which no one believes), the economy is still shedding jobs and consumer prices are still falling, especially when one properly factors in housing. Please see What's the Real CPI? for details.

It's Not About Prices!

That aside, inflation is not about prices at all but rather the expansion and contraction of credit.

Falling prices do not constitute deflation. However, they are a likely but not mandatory symptom of it.

In a credit based economy, the key issue is expansion and contraction of credit. Credit is clearly contracting. And credit marked to market (which is what matters most) has dwarfed Central Bank expansion of money supply to counteract it.

Given that the Fed and the accounting board have suspended market to market accounting it is a guess as to whether credit marked to market is expanding or not. However, the latest reports still show a contraction in bank lending as well as tightening of lending standards.

And yes the Fed has pumped up money supply. But if money just sits there as excess reserves (and this is indeed what is happening) then it does not affect prices.

Short-Term, the Quantitative Easing efforts by the US, UK, and ECB have stabilized the markets. Long-term all the governments have done is pile on more debt that must be paid back (with interest), and that will act as a huge drag on the economy at a later time.

Note that US and European banks are still reluctant to lend because of massive overcapacity everywhere. Consumers are still reluctant to borrow. The savings rate is rising.

Chinese banks are a different story. China is a command economy and if the government says lend, Chinese banks lend. One must not confuse rising commodity prices on account of China or on account of inventory replenishment in the US and Europe as a sign of a sustainable, renewed credit boom by consumers or businesses.

Demand for Credit is Weak

Moreover, the $14 trillion effort by the Fed has not done a thing for jobs, nor will it. And without jobs, credit card writeoffs will soar along with foreclosures. Congressional policies like "cash for clunkers" merely pushes demand forward while adding to debt that must be repaid via higher taxes.

In the "Recoveryless Recovery" Bernanke will continue to be stymied by consumer and business frugality. Demand for credit is weak and so is bank willingness to extend it. Thus, inflation is not yet in the picture, and when it does arrive, it will be far less than most expect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Thoughts On The "Recoveryless Recovery"

In response to Military vs. Non-Military Durable Goods in Pictures where I suggested the "bottom may be in", many people asked "how so?"

For example "They Stole My Country" writes:

Mish,

Most of the deflation blogs I lurk at here and there are pretty adamant that things are going to get worse. You always seem to hedge that the "bottom might be in." When I look at all I have learned from you and others regarding the state of the economy, I just can't hold out hope the bottom might be in. The jobs are not coming back. Why do you feel the need to qualify?

Likewise "VaAppraiser" asks:

Mish, I also am wondering what bottom you keep referring to? I do not like gloom and doom predictions but I am in the camp with all the others that we not seeing spring here (re: green shoots). Looks more like the end of fall... but I am no expert in the larger matters. What I do know and have expertise in is the housing markets I cover. I have written on some other sites that there is no way any of the markets I cover have reached their bottom.

In the best markets, they still have just under 6 months inventory and we are about 75% of the way through our selling season. If this were the inventory going into the season, yes...we could be bottoming but we are getting ready to go into our slow season...not the bottom by far. I believe inventory will shoot up to 9-12 months pretty quickly. Then prices drop, especially with short sales and REO's having such a big percentage of the market.

Recovery? What Recovery?

Before we can address the question "is the bottom in?" we must answer the question: "the bottom of what?" Moreover, we must also state a timeframe. The latter is critical.

• In general, when I say the bottom may be in, I am speaking of the GDP. Yes, GDP is a very flawed measure, but given all the economic stimulus, it is highly likely the GDP will rebound for a quarter or two, perhaps more.
  
• In regards to the recession, expect to hear announcements that the recession is over coming soon.
  
• In regards to the stock market, I have repeatedly said "the bottom MAY be in". Personally I doubt it. But it could be.
• In regards to unemployment, there is no way the bottom is in.
• In regards to housing prices, the same applies. The bottom is not in.
• In regards to housing starts and permits the bottom is probably in.
  

Now, assuming "the bottom is in" for the GDP and the recession will soon be over, the next question is "for how long?"

Most know that I am in favor of an "L shaped recession", but that definition includes a "WW" or even a "WWW" where the economy slips in and out of recession for a decade, as happened in Japan.

There is no reason to think that consumers are going on huge, sustainable shopping sprees soon. However consumer spending needs to to be balanced with the government throwing money around like crazy, not just in the US, but also the Eurozone, the UK, and especially China. Moreover, an inventory rebuilding process will occur at some point. It may have already started.

However, given that unemployment is likely to rise for another year, this is likely to be a "Job Loss Recovery" or as "Michael" commented on my blog a "Recoveryless Recovery". Indeed, if one is waiting for a recovery in jobs then a recover is a year away at least. However, the NBER will focus on improving GDP and various other factors and not just jobs when deciding the end of the recession.

Whether or not the stock market has bottomed depends on the US dollar. If the US dollar sinks to new lows, the bottom in the stock market is likely in. If the US dollar manages a major new high, I surmise the bottom is not in.

No one really knows. What we do know is currency debasement is not just a US phenomenon. Global currency debasement by central bankers everywhere is underway. And since things are relative, one should NOT be surprised to see the US dollar make new highs. However, my favored scenario is the US dollar will fluctuate in a wide trading range which makes it touch and go as to whether the stock market bottom is in.

At this point, the market has priced in a strong recovery, something that is not going to happen. And even IF the bottom is in, the market is likely to do nothing from here (at best), for quite some time.

This is also the "pain trade" in many ways for many people. For example, pension plans still have lofty as well as unreasonable market expectations going forward, jobs will remain difficult to find, and boomers headed into retirement hoping for a return to new market highs to "get even" will be frustrated time and time again. Things are shaping up as that have in Japan, with "two lost decades".

In short, the bottom may be in, but lock up those party hats because most will not see it in terms of jobs, wages, home prices, and the stock market. From many angles, the most likely scenario is a "Recoveryless Recovery".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Is the Housing Bottom in, or is this just a Seasonal Uptick?

Inquiring minds are pondering a few charts from my friend "TC" who has plotted the Case-Shiller price history since 1995 for 20 cities. Please click on any chart to see a sharper image.

Absolute Price History 10 Cities



Absolute Price History 10 Additional Cities



Relative Price History 10 Cities



Relative Price History 10 Additional Cities



May 2009 vs. April 2009



Thoughts From "TC":

Much has been made about prices "hitting bottom" and the market showing signs of stabilization. However, when one dives just a bit deeper into the numbers, it appears the increases are not much more than seasonality.

Another reason for the small price incline on a month-over-month basis is that May 2009 data is the first full month of data since the Federal $8000 Tax Credit took effect (the bill actually passed in mid-February, so March was the first complete month, but escrows aren't typically closed and sells recorded until May).

In order to showcase how small these price increases actually were in dollar terms, I've included a new chart which the price differences of May 2009 vs. April 2009 for all 20 cities tracked by Case-Shiller. The changes range from a gain of $5,800 in San Francisco to a continued drop of $1600 in Miami - no city experienced an increase any where near the $8000 Federal Tax Credit.

Median national prices have now fallen 32% peak-to-trough over the past 3 years or $80,000. In the 20 cities that Case-Shiller tracks prices have fallen from 8% in Dallas to 55% in Phoenix. Price declines are highest in CA, NV, AZ, FL and Detroit. In nearly all of the cities prices have now declined back to early 2000 prices and thinly traded futures data points to a bottom occurring in the next 12 months.

It is important for readers to know that Case-Shiller uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, there are two newer columns titled "Price Level" which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.

Once again included absolute and relative price charts. The relative charts are based upon a year 2000 equal point for the 20 cities and the absolute price chart helps to show the current price declines.

Thanks TC!

At some point housing will bottom. The key question is "what then"?' I surmise in real terms housing will be negative for a decade given the last bubble is never reblown. Look at the Nasdaq for a prime example.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Military vs. Non-Military Durable Goods in Pictures

Sometimes a chart is nearly all you need to understand the story. This is one of those times.

Military vs. Non-Military Durable Goods




click on chart for sharper image

Durable Goods Shipments Down 20%

With that stunning graphic out of the way, please consider some interesting factoids from Why a Recovery May Still Feel Like a Recession.

• Durable goods shipments fell by more than 20 percent during this recession, and would have declined further were it not for increased production of weapons.
• In no previous downturn since 1958, when the figures began being recorded, had the decline been as much as 14 percent.
• The drop is all the more remarkable because such shipments rose at a relatively restrained rate in the preceding period of economic growth, particularly when military sales were excluded.
• In June, seasonally adjusted shipments for civilian purposes were 19 percent below the average monthly figure for 2000. Shipments of military items were running 123 percent above the 2000 average.
• Those figures are in nominal dollars, not adjusted for inflation. That fact may exaggerate the trend, since prices of some durable goods, like computers, have fallen over the years.

Given the amount of durable goods that go into homes (washers, dryers, microwaves, stoves, refrigerators, etc), and given the enormous boom in housing from 2003-2007 that chart is a stunning description of the state of our economy.

However, the chart is misleading in once sense. Military spending accounts for only 8% of durable goods orders. Then again, military spending was only 3% in 2000 according to the article.

Perhaps the bottom is in, but please don't expect the "recovery" to take us back to 2007 levels of spending any time soon. Housing, commercial real estate, and autos will remain weak for years to come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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32 Story Highrise Has 1 Tenant

In case you did not realize just how bad the condo bust is in Florida, this story will clue you in: Florida highrise has 32 stories, but just 1 tenant.

FORT MYERS, Fla. — The Vangelakos' southwest Florida condominium has marble floors, a large pool overlooking a river and modern furnishings that speak of affluence and luxury. What they don't have in the 32-story building is a single neighbor.

When the Vangelakos' travel from Weehawken, N.J., to spend a week or a few days in their Florida home, they have exclusive use of the pool, game room and gym, but they miss having a few tenants around.

A large, circular fountain in front of the building is dry. The automatic glass doors that lead to the front lobby are locked. On the front desk is a guest sign-in sheet. The last entry: Feb. 13, 2009.

Victor Vangelakos said they don't want to move to the tower next door because they would still be paying the mortgage and maintenance costs on the condo they own. They paid $430,000 for the unit and took out a $336,000 mortgage — essentially spending their life savings.

The family's attorney said he has filed two lawsuits on behalf of would-be tenants because the building wasn't finished as promised. He said they expected a clubhouse, marina, private cinema and restaurants.

Ah yes , it makes perfect sense to have a clubhouse, a marina, and restaurants for 1 part-time tenant. However, the private cinema would indeed be private, just as advertised.

Addendum:

E-Recep in a comment to this post has an interesting anecdote to share ...

"The over-capacity in housing has started to look ridiculous if not tragic. Here in Turkey we have a similar situation. One of my nephews is living alone in a 12-story building which was completed last year. The outskirts of Istanbul are full of newly finished condos, most of which are empty."

Similar stories abound in China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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European Prices Fall 0.6%, Most in 13 Years

Troubles in Europe continue to mount even as stock markets everywhere are pricing in a strong recovery. Please consider European Prices Fall 0.6%; Jobless at Decade High.

European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade.

Prices in the euro region dropped 0.6 percent from a year earlier, the most since the data were first compiled in 1996, the European Union statistics office in Luxembourg said today. That exceeded the 0.4 percent decrease forecast by economists in a Bloomberg News survey. Unemployment rose to 9.4 percent in June, the highest since 1999, a separate report showed.

More than 3 million people have joined the euro region’s jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12 percent in 2010.

The European Central Bank aims for inflation to be just under 2 percent and ECB President Jean-Claude Trichet has said he anticipates inflation will “temporarily remain negative” before turning positive by year end. While the ECB says medium- to long-term inflation expectations are “firmly anchored,” a European Commission measure of consumer price expectations over the next 12 months fell in July to the lowest since at least 1990, a report showed yesterday.

“The risks on the deflation side are there,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London, which estimates euro-area inflation is the lowest since 1953. “The underlying dynamics do resemble those that you would see in a typical deflationary environment.”

German consumer prices fell in July from a year earlier for the first time in 22 years, data showed this week. Spain and Ireland have experienced annual price declines since March as Tesco Plc and Marks & Spencer Group Plc have reduced prices in their Irish stores.

Unemployment in the euro region increased by 3.17 million people in the year through June and the highest jobless rate was in Spain, at 18.1 percent, according to today’s report. Most Europeans think the worst of the crisis is still to come and a third of workers are “very concerned” about losing their jobs, a survey published on July 24 by the European Commission showed.

Deflation is Not Imminent, it is Here, Now

Falling prices do not constitute deflation. However, they are a likely but not mandatory symptom of it.

In a credit based economy, the key issue is expansion and contraction of credit. Credit is clearly contracting. And credit marked to market (which is what matters most) has dwarfed Central Bank expansion of money supply to counteract it.

Marek Belka, head of the Washington-based IMF’s European department said “We do not see deflation as imminent. But we shouldn’t completely exclude this possibility.”

Belka's statement is silly. Deflation is not imminent, it is right here, right now, by any reasonable measure, and even some unreasonable measures such as falling prices in Europe, Japan, and the US, the likes of which we have not seen since the great depression.

And given we have been in deflation for at least 15 months and possibly much longer (on a credit basis), the debate is not whether deflation arrives. At this point, the only question is how long it lasts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Unemployment Claims Portend Disaster

The Department of Labor Weekly Unemployment Report is now so skewed by abnormalities, it is difficult to get a clear picture. First, let's take a look at the data.

Seasonally Adjusted Data

In the week ending July 25, the advance figure for seasonally adjusted initial claims was 584,000, an increase of 25,000 from the previous week's revised figure of 559,000. The 4-week moving average was 559,000, a decrease of 8,250 from the previous week's revised average of 567,250.

The advance seasonally adjusted insured unemployment rate was 4.7 percent for the week ending July 18, unchanged from the prior week's unrevised rate of 4.7 percent.

The advance number for seasonally adjusted insured unemployment during the week ending July 18 was 6,197,000, a decrease of 54,000 from the preceding week's revised level of 6,251,000. The 4-week moving average was 6,416,250, a decrease of 131,750 from the preceding week's revised average of 6,548,000.

Weekly Claims



click on chart for sharper image

Initial Claims Analysis

One could point at the substantial +25,000 jump in initial claims and conclude things are deteriorating. However, it is difficult if not impossible to know exactly because a huge seasonal adjustment factor beyond the ordinary related to auto manufacturing plant shutdowns skewed the seasonally adjusted numbers.

The unadjusted drop of -78,111 is even more misleading. Moreover, the only way to use unadjusted numbers accurately is on a year-over-year basis and that fails for reasons stated.

Continuing Claims Analysis

Note the huge drop of 131,750 in continuing claims. Ordinarily this might be significant. However, these are not ordinary times. Much, perhaps all of that drop is due to benefits expiring.

Indeed states and federal programs have extended unemployment benefits several times. They do so but do not adjust the headline numbers.

Please look at lines boxed in red for Extended Benefits and EUC 2008. The latter is Federal extensions picking up where states left off. The former is state extended benefit programs.

Note that 2,656,879 people are on extended federal benefits compared to 127,438 a year ago!

In other words, the headline extended claims number of 6,416,250 is off by more than 2.6 million. And one also needs to add in another 352,000 from various state programs.

Still More Considerations

Even though EUC 2008 claims rose by 24,518, one cannot count on that number either because hundreds of thousands have used up all of their extended benefits.

On July 19, I noted 500,000 Will Exhaust Unemployment Benefits by September, 1.5 Million by Year-end.

Unemployment benefits plus extension last 79 weeks in New York, over 1.5 years. Yet, in June alone, for New York alone, 47,000 used up 72 of those weeks, and count on the extra 7.

From the above post, courtesy of Dave Rosenberg:

Record Number See Benefits End



Take a good look at that chart. It's 50,000 now. The expectation is 500,000 by September and 1.5 million by the end of the year. What are the odds Obama creates 1.5 million jobs by the end of the year? Can he really create any? For how long?

Emergency Unemployment Compensation

Inquiring minds may wish to consider the Emergency Unemployment Compensation (EUC) PDF.

EUC is a federal emergency extension that can provide up to 33 additional weeks of unemployment benefits. The first payable week was the week of July 6-12, 2008.

The original extension passed in July 2008 paid up to 13 weeks of additional benefits. Effective November 23, 2008, we can pay up to 7 additional weeks of benefits.

Effective December 7, 2008, we can pay up to another 13 weeks of benefits.

With that backdrop, here are some custom created charts courtesy of Chris Puplava at Financial Sense, based on my request. The charts show the effect of the EUC program over time.

Continuing Claims Since 2000



Continuing Claims Since 1970



Continuing Claims as % of Population Since 2000



Continuing Claims as % of Population Since 1980



Chris notes "The EUC and the extended benefits come out with a lag as Moody’s had data for them only up to 07/11/09 while the continuing claims data is up to 07/18/09. The charts above are through 07/11/09."

Thanks Chris!

Unparalleled Continuing Claims

On a percentage of population basis this recession is unparalleled.

Making matters worse, the US consumer was nowhere near as leveraged to real estate in 1980 or 1982 as now. Also note that boomers are heading into retirement now, undercapitalized and looking for jobs, in effect competing against their kids and grandkids for jobs.

Look at the average age of baggers in grocery stores or greeters at Walmart. These people are not working because they want to; they are working because they have to. Demand for jobs is at an all time high while the number of available jobs and the pay scales of those jobs have both collapsed. The employment situation is not only an unmitigated disaster, things are about to get worse with pending state cutbacks.

Because of expiring claims, continuing claims data will soon start looking better. The reality however, is things will get worse for another year as unemployment soars into double digits. My forecast in January was 10.8% in 2010 while the Fed's was 8.5%. I see no reason to change mine, but the Fed upped theirs.

The implications for housing and especially commercial real estate are ominous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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