Job Creation Down 35%, Consumer Spending Down 33% From Year Ago

On this Labor Day, inquiring minds are reading Gallup Economic Monthly: Job Creation Not Happening.

Gallup Daily economic data aggregated on a monthly basis show that job creation in August is just not taking place in the U.S. economy. While Gallup data for the month also show a slight moderation in job loss, this is not sufficient to take up the slack for a 35% decline in the rate of job creation compared to a year ago. And, while confidence in the future direction of the U.S. economy is at its highest level in 20 months, Gallup data also show a continued delinking of consumer spending -- which is down 33% from a year ago.



What Happened?


Job Creation was unchanged in August, with 24% of employees saying their companies were hiring, as was the case in July -- and once again within the 23%-24% range that has held throughout 2009. However, the gap between job creation and job loss did close slightly, as 25% of Americans said their companies were letting people go -- a slight improvement from the 26% of the previous three months. While Gallup data show fewer employees being laid off this summer than earlier in the year, the percentage of Americans reporting that their companies are hiring is down 35% from the same month a year ago.

Consumer Confidence hit a new high for the year in August and its highest level since Gallup Daily tracking began in January 2008, as the percentage of Americans saying the economy is "getting better" reached 39% for the month. Confidence is up from 33% during July and 16% a year ago. Still, even as confidence increases, 45% of consumers rate current economic conditions as "poor" -- not much different from the 43% of a year ago. Consumers continue to believe the economy is improving, but -- at least to this point -- they don't seem to see the improvement in their daily lives.

Consumer Spending improved slightly in August, as self-reported average daily spending in stores, restaurants, gas stations, and online increased by $3 per day. Still, spending over the first eight months of 2009 remains in a tight $6 range of $59 to $65, with August spending down 33% from the $97 daily average of a year ago. This lack of spending improvement even as confidence has improved dramatically since the beginning of the year seems to reflect a "new normal" in consumer spending.



It may be that the current inventory- and "clunker"-driven economic upturn will be a "jobless" recovery. It is possible that government and business spending alone can drive economic improvement for a short period of time. However, without significant job creation, it is hard to see how consumer spending will increase; how many retailers will survive after the Christmas holidays; and how the economic recovery will be maintained into early 2010.

Many think that consumer spending will return once job creation picks up. Actually, there is so much consumer debt, and for many, no reasonable way to service it, that consumer spending is likely to remain weak and defaults high even after unemployment starts inching back down.

Frugality The New Normal

Frugality is the "New Normal" as discussed on this blog for well over a year. Now, a Gallup Poll shows the effect in hard numbers. Please consider Consumers Adjust Attitudes Toward Spending.

Most Americans have consistently viewed themselves as financially cautious this summer, with about 9 out of 10 since early June saying they are watching their spending closely, and 7 in 10 saying they are cutting back on how much they spend each week. There has been little variation in these reported behaviors.



Solid majorities of Americans across all income categories report that they are watching their spending closely and are cutting back. Eight in 10 of those making $90,000 or more a year say they are watching their spending, and nearly two in three say they are cutting back on their spending -- nearly as high as the percentage of middle- and lower-income Americans doing the same.

Consumers are spending less because they have to. In many instances it is a forced attitude adjustment because debt levels are too high, and ability to service that debt is decreasing. Karl Denninger has some thoughts about that in 2009 Labor Day Ponderings..... It's well worth a look.

Bear in mind I think unemployment is going to continue rising for another year, then come back down slowly and reluctantly as noted in Structurally High Unemployment For A Decade. Thus a jobless recovery is a given, assuming there even is a recovery worth mentioning.

Happy Labor Day

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Public Support of Unions Collapsing

In honor of Labor Day, inquiring minds are interested in a Gallup Survey on public support of unions. Please consider Labor Unions See Sharp Slide in U.S. Public Support.

Gallup finds organized labor taking a significant image hit in the past year. While 66% of Americans continue to believe unions are beneficial to their own members, a slight majority now say unions hurt the nation's economy. More broadly, fewer than half of Americans -- 48%, an all-time low -- approve of labor unions, down from 59% a year ago.

Approve Or Disapprove?


Public reaction to labor unions is one of the longest-running trends The Gallup Poll has maintained. Gallup first asked "Do you approve or disapprove of labor unions?" in 1936, a year after Congress passed the National Labor Relations Act establishing the right of most private-sector employees to join unions, to bargain collectively with their employers, and to strike. That first poll found 72% of Americans approving of unions and only 20% disapproving.

While approval of unions has declined since 2008 among most major demographic and political groups, the biggest drop has been among political independents.

Stats By Party ID



Americans' most negative assessments of unions -- as has typically been the case -- involve their impact on non-union workers. More than 6 in 10 Americans, up from about half in 2006, say unions mostly hurt non-union workers.



Americans living in union households and those in non-union households have sharply different assessments of unions' impact on each of the four dimensions mentioned above. However, the widest gap is in perceptions of unions' impact on the companies where workers are unionized. Of adults living in union households (representing 18% of all U.S. adults), 7 in 10 believe unions help the companies; only 39% of residents living in non-union households agree.

Bottom Line

This year's Gallup update on views toward unions comes in the midst of an economic recession, and in the aftermath of major economic interventions by the U.S. government on behalf of two of the Big Three domestic auto companies.

The update also comes as the Employee Free Choice Act -- a proposal to significantly change collective bargaining laws -- is still under consideration by Congress. If passed as originally proposed, the bill would most likely make it easier for unions to organize. In fact, proponents of EFCA (who feel the current system is stacked against unions) say that's the intent. However, those changes may be going against the tide of public opinion, which currently is at a historically low ebb for unions.

There are 9 charts in the article so it's well worth a closer look.

The trends seem to show people are getting increasingly fed up with unions even as Obama himself is clearly leaning the other way. Certainly the defined benefit pension plans of public workers are nothing short of outrageous as well as one of the primary reasons many states and municipalities are in deep fiscal trouble. Waning support of unions is a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Many Rabbits Are Left In The Hat?

As amazing as it seems, inquiring minds are interested in hats and rabbit, more specifically, "How Many Rabbits Are Left In The Hat?"

Dave Rosenberg was rabbits and hats in Friday's Lunch With Dave, NOT LABOUR’S DAY.

While the Obama economics team is pulling rabbits out of the hat to revive autos and housing, there is nothing they can really do about employment; barring legislation that would prevent companies from continuing to adjust their staffing requirements to the new world order of credit contraction. While nonfarm payrolls were basically in line with the consensus, declining 216,000 in August, there were downward revisions of 49,000 and the details were simply awful. The fact that 65% of companies are still in the process of cutting their staff loads is quite disturbing — even manufacturing employment fell 63,000 in August, to its lowest level since April 1941 (!), despite the inventory replenishment in the automotive sector and all the excitement over the recent 50+ print in the ballyhooed ISM index. The fact that temp agency employment is still declining, albeit at a slower pace, alongside the flat workweek and jobless claims stuck at 570,000, are all foreshadowing continued weakness in the labour market ahead. Until we see signs of a sustained turnaround in the jobs market all bets are off over the sustainability of any economic recovery.

What was really key were the details of the Household Survey, which provide a rather alarming picture of what is happening in the labour market.

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle). As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positivity discuss that particularly statistic in their post-payroll assessments; we are not exactly holding our breath.

Second, the unemployment rate jumped to 9.7% from 9.4% in July, the highest since June 1983 and at the pace it is rising, it will pierce the post-WWII high of 10.8% in time for next year’s midterm election. And, this has nothing to do with a swelling labour force, which normally accompanies a turnaround in the jobs market — the ranks of the unemployed surged 466,000 last month.

Record Part-Time Employment



As with the headline data, the details beneath the surface of the unemployment rate figure are very troubling. The adult male unemployment rate has already climbed above the 10% level. When all the labour market slack is included, for example, the fact that full-time employment cratered 336,000 and those working part-time for economic reasons surged 298,000, the all-inclusive U6 jobless rate rose to an all-time high of 16.8% from 16.3% in July. Unless the laws of supply and demand have been permanently repealed, this record and growing amount of slack in the labour market is only going to exert more downward pressure on wages at a time when organic personal income is deflating at nearly a 5% annual rate. Unless Uncle Sam extends his generosity, the outlook for the consumer is fraught with fragility, and all one has to do is have a read of those tortured FOMC minutes that were released earlier this week from the August meeting to see how nervous the Fed really is over prospects for a sustainable recovery.

Real Unemployment - U6



The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.

Record Unemployment For 6 Months Or Longer



Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.

Two final items: First, some will point to the fact that average hourly earnings were up 0.3% MoM in August as a sign of a renewed wage growth. Sorry, but what this represented was the spillover from the minimum wage hike, which was so evident in the 1% surge in retail sector earnings and the 0.5% boost in leisure/hospitality — the two sectors most affected. Outside of these sectors, wages barely rose at all last month.

Second, aggregate hours worked fell 0.3% MoM in August and so far in the third quarter, aggregate hours declining at a 2.5% annual rate. Think about that statistic for a moment, in order to achieve the 3.5% consensus estimate for current quarter real GDP growth, productivity would have had mushroomed at a 6% annual rate, mirroring the 2Q performance. We’re not saying this is impossible, but we are saying that you pretty well have to go back 40 years to see the last time the economy achieved such a feat.

There is much more in the report including a look at Canadian unemployment, retail sales, and consumer confidence numbers.

Geithner Continues To Heap Praise On Himself

Meanwhile, although it's clear there were no job-related rabbits in the hat, Geithner continues giving himself undeserved praise for his handling of the situation.

Please consider Statements by Secretary Geithner at the G-20 Meeting of Finance Ministers and Central Bank Governors.

Good afternoon. My thanks and compliments to Chancellor Darling and his team for hosting this meeting. The United States looks forward to welcoming the Prime Minister and the Chancellor to Pittsburgh, along with the Leaders and Finance Ministers of the G-20, in just a few weeks.

On April 2, facing the greatest challenge to the world economy in generations, the G-20 gathered here in London and committed to an unprecedented program of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.

However, we still face significant challenges ahead. Unemployment is unacceptably high. Conditions for a sustained recovery led by private demand are not yet established. The classic errors of economic policy during crises are that governments tend to act too late with insufficient force and then put the brakes on too early. We are not going to repeat those mistakes.

We need to provide sustained support for growth and financial repair until we have in place a strong foundation for recovery. But that strategy will not be effective unless we can make fully credible our commitment to reverse those actions as soon as conditions permit. This means our strategies will need to evolve as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.

We must lay a foundation for a more balanced and sustainable pattern of future growth, both within and across countries. In the United States, we are going through a necessary and fundamentally healthy transition, raising savings rates and borrowing less from the rest of the world. As this happens, we need to see a complementary shift in countries outside the United States toward stronger domestic demand-led growth.

Geithner Dead Wrong

Geithner is dead wrong. Growth may be underway, using the term loosely. However, sustainable growth is certainly not. Cash-For-Clunkers was a huge boondoggle that created no jobs. Instead it robbed some taxpayers for the sole benefit of others. Furthermore, and as discussed many times, it shifted demand forward.

Now what?

Government cannot create sustainable growth by spending. Sustainable growth comes from businesses voluntarily investing in productive capacity.

It's clear we are going to get a rebound in GDP. Nearly 100% of that rebound will be government spending.

Then what?

Then a double dip recession will come immediately as soon as government stops spending, or later even if it does not. Indeed, the US faces Structurally High Unemployment For A Decade

There are no sustainable job rabbits in the Government's hat, nor will there ever be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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One Sixth Of All Construction Loans In Trouble

The New York Times has an interesting article about construction loans that Inquiring minds will want to read. Please consider Construction Loans Falter, a Bad Omen for Banks.

Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.

Construction loans were highly attractive in recent years for many banks, particularly smaller ones without a national presence. One reason was that other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.

Construction loans, however, needed local expertise and were not easy to standardize. In a booming real estate market, there were few losses on such loans.

It is in commercial real estate construction — be it stores or office buildings — that the pain seems likely to rise. At the end of June, $291 billion in such loans was outstanding, down only a few billion from the peak reached earlier this year.

“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.”

Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

Construction Loans Problems By Type



Local Expertise? What Local Expertise?

One has to laugh at the statement "Construction loans, however, needed local expertise".

In regards to "local", Pray tell what did Chicago-based Corus bank know about condo construction in Florida, California, and Georgia?

Indeed, what expertise was displayed by anyone, anywhere in regards to construction loans?

How Bad An Omen?

Just how bad an omen this is for banks depends on whether or not the problem is getting worse (it is), and how much banks have allocated in loan loss provisions.

In regards to loan loss provisions, here are a few pertinent charts from How Overpriced Is The S&P 500?

Assets at banks whose ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B where ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B (Pacific Region) where ALLL exceeds Nonperforming loans




Banks with Total Assets over $20B where ALLL exceeds Nonperforming loans



Remember that allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated. Moreover, even as problem loans are increasing and expected to keep increasing, allowances for loan losses have gone the other direction.

"Bad Omen" is a serious understatement.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Critically Underfunded Unemployment Insurance Plans

Eighteen states have critically underfunded unemployment insurance plans. This issue has yet to come to a head, but it soon will.

Please consider Unemployment Insurance Buckles After Years of Underfunding.

[Eighteen via latest updates] states have simply run out of money to pay benefits and been forced to borrow from Washington a total of more than $8 billion. That number is almost certain to grow as more states reach the brink. If they are not able to pay that amount back before 2011, which most will not be able to do, they face paying hundreds of millions of dollars in interest.

Meanwhile, many workers are struggling to get by on what the system pays them. Where you live can make all the difference -- workers in the most generous states get twice the average benefits of workers in the stingiest ones. The percentage of unemployed workers who even receive benefits varies greatly by state.

Unemployment insurance is also intended to be automatic stimulus during a recession, keeping people spending and businesses open.

"The idea is you accumulate reserves and then you can support spending when the economy goes south," said Gary Burtless [3], an economist at the Brookings Institution.

But many states have failed to do that, and they're now paying the price. Indiana, which ran out of reserves last year, just raised its unemployment taxes by 35 percent, right in the middle of a deep recession when businesses can least afford it.

Many have been maintaining close to zero reserves [4] for years, well before the economy headed south. California, for example, got into trouble by raising benefits without increasing taxes. Other states, like Michigan, lowered taxes to unsustainable levels and watched their reserves dwindle.

Now, these states will be forced to raise taxes or cut benefits in the middle of a recession -- just when those changes will do the most economic damage.

On average, workers who rely on unemployment insurance get about half as much as they earned while they were working. In some states it is much less, and it may get lower as policymakers struggle to keep their unemployment insurance systems afloat.

There are also wide variations in the percentage of unemployed workers who collect benefits. Nationwide, only about 30 percent of workers who lose their job ever see an unemployment check, but in some states it is as high as 80 percent. Some of the variation is due to differences in who is allowed to collect benefits, some is because many workers -- particularly in states where unemployment insurance is considered a welfare program -- never apply.

Is Your State Flat Broke?

States are free to choose the level of funding for their systems. Over time, many states yielded to political pressure to increase benefits and lower taxes, allowing their reserves to dwindle. Now, 17 states have run out of money altogether, forcing them to borrow money and increase taxes at the worst possible time: in the middle of a deep recession.


Click here for an Interactive Map of State Unemployment Woes

That is an excellent article by Pro Publica outlining the problems. Inquiring minds will want to click on the interactive map link as well as the link to the original article. There is much more to see.

Those 18 problem states constitute an enormous percentage of the population of the United States. New York is $1.3 billion in the hole, Indiana is $1 billion in the hole, and California alone is over $3 billion in the red. Is that factored into the California budget?

On a per capita basis, Indiana is in the worst shape by far.

Who Is To Blame?

It's easy to blame states for woefully underfunding unemployment insurance funds. However, that is not the origin of the problem.

A big share of the blame must go to politicians for making promises that cannot be met. However, let's not forget all the people irresponsibly living on the edge all along.

34 Percent of Workers Have One Week or Less of Savings

Did it occur to any individuals to live within their means and to have actual savings in the bank in case they lost their jobs? The answer is "no, not many".

Please consider 34 Percent of Workers Have One Week or Less of Savings.

Over a one week period beginning July 6 and running through July 13, more than 16,000 visitors to Monster.com participated in the Monster Meter Poll question “If you were laid off without severance, how long would your savings cover your living expenses?”

• One Week or Less: 34%
  
• 2-4 Weeks: 16%
  
• 1-2 Months: 16%
  
• 3-5 Months: 14%
  
• 6 Months or Longer: 20%

Creating three broad groups, 50% have less than a month of savings, while only 20% have 6 months or more. The remaining 30% are in between. Although the Monster Poll is not scientific, I cannot help thinking it is reasonably accurate.

Role of the Fed and Congress

One must also not forget the role of the Fed in this mess. The Fed, via debasement of the US dollar, fostered an economic environment environment that outright encouraged people to borrow more money than they could possibly pay back. Those same policies, plus the moral hazard of too big to fail, encouraged banks to take ridiculous risks, which of course they did.

Finally one must take into consideration the role of Congress and the Bush Administration for misguided policies promoting housing. The result was a Collapse Of The "Ownership Society".

In the wake of that collapse, the Obama Administration has shifted priorities towards renting.

Although there is plenty of blame to share, the root cause can be traced back to Fed policies and fractional reserve lending, both of which acted in unison to encourage irresponsible lending by banks and irresponsible borrowing by consumers.

Sadly, I have no doubt that the political "solution" will be higher unemployment insurance taxes, just as happened in Indiana. Such measures cannot help but cost jobs. Add up all the things that cost jobs while debasing the dollar and you will see policies that collectively encourage outsourcing to India and China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 20th Straight Month; Unemployment Rate Hits 9.7%

In January I forecast the unemployment rate would hit 9.8% by August. Meanwhile, even though it was clear the Fed was wildly off base in its adverse scenario, the Fed upped it total to a mere 9.2% to 9.6% for the year as noted in Fed's Economic Forecast Worsens; Still Ridiculously Optimistic.

The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%.

Given that unemployment is likely to continue rising through the end of the year, and probably for another six months to a year after that, it can be seen the Fed is still ridiculously optimistic, unless they revised higher again and I missed it.

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

Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent
months..




Establishment Data



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Highlights

• 216,000 jobs were lost in total vs. 247,000 jobs last month.
• 65,000 construction jobs were lost vs. 76,000 last month.
• 63,000 manufacturing jobs were lost vs. 52,000 last month.
• 80,000 service providing jobs were lost vs. 119,000 last month.
• 10,000 retail trade jobs were lost vs. 44,000 last month.
• 22,000 professional and business services jobs were lost vs. 38,000 last month.
• 52,000 education and health services jobs were added vs. 17,000 added last month.
• 21,000 leisure and hospitality jobs were lost vs. 9,000 added last month.
• 18,000 government jobs were lost vs. 7,000 last month.

A total of 136,000 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 were flat at 33.1. 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.

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 August, the number of unemployed persons increased by 466,000 to 14.9 million, and the unemployment rate rose by 0.3 percentage point to 9.7 percent. The rate had been little changed in June and July, after increasing 0.4 or 0.5 percentage point in each month from December 2008 through May.

Since the recession began in December 2007, the number of unemployed persons has risen by 7.4 million, and the unemployment rate has grown by 4.8 percentage points.

The civilian labor force participation rate remained at 65.5 percent in August. The employment population ratio, at 59.2 percent, edged down over the month and has declined by 3.5 percentage points since the recession began in December 2007.

In August, the number of persons working part time for economic reasons was little changed at 9.1 million. These individuals indicated that they were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of such workers rose sharply in the fall and winter but has been little changed since March.

Persons Not in the Labor Force

About 2.3 million persons were marginally attached to the labor force in August, reflecting an increase of 630,000 from a year earlier. (The data are not seasonally adjusted.) These individuals 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, the number of discouraged workers in August (758,000) has nearly doubled 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 August 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 9.1 million people are working part time but want a full time job. A year ago the number was 5.9 million. This series has stabilized for the last 6 months.

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 9.7% 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 16.8%. 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.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Overpriced Is The S&P 500?

Inquiring minds are wondering How Overpriced Is The S&P?

It's an excellent question given bulls feel the market is headed much higher while the bears feel the opposite after a remarkable 50% rally.

Let's start off with a look at the financial sector where Allowances for Loan and Lease Losses (ALLL) have plunged even though non-performing loans soar.

To understand the importance of ALLL, inquiring minds are reading a description of Allowances for Loan & Lease Losses.

Businesses try to predict, on an ongoing basis, the amount of loss in their accounts. They take periodic charges to earnings to better match losses to periods when they occurred. Banks do this as well. They use current income, through the provision for loan and lease losses, to create and build a reserve to absorb losses.

The ALLL can be increased another way. When the bank collects on previously charged-off loans, the amount recovered goes into the ALLL.

Charged-off loans decrease the ALLL. If a bank decides it has overestimated its potential loss exposure, it can choose to reduce its ALLL and add the amount to its income. This is known as making “reverse provisions” for loan and lease losses, because the bank decreases the allowance, or reserve amount, rather than increasing the provision. It is rare for a bank to make a reverse provision, however, because of the imprecise nature of determining an appropriate reserve.

One last point to remember with respect to the reserve is that the ALLL is a general reserve. Therefore, even if a bank analyzes and estimates the loss on each loan, the allowance is there to absorb all losses in the loan portfolio and is not specific to a particular loan.

With that backdrop, let's take a look at a few charts. Click on any of the following charts to see a sharper image.

Assets at banks whose ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B where ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B (Pacific Region) where ALLL exceeds Nonperforming loans




Banks with Total Assets over $20B where ALLL exceeds Nonperforming loans



Remember that allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.

Bank Profits Too Good To Be True

Flashback April 16, 2009: Wells Fargo’s Profit Looks Too Good to Be True: Jonathan Weil

What sent Wells shares soaring on April 9 was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.

Dig below the surface of Wells’s numbers, though, and there are reasons to be wary. Here are four gimmicks to look out for when the company releases its first-quarter results on April 22:

Gimmick No. 1: Cookie-jar reserves.

Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books -- the effect of which I’ll explain in a moment.

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.)

The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income.

Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.

Weil goes on with three other highly suspicious (at best) practices by Wells Fargo, including a balance sheet holding of $109 billion of "other assets". Weil writes:

"The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard.

Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.

FDIC Problem Bank List Soars To 416

For a nice discussion of some of the problems facing the financial sector, please consider For FDIC, a long tunnel and little light by Rolfe Winkler at Option Armageddon.

FDIC’s problem bank list grew to 416 at the end of last quarter. These banks have $300 billion of assets.

In total, FDIC estimates the banking sector is wrestling with $332 billion worth of loans and leases on which borrowers have stopped making payments. That excludes hundreds of billions worth of underwater loans that may be current now but will ultimately default. Many banks, including the largest ones, are likely to struggle for some time.



Citigroup and Bank of America have received hundreds of billions of dollars of government support, but, precisely because of that support, they’re not on the FDIC’s list. Adding them to it would multiply total problem assets 10 times, to $3 trillion.

Asset prices aren’t going back to their highs of 2006-2007, so loans held against them will be generating losses for years. The FDIC may raise enough cash from banks to fund depositor losses in small and medium-sized banks, but it is clear that the biggest banks are far too large for them to handle.

As a result, the government’s emergency rescue measures aren’t going away for a while. And taxpayers should expect to be writing fat bailout checks to the financial system for years to come.

America’s Japanese banks

Inquiring minds are reading America’s Japanese banks also by Winkler.

A banking system loaded down with hundreds of billions of dollars worth of unrecognized bad debt — Japan in the 1990s? No, it’s the United States today.

And where are American banks hiding their losses? Among other places, in their loan portfolios. Banks have written down billions in toxic securities, but many toxic loans are still carried at close to full value.

According to data published by the Federal Reserve late last year, banks are carrying $3 trillion of residential real estate loans and $1.7 trillion of commercial real estate loans on their books for a total of $4.7 trillion. Dan Alpert at Westwood Capital thinks as much as a fifth of that total could be uncollectable.

Banks argue that loans should not be marked down if they’re still “performing.” As long as borrowers are meeting their contractual obligations, there’s no reason to take a writedown. The problem is, this gives banks an excuse to extend, amend and pretend. They can make concessions on loan terms or delay foreclosure notices, if only to maintain the fiction that borrowers will make good.

With real estate prices likely to fall, and stay, 40 percent below the peak, borrowers have a big incentive to renege on their side of the bargain. This is how we become Japan. Emergency bailout facilities allow banks that otherwise would have failed under the weight of bad loans to hold those loans to maturity — pretending the bad ones will be paid off in full over time.

In reality, many loans will default and banks will bleed capital for years. Take commercial real estate. As the Congressional Oversight Panel has reported, few CRE loans that were originated at the peak will qualify for refinancing when they mature. Banks can pretend they will, carrying the loans at values far above what will ever be paid back.

So what do we do? We can start by eliminating government guarantees that allow banks to avoid dealing with the problem.

As things stand, the biggest banks have no incentive to write down loans because the Federal Reserve, Federal Deposit Insurance Corporation and Treasury Department have, in effect, promised them unlimited financing to hold loans to maturity.

As the Japanese can tell you, this is just a recipe for stagnation. Thanks to a debt bubble that authorities refused to deal with decisively, that country is now entering its third consecutive lost decade.

S&P 500 Earnings

Given that loan loss provisions directly affect earnings. Let's take a look a PE chart of the S&P 500 from Chart of the Day.



That chart was from earlier in the month. Nearly all companies have now reported and the PE is down to 127.43. If that sounds preposterous you can check the S&P 500 Excel Spreadsheet right on Standards and Poors.

Real vs. Operating Earnings

The chart above is based on actual reported earnings. Unfortunately it's difficult to find anyone stating P/E ratios based on actual earnings. Instead, because the media and investor bias tends towards being 100% invested 100% of the time, nearly all estimates you see are based on "operating earnings".

Barron's had an excellent article on this subject in May of 2008. It is as relevant today as it was then. Please consider What's the Real P/E Ratio?

There are two main earnings numbers that Wall Street uses when discussing valuations -- "reported earnings" or "operating earnings." Typically, the bulls use "operating earnings," and the bears use "reported earnings" because operating earnings are higher and reported earnings are lower. Also, it makes sense for the bears to use the past 12 months of earnings because they are usually lower, and for the bulls to use forward operating earnings to help make their case. Using the last 12 months is much more consistent, since it avoids dependence on estimates of earnings.

Operating earnings exclude write-offs, while reported earnings include write-offs. That is the only difference, but it's a difference that is getting much more important. As recently as the early 1990s, operating and reported earnings were virtually the same. But then we entered the greatest financial mania of all time, and the earnings numbers diverged.

There were so many write-offs by companies making unwise investments and then undoing them that operating earnings grew much faster than reported earnings. The write-offs that had been sporadic and unusual became common for many companies.

Using operating earnings is now like playing in a golf tournament that doesn't count any penalty strokes for hitting the ball into a water hazard or out of bounds.

Over the past 75 years, most market peaks topped at around 20 times reported earnings, and the troughs occurred at around 10 times earnings. The financial mania of the late 1990s pushed P/Es to over 40 times reported earnings, and the following bust never brought P/Es below 18 times reported earnings.

There's more we can do to make sense of earnings: The best way to measure present earnings and future earnings is to smooth them out over long periods. Earnings can grow at only approximately 6% a year over the long term. The trend is limited by the growth in real GDP plus inflation. And long term, real GDP cannot grow faster than the increase in the labor force plus the increase in productivity.

If you don't accept this, look at a long-term chart and draw a 6% growth line through the earnings. It is clear that earnings sometimes rise above the line and sometimes fall below it, but earnings always revert to the 6% mean.

Going back to 1950, every instance where actual earnings rose above trend-line earnings was followed by a period where actual earnings went well below trend-line earnings.

Creative Destruction

Please bear in mind that historical long term trends are just that. Intermediate-term, it is imperative to factor in demographics, changing consumer attitudes towards debt, willingness and ability of banks to lend, overall debt levels, etc.

I have discussed consumer attitudes many time, most recently in Creative Destruction.

Factors Sealing The Deflationary Fate

The five month, 50% rebound in the S&P 500 was certainly spectacular. However, the more important question is where to from here?

Take a look at Japan's "Two Lost Decades" for clues.

Creative destruction in conjunction with global wage arbitrage, changing demographics, downsizing boomers fearing retirement, changing social attitudes towards debt in every economic age group, and massive debt leverage is an extremely powerful set of forces.

Bear in mind, that set of forces will not play out over days, weeks, or months. A Schumpeterian Depression will take years, perhaps even decades to play out.

Thus, deflation is an ongoing process, not a point in time event that can be staved off by massive interventions and Orwellian Proclamations "We Saved The World".

Bernanke and the Fed do not understand these concepts, nor does anyone else chanting that pending hyperinflation or massive inflation is coming right around the corner, nor do those who think new stock market is off to new highs. In other words, almost everyone is oblivious to the true state of affairs.

How Overpriced Is The S&P?

Take another look at those charts kicking off this article. Factor in the analysis of Winkler and Weil. Factor in demographics, consumer attitudes, etc. Factor in global wage arbitrage. Factor in loan loss provisions that have only one way to go, up. Factor in consumer debt levels, realizing that consumer spending is 70% of the economy.

Do the forward earnings estimates you hear from bulls make any sense to you? They do not make sense to me. While it's hard to put a price tag on any of those components, we can look at Japan as a model as I have suggested on many occasions and Winkler is suggesting now.

If you have not yet done so, please consider Effect of Household Deleveraging on Housing, Consumption and the Stock Market. Here is a snip pertaining to Japan, but there is much more in the article to see.

Nikkei Stock Index 1980-Present



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A look at the Nikkei shows that Japan has already lost two decades since the peak in 1990. It is likely the US follows the same general pattern.

Of course some huge innovation like the internet could come along that would create enormous profits and employ millions of highly paid workers. However, the odds of that are extremely small.

Thus, the risk/reward scenarios of long term investing are awful based on fundamentals alone. Traders however, will have many opportunities in both directions.

All things considered, I suggest the S&P 500 is easily 50% overvalued based on what we know now. That is not a prediction the S&P will be cut in half, rather it is my belief that it should be cut in half. Given that I have seen estimates as low as 200, I am not "SuperBear".

However, the reality is no one really knows what innovation is (or is not) coming, nor can anyone say for certain what valuations investors are willing to place on earnings. There are also foreign Central Bank issues to fact in. With that in mind, the S&P could easily meander around this level for a decade while earnings catch up to what are now very poor valuation metrics.

As always, traders need to keep an open mind and not get locked into any scenario. Long-term investors will have to take what they get. Unfortunately, I suggest those results are not likely to be very pretty.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economic Black Hole

I have been receiving many interesting emails lately from all areas of the country, international as well. I would like to share some of them with you.

In a reply to Cut My Pay, But Please Give Me A Job, Bobbie Writes:

Mish,

It seems to me that anyone able to actually get a job offer at 50% of their former pay would be lucky.

My husband has spent 8 to 10 hours a day for the last 12+ months sending off CV’s, letters, working the phones, researching companies, writing to CEO’s and HR, all to no avail.

It’s a black hole out there!

Responses are not forthcoming even for a job that is written to his experience.I realize that companies are making “wish lists” regarding what they are seeking in an employee and I also realize that HR folks online are “copying” from other sites just to have a job to post.

Please consider that you pay to look at listings on Ladders.com yet you later find the same job listed on Monster.com, Indeed.com and Careerbuilder.com (just to mention a few). I am aware that having responded to the incorrect one has eliminated job seekers from consideration by the actual entity looking to employ a candidate!

Also note that if you have experience in years past at a certain level and apply for that job offering up to 50% less, if you even receive consideration, you might just be lucky enough to be told to apply for a position more in keeping with your current experience. This too has occurred .

We have even had a HR person say that my husband “looks like” a “$200,000.00 a year guy” and that job he applied for is nothing near that, so they will keep him in mind should a $200K job “pop up”! He has never made that kind of income, as this person was well aware! It would be nice but, give us a break!

So, even with little to no debt, including no auto loans or mortgage, we are being forced to draw down our retirement funds just to pay for basics. With a child in high school and one in elementary school, we have a long way to go before we achieve empty nester status and are quite content to continue contributing to society via our work and taxes, contributions to non-profits and volunteering. As long as we can pay the bills, feed the kids and keep our heads above this economic flood, we might just have something left to retire on when that time arrives.

So, what to do? Frankly, we’ve not a clue!

50% off? We’ll take it and gladly!

This is one lady that enjoys your posts daily and my reading thereof saved our invested monies when we pulled back to cash in ’07. If we had not, it would not be there today to pay for those same basics!

Thanks.
Bobbie

"Recession" Ending?

Highly doubting the recession is ending Rick writes:

Hey Mish, Have you looked at Reuters and Market Watch headlines today?

Reuters: "Looking for a sign the economy is turning around, investors keenly await the jobs number for August."

Market Watch: "Global rebound coming sooner than expected, OECD. Fed officials are more confident than ever that the economy's steep downturn is coming to an end, but they were uncertain at their latest policy meeting about what the recovery will look like.”

I cannot find a job, although I have tons of experience, a university degree and additional business training. And even I can easily see that the "depression" is only starting, the stock market is following the same cue from 1929 onward and there is still an enormous amount of pain, suffering and deprivation that will be coming in the future.

Rick

These emails cannot be considered hard data as the sampling is both too small and too unscientific from which to make solid factual conclusions. Nonetheless, I believe these emails are representative of what is happening in the real world, by real people.

Thanks also go to Bobbie for the warning about multiple job listings and pay sites.

Finally, instead of looking just at numbers, putting a human side to things better shows what people are actually going through.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Non-Manufacturing ISM Still Contracting

The Institute for Supply Management August 2009 Non-Manufacturing ISM Report On Business® shows the Non-Manufacturing (Service) sector is still contracting.

"The NMI (Non-Manufacturing Index) registered 48.4 percent in August, 2 percentage points higher than the 46.4 percent registered in July, indicating contraction in the non-manufacturing sector for the 11th consecutive month but at a slower rate. The Non-Manufacturing Business Activity Index increased 5.2 percentage points to 51.3 percent. This is the first time this index has reflected growth since September 2008. The New Orders Index increased 1.8 percentage points to 49.9 percent, and the Employment Index increased 2 percentage points to 43.5 percent. The Prices Index increased 21.8 percentage points to 63.1 percent in August, indicating a substantial increase in prices paid from July."

Non-Manufacturing Survey Results



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Even though things are contracting at a slower pace, 12 non-manufacturing industries are still contracting while only 6 are expanding. From the report:

The six industries reporting growth in August based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Health Care & Social Assistance; Transportation & Warehousing; Utilities; Accommodation & Food Services; and Information. The 12 industries reporting contraction in August — listed in order — are: Management of Companies & Support Services; Mining; Finance & Insurance; Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Construction; Other Services; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Educational Services; Public Administration; and Retail Trade.

The most striking thing in the report is the price index soaring from 41.3 to 63.1. Bloomberg discusses the report in U.S. Service Industries Contracted at Slower Pace.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 48.4, exceeding forecasts and the highest level in 11 months, from 46.4 in July, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.

A measure of new export orders rose to 54 from 47.5, while the index of prices paid rose to 63.1, the highest in 11 months, from 41.3. The gain in prices was the biggest 1-month jump since records began in 1997, due to higher energy costs.

Federal Reserve efforts to unlock credit and government measures such as the “cash-for-clunkers” incentive program are reviving demand and may help the economy grow this quarter.

“We’re coming out of the recession,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The main problem is the lack of jobs and we know consumers are in fairly fragile health.

A report earlier today showed more Americans than anticipated filed jobless-benefit claims last week, indicating companies remain focused on cutting expenses even as the recession eases. Applications fell by 4,000 to 570,000 in the week ended Aug. 29, exceeding the 564,000 median forecast in a Bloomberg survey, figures from the Labor Department showed. The total number of people collecting unemployment insurance rose.

Notice the silly belief in cash-for-clunkers. It is nearly universal. I expect auto sales to quickly collapse, proving the only real demand is when government gives away "free money".

While the jobs picture is worsening at a lesser rate, the key is that the employment index at 43.5 is still worsening and quite a ways from the break even point at 50.

Whatever is driving energy prices does not seem sustainable given falling natural gas prices and relatively stable prices elsewhere in the energy sector.

Natural Gas Monthly Chart



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Natural gas futures are at an amazingly low $2.54 this morning. I have to admit that I did not expect to see $2.50 prices again when the futures spiked about a year ago.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Too Big To Survive

Some emails I receive are too good not to share. This is one of them. "GD" tells his story of attempting to buy a foreclosed property.

"GD" Writes:

Mish,

I had to pass this tale along to illustrate how ridiculous the housing situation is and how much of a mess Bank of America / Merrill Lynch (BAC) is right now.

My wife and I are currently looking to buy a house in hopes of finding something that has reasonably returned to earth in the last 18 months in the Bay Area. We found a bank owned property in an excellent neighborhood that had been absolutely gutted by the departing owners/tenants. The listing agreement said that all offers had to be submitted with a Bank of America prequalification. We have been working with Merrill because we have investments with them and they are willing to verify our assets without forcing to sell anything until the last minute.

Our agent contacted the selling agent to make sure that it was fine for us to submit our offer with the Merrill pre-approval. No dice, it had to be Bank of America. So we contact a B of A rep and get a quick approval ($50 for the trouble plus another run on our credit). Then our agent prepares the offer and learns that the house is actually owned by Merrill. We then contacted our Merrill rep and had him see what the story was to determine if we could perhaps deal directly with the person inside managing that portfolio.

What happened next? You probably already guessed it, Merrill couldn’t find the property on any of its books. Neither could Bank of America. Needless to say we walked away from such a mess.

This is not a “one hand doesn’t know what the other is doing,” this is a other fingers on the same hand are clueless situation. These banks are not too big to fail. They are failing because they are too big.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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What's Priced In?

This morning's Breakfast with Dave is another good one. Rosenberg discusses the ISM, car sales, housing, and most importantly "What's Priced In?"

Yesterday was an exclamation mark on just how much is priced in because ISM surged to 52.9 (see more below) and pending home sales soared 3.2% MoM (best level since June, 2007, no less) — though construction spending in June did dip 0.2% as declines in nonresidential and public construction overwhelmed the recovery in the residential sector. And there was also the news that global chip sales rose in July for the fifth time in as many months — by a ripping 5.3% (though still down 18.2% YoY). Not only was the stock market down 2.2% yesterday, but it was on higher volume to boot (+19% on the NYSE) — distribution days are never very good signposts.

As everyone knows, we have been very busy working hard to identify what the markets are discounting in terms of future economic growth and came to the conclusion months ago that the equity rally in particular was leapfrogging the outlook. It’s one thing to price out the recession, which is what a 20% rally suggests, but once you surge over 50% from any low the market is usually in year two of the recovery phase. Even if the economy does better than we think it is capable of, the reality is that the stock market has discounted a whole lot of growth — from our lens, two year’s worth. We can debate the macro outlook, to be sure, but the market does look now as though it is going to sit and wait for the fundamentals that have been priced in to come to fruition.

From a purely technical standpoint, which is beyond our purview but must be addressed since so much of the bear market rally was technically-based, a 50% retracement would imply a corrective phase to 840-850 on the S&P 500, which would imply that the market is back to pricing in a 2.0% growth trajectory for the coming year (precisely where the corporate bond market is in terms of its embedded outlook for growth).

Presently, it is still unclear whether or not we are going to necessarily undergo this correction — so many times in this bear market rally buyers have come in after the type of giveback we have endured, which has been just 3.2% thus far from the 1,030.89 interim peak on August 27. A break below the most recent low of 979.73 back on August 17 would probably be very meaningful in this sense, and again, what is different this time is that we just came off a week with some new information — Mr. Market is no longer rallying on good news. And, this is exactly what the tell-tale sign was back in 2002, when after a huge rally, the S&P 500 failed to rise on the day that the ISM broke above 52.0 as it did yesterday (when the March 2002 data were released on April 1 of that year) — that was an early sign to take profits because the market slid more than 30% over the next six months.
Similarly for the bond market, it would be critical for the yield on the 10-year note, now at 3.37%, to “take out” the interim July 10 low of 3.32% — if that happens, a break towards 3.00% is very probable.

Besides the VIX index being at its highest level since July 9, Baa spreads have stopped tightening and have widened back to levels seen a month ago. High-yield spreads have widened roughly 50bps from their recent tightest levels of just three weeks ago and are back to where they were at the end of July — when the S&P 500 was at 987. Keep your eyes on the credit market — it tends to “lead” equities.

ISM – A HISTORY LESSON

The ISM came in above expected at 52.9 in August, up from 48.9 in June and has risen now for eight months in a row after hitting bottom at 32.9 last December. This is the best result since October 2007.

The proverbial fly in the ointment is the fact that there still appears to be no sign of any renewed inventory cycle taking hold — in fact, at 34.4, the subindex is suggestive of continued de-stocking on the part of manufacturers. The last time the ISM production component was at 61.9, employment was at 54.3 (8 points above where it is today) and inventories were 48.1 (14 points higher than they are today).
It still seems as though the story is one of a rebound in auto production, which had sunk to levels that were well below even the depressed quarter-century lows in vehicle sales before the Cash-for-Clunkers gave spending activity a near-term boost.

Next question comes down to what is priced in. The fact that the equity market sold off is a clear sign that a super-sized ISM index had been priced in long ago even as the economists went ga-ga over the prospect that it was heading for a 50+ print.

The current landscape is eerily similar to what happened in late 2001 and early 2002 when green shoots were everywhere and the Nasdaq rallied over 40% and the S&P 500 by over 20%. Back then it was all about autos — 0% financing and a massive production runup: Auto sales soared at a 65% annual rate in 4Q of 2001 and in the first quarter of 2002 we saw auto production ramp up at nearly a 20% annual rate and that kick-started real GDP to a 3.5% annual rate. According to the consensus, the recession was over and a V-shaped recovery was under way. Well, it was half-right. The lesson learned was recessions that are followed by listless recoveries do not end bear markets in equities. We also learned that inventory improvement that is not backed by higher final demand results in an economic relapse — who exactly believed at the start 2002 when the ISM index was surging above the 50 threshold that we would finish the year with 0% GDP growth and the stock market struggling at new cycle lows? The consensus is early 2002 for fourth quarter growth was 3.6% and ended up f-l-a-t.

The reason we think it is important to talk about this is because it was precisely at this point in the brief ISM cycle in late 2001/early 2002 that the S&P 500 peaked — at 1,170 even though the index had three months to go before peaking out. And the decline was serious — down 34% and the falloff in bond yields to the lows was 230 basis points.

There's lots more in Rosenberg's four-page article about the ISM, Housing, the FHA, and historical comparisons. The most important take-away is "Keep your eyes on the credit market — it tends to “lead” equities."

I had similar thoughts in Corporate Bond Spreads Key To Continued S&P Rally.

I have been meaning to do a followup post on credit spreads, and will try and get to that later this week.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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So What's Behind Moves In Gold?

In response to How Will China Handle The Yuan? I received many emails regarding a single statement I made: "Prechter, who does not view gold as money, thinks gold will collapse. Thus, not all deflationists think alike."

The first half of that statement "Prechter, who does not view gold as money" is an inaccurate representation of Prechter's views.

Inquiring minds pointed out that the title of Chapter 1 in Prechter's Gold and Silver eBook (a publication you can download for free) is "Gold Is Still Money".

Apologies go to Robert Prechter.

That out of the way, there are many things worthy of discussion from the same eBook. Please consider the following image snip.

From the chapter: Does Gold Always Go Up In Recessions and Depressions?



Click On Image To Read Text

When Does Gold Act Like Money?

While Prechter states "gold is still money", the above paragraph shows that he thinks gold acts differently when "gold is officially money".

On the other hand, I think gold is money and gold acts like it as well, regardless of whether or not governments make it "official". Please see Misconceptions about Gold for a detailed explanation.

In the eBook, Prechter notes "All the huge gains in gold have come when the economy was expanding".

That is a true statement. However, this is a true statement as well: "All the huge losses in gold have come when the economy was expanding."

Please consider the following charts.

Gold 1980 To 1988



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Gold 1988 - 2000



Instead of asking "Does Gold Always Go Up In Recessions and Depressions?" one could easily ask "Does Gold Always Go Up In Expansions?"

Gold does not always do anything. However, given that recessions make up minimal periods from 1980 through 2000, this is an accurate representation of the period.

Gold 1980 - 2000



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Gold collapsed from over $850 to just above $250 during one of the biggest expansionary periods in history. That is the reality and the charts show it perfectly well. Thus the statement "all of gold's gains were in expansions" is very misleading, at best.

What's Behind Moves In Gold?

1) What was behind gold's move in the Great Depression?
2) What was behind gold soaring to $850 in the 80's?
3) What is behind gold collapsing to $250?
4) What is behind gold soaring again now?

Clearly it is not expansion or contraction driving the price of gold, but rather something else. That "something else" is credit issues.

The great depression sported a massive contraction in credit. Gold rose by force when Roosevelt confiscated, and re-pegged it. Nixon taking the US off the gold standard was also a massive credit event. The difference is that gold, allowed to float, soared.

From the $850 high, gold then plunged to $250 even though there was inflation every step of the way. What happened? Credit fears collapsed. Psychology changed (more on psychology and attitudes below). Moreover, gold's reaction to Long Term Capital Management (LTCM) was a big yawn suggesting that the crisis would be contained.

In general, Gold, like Fiat money does poorly when economic conditions are generally rosy, credit worries are non-existent, and interest rates are falling. In simple terms, cash (and gold) are trash, and assets are where you want to be. Free to float, gold is apt to do worse as Prechter notes.

In 2002 when Greenspan stepped on the gas to fight deflation. Gold started reacting in advance to the pending credit event, an event that blew sky high in 2008. Gold's reaction now suggests the crisis is still not over.

In the early 30's even before Roosevelt stole the citizens' gold, it value in relative terms soared, just as one would expect.

This go around, gold sunk in the initial credit collapse as leverage everywhere was forcibly repudiated. Unlike other commodities however, gold quickly regained its composure, as I surmised.

Email Exchange With Robert Prechter

I had an email exchange with Prechter on August 12 regarding my post Social Safety Nets Mask The Deflationary Depression and his video "Dollar's Hit A Major Bottom" in which he notes that a deflationary depression is coming.



Mish to RP: You are looking for a "major economic depression". I think it is clear we are already in one.

The only reason it is not more readily visible is people are living in foreclosed houses unable or unwilling to pay their mortgage, one in nine living in the US is on food stamps, and unemployment insurance has been extended twice. Congress is now debating extending it a third time.

RP to Mish: Hi Mike,
By all means we are in a depression. It began in July 1999 and is a long way from the bottom.
RP

If the depression began in 1999 then the "gold does well in deflation" camp is clearly winning the debate!

Regardless, this depression has been one massive credit event of epic proportions. It should be no surprise that gold has been rising.

Not all recessions are made alike, nor are all deflations. Certainly Japan was in deflation and the price of gold dropped, but Japan, in comparison to the rest of the world was a small piece of the pie, not enough to influence the price of gold in and of itself in a healthy global economy. Thus it is also important to understand the context of deflation in the global economy.

One final point: Gold does well in "real" terms during deflations. It can do better in nominal terms at other times. "Real" means purchasing power of what it buys.

Praise For Prechter

Tossing aside a difference of opinion on gold, I praise Robert Prechter as a pioneer and a visionary. His views on deflation, although famously early, paved the way for others.

Moreover, I am extremely fond of his theory that shifts in social mood lead the markets, not the other way around.

Housing is a good example. Most still believe consumer attitudes have fallen because the stock market is down and/or because housing is down. The reality is attitudes changed first.

In summer of 2005, people were camping out overnight in Florida hoping to be one of "the lucky ones" to secure a deal on a condo. A few weeks later the lines were gone. Prices did not drop significantly for a year.

What happened?
Attitudes changed first, then prices eventually followed. Once attitudes changed, the party was over.

A common applicable statement is "The Pool Of Greater Fools Ran Out".

Prechter's Elliott Wave theory is also based on patterns of attitudes, that things play out in waves, finally ending in trend exhaustion.

It's easy to be critical of economic pioneers because they are frequently early. That should not get in the way of giving credit where credit is due.

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