Shared Sacrifice Illinois Style - 40,000 Union Workers Get 14% Pay Raises, Governor Quinn Gives Raises Averaging 11.4% to 35 Staff Members

I am in favor of the concept of shared sacrifice. Unfortunately, Illinois stretches the boundary as to the meaning of the term.

For example, please note Illinois Governor Pat Quinn Gave Raises Averaging 11.4% to 35 Staff Members.

Illinois Gov. Pat Quinn has handed out raises -- some of more than 20 percent -- to his staff while proclaiming a message of "shared sacrifice" and planning spending cuts of $1.4 billion because the state is awash in debt.

The Democrat has given 43 salary increases averaging 11.4 percent to 35 staffers in the past 15 months, according to an Associated Press analysis of records obtained under the Freedom of Information Act.

They include a $24,000-a-year bump for the man promoted to shepherd the state through the fiscal storm. Budget Director David Vaught got a 20 percent raise to bring his pay to $144,000 in October when he moved to his new position from Quinn's staff, where he was a senior adviser.

Lawmakers, whom Quinn has asked to raise income taxes and borrow billions to meet its obligations for employee pensions reacted with skepticism and anger.

"It's insulting," said Rep. Jack Franks, a Woodstock Democrat who voted "no" on Quinn's proposal to borrow $3.7 billion for the pension payment that the House OK'd but Senate has not.

"It shows how out of touch he is with the real world, where businesses are freezing salaries and in some cases laying people off," Franks said.

The budget Quinn signed last week for the fiscal year that began July 1 would borrow money and delay bill payments, along with cutting about $1.4 billion in spending. Quinn may have to come up with another $3.7 billion for pensions if legislators continue to deny him permission to borrow the money.

Sen. Michael Noland, an Elgin Democrat who opposes the pension borrowing plan despite heavy lobbying, said there might be circumstances where a raise is warranted for someone taking on significant new duties. But he encouraged the governor to follow his own call for shared sacrifice and "hold the line."

Employees "might be having to accept a little more responsibility, but generally speaking, the state of Illinois is not in a position to be issuing raises at this point," Noland said.

Along with cuts in the governor's office, Jentz said the budget office cut spending by 17 percent last year. Quinn's proposed spending plan had a 10 percent increase in the budget office this year, documents show.

"We have fewer people doing more, and that's what the public wants," Quinn said.

40,000 Illinois State Workers To Get 14% Payraises

While pondering the massive sacrifices taken by Quinn's staff, please consider 40,000 Illinois State Workers To Get 14% Pay Raises

More than 40,000 unionized state workers got a pay raise last Thursday, bringing to 7 percent the amount they're gotten since last year. These same state employees are in line for another 7 percent by next July 1, all at a cost of a half-billion tax dollars a year.

It's more than the virtually bankrupt state can afford, and some Republican lawmakers say the raises need to be rolled back.

"I'm outraged," said State Senate Minority Leader Christine Radogno. "It's very difficult to buy this rhetoric that, 'We need to borrow, we need increased revenue,' when these kind of poor management decisions are going on."

AFSCME said it's outrageous that Republicans like Radogno have "done nothing to help solve the state's financial problems." The union argues that the state needs to raise taxes.

For his part, Governor Quinn said the 14 percent pay raise deal was cut by then-Governor Rod Blagojevich in 2008. Quinn did persuade the AFSCME union last year to postpone 2 percent of the pay raise until 2011, the first time AFSCME had ever consented to even a temporary deferment of a pay raise.

No doubt AFSCME considers deferring 2% of a 14% pay raise is one hell of a sacrifice. I consider it a farce.

Bayer and his union can go to hell. If you disagree, simply vote Democratic in the upcoming election because the Democrats in general will bow down to the union, raise your taxes, and hand out raises to unions like always. It will not matter one bit that Illinois is broke and taxpayers cannot afford it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Market Rallies as Retail Sales 'Purportedly' Rise at Fastest Pace in 4 Years; Signs Suggest this Oversold Rally will Soon be Dead

Everyone is looking for signs of a continued recovery. Unfortunately there are many misleading signs that trap all but those willing to look beneath the surface to see what is really happening.

For example, please consider the Bloomberg headline U.S. Retailers’ Sales Rise at Fastest Pace in 4 Years

U.S. retailers’ sales are growing at the fastest pace in four years, a sign consumers may be overcoming concern about unemployment and depressed home values.

Sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. Nordstrom Inc. and Kohl’s Corp. are among chains that will report June sales increases at stores open at least a year, according to analysts’ estimates.

Retailers may have bucked last month’s drop in consumer confidence that threatens to temper the rebound. The year-to- date growth in sales shows that spending, a key driver of the U.S. economy, is faring better than many investors are betting, said Michael Niemira, the New York-based ICSC’s chief economist.

“The sales results have been uneven, which makes people worry about the recovery,” Niemira said in a telephone interview. “If you look at the underlying growth rate, it suggests a relatively healthy, moderate pace of spending for the remainder of the year.”

“Investors seem to have given up on the consumers,” Bill Dreher, an analyst with Deutsche Bank AG in New York, said on a July 1 conference call with clients. “Most of our retail operators are very bullish.”

June sales reports will meet or beat analysts’ estimates, and the positive comparable-sales trend will continue, Dreher predicted. Retailers are well-positioned for profitability, with inventories and operating expenses tightly controlled, he said.

“These growth rates are the best we’ve seen in several years, after a multiyear slump,” Craig Johnson, president of Customer Growth Partners LLC, a consulting firm in New Canaan, Connecticut, said in a July 2 telephone interview. “Some of the analysts get caught up in the month-to-month comparable sales, and they can be misleading.”

Sign, Sign, Everywhere a Sign

All of these pundits are barking about same store sales, an extremely misleading sign given retail stores are closing like mad.

Month in and month out we hear the same nonsense about retail sales. I will believe it when I see state sales tax collections support the claims.

Strip Mall Vacancy Hits 10.9 Percent, Approaches 1991 Peak

Amidst all the fanfare of purportedly rising retail sales, those digging a little deeper note US shopping center vacancy rates rose in 2nd quarter.

Retailers shuttered more stores in U.S. shopping centers during the second quarter, further delaying a rebound in the struggling retail real estate market, according to research firm Reis Inc.

Shopping centers and strip malls have been pounded harder than other types of real estate, hurt by weak consumer spending, anemic job growth and an oversupply built to serve new housing that never materialized.

"Until we see stabilization and recovery take root in both consumer spending and business spending and employment, we do not foresee a recovery in the retail sector until late 2012 at the earliest," said Victor Calanog, Reis director of research.

For U.S. strip centers, the vacancy rate in the second quarter rose 0.10 percentage point from the first quarter to 10.9 percent, slightly below the 11 percent in 1991 during the prior real estate bust, according to the Reis quarterly report, released on Wednesday.

Retailers gave up 1.85 million square feet of occupied space in the second quarter at neighborhood shopping centers, while developers opened less than 400,000 square feet of new strip mall space.

That compares with an average of about 7 million to 8 million square feet of shopping centers built each year from about 2001, according to Reis.

Retail Mall Vacancies





Mall vacancies have risen for 11 straight quarters and rents have fallen 7 consecutive quarters! Inflation? Hardly.

Same Store Sales - Misleading Sign

Reis has it correct and so do I. Not only is it easy to beat record low comparisons of a year ago, same store sales are rising in part because stores are closing like mad.

Circuit City closed its entire chain in bankruptcy, thus some of those sales went to Best Buy, some other places, and some sales simply vanished.

More importantly, states have been reporting declining sales tax collections for the entire year.

Admittedly state tax collection numbers are frequently delayed by a couple months, but that still does not jibe with overly bullish comments about sales over the first five months of the year from the International Council of Shopping Centers.

Assuming you believe the fantasy sales reports, a more important question is "where to next?"

Where Next Signpost

• Home tax credits are dead along with housing starts.
• New home sales cratered a record 33% in May, to a record low annual rate of 300,000 units. See Inane Thoughts of the Day: CNNMoney Article says "Housing Shortage is Coming" for thoughts and details
• Massive numbers of state layoffs are coming even if Congress throws the states a small bone
• Global growth is slowing led by Europe and Asia (that will affect hiring plans)
• Anemic consumer sentiment numbers took a turn for the worse
• The ECRI's Leading Economic Indicator has fallen like a rock. See ECRI Weekly Leading Indicators at Negative 6.9; How Likely is a Double Dip?

By the way, the WLI is now at -7.7 falling again last week.

Yet, amazingly nearly everyone thinks some sort of sustainable recovery is underway. However, the treasury market begs to differ, so do the vast majority of economic signs, and so do I.

2-Year treasuries are close to record lows at .62%, 5-Year treasuries are at 1.78% and 10-Year treasuries are at 2.98% and except for today, falling like a rock. Treasury yields are arguably the most valuable sign.

Nonetheless, the stock market is throwing a party over retail sales that cannot be sustained even if by some sense of the imagination those sales are happening.

Signs suggests this is an "oversold" bounce that will die just as the rest of the bounces this year have died.

A tip of the hat to the Five Man Electrical Band for "Signs"

Signs

Sign Sign everywhere a sign
Blocking out the scenery breaking my mind
Do this, don't do that, can't you read the sign?

Can you read the signs? Most can't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economists Surprised Again as German Factory Orders Unexpectedly Fall

Economists are surprised by the strangest things.

The UK has announced austerity measures, Greece, Spain, Portugal (3 little PIIGS) are in forced austerity programs, and Germany is paying more attention to deficit reduction than growth (rightfully so), yet somehow economists expect factory orders in Germany to keep improving.

Please consider the Bloomberg report German Factory Orders Unexpectedly Fell in May

German factory orders unexpectedly fell for the first time in five months in May as demand for goods made in Europe’s largest economy waned across the 16- nation euro region.

Orders, adjusted for seasonal swings and inflation, declined 0.5 percent from April, when they rose a revised 3.2 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.3 percent gain for May, according to the median of 30 estimates in a Bloomberg News survey. From a year earlier, orders increased 24.8 percent.

Europe’s sovereign debt crisis has pushed the euro down 17 percent against the dollar since late November, making exports to countries outside the currency bloc more competitive just as the global recovery gathered pace. With governments cutting spending to convince investors that budget deficits are under control, growth in the euro area, Germany’s biggest export market, may slow.

“You have to see today’s decline in orders in the context of strong increases in the previous months,” said Klaus Schruefer, an economist at SEB Bank AG in Frankfurt. “It doesn’t throw the German economy off its recovery track.”

Recovery Off The Rails

While it is true that any month can be an outlier, the European macro picture is anemic in light of austerity programs virtually everywhere you look.

Moreover, the Asia picture is anemic, the US macro picture is anemic, and indeed the entire global macro picture is anemic. Yet economists, an ever optimistic lot, still have faith in a recovery 100% based on unsustainable government spending even though governments in general are cutting government spending in an attempt to reduce budget deficits.

For now, the US is an exception to global budget tightening. However, it should be perfectly clear that Congress is taking a harder stance towards more stimulus efforts as a measure to extend unemployment benefits has died in the US senate.

Talk of continued recovery is nonsense. The best anyone can possibly hope for is an economic flatline and that will not create any jobs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Hussman Blasts Geithner, Bernanke, Keynes; Why Keynesian Stimulus Always Fails

In his latest post, John Hussman takes a well deserved swipe at illegal Fed operations, Geithner, Bernanke, and Keynesian stimulus.

Please consider a few snips from Implications of a Likely Economic Downturn.

.... With regard to "stimulus" plans, my difficulty with last year's policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy. The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned?

The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again... there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street.

...Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials - to precisely the worst stewards of capital in society - is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions. From my perspective, it is urgent to recognize that Fannie Mae and Freddie Mac obligations are not legally obligations of the U.S. government, that its backing was always at best implicit, and that even the Treasury's distressingly generous 3-year promise to bail out Fannie and Freddie only takes those obligations through 2012. Longer-term GSE securities held by the Fed and by investors represent debt obligations of insolvent institutions, yet are still treated by investors as if they are default free. Congress should quickly clarify that FHA obligations are explicit government commitments and GSE debt is not. Traditionally, the Fed's open market operations have been almost exclusively using Treasuries. Any other securities were purchased on a repo basis only, which meant that the Fed would get its money back predictably, regardless of the quality of the security. Without these, the Fed can unconstitutionally engage in fiscal policy, and has recently done so by purchasing Fannie and Freddie debt outright. Congress should limit the Fed to purchasing sovereign debt of the U.S., with a limited role for sovereign debt of major, fiscally intact trading partners, or it should bless GSE debt explicitly so Americans understand that the U.S. dollar will ultimately become the Reichsmark.

...Interestingly, some observers lament that corporations and some individuals are holding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well."

Advancing Socially Useful Outcomes

There is much more in the article that inquiring minds will want to investigate, including a "3-minute course in Keynesian Theory", much of which Hussman quickly and correctly rebuts.

My one point of disagreement with Hussman concerns whether or not government can "advance socially useful outcomes" and if so at what cost.

I do not believe it is the government's job to even attempt to do such a thing. Indeed, Fannie Mae and Freddie Mac are the direct result of Congress attempting to advance social outcomes.

By promoting home ownership with hundreds of "affordable home" programs, government drove up the costs. The ultimate irony is home prices are now crashing, thereby becoming more affordable, yet the government wants to halt the slide.

It is difficult to find any major government policies that successfully advanced socially useful outcomes. The one possibility that I can think of the interstate highway system.

However, as the link shows, the original purpose of the highway system had noting to do with enhancing trade or commerce, or creating jobs, but rather a way to quickly move troops and also to evacuate cities in case of nuclear attack.

Now we are paving roads that do not need to be paved just to put people to work quickly (and I might add at ridiculously inflated wages). That stimulus is now dead, and what pray tell did we get out of it?

Unfortunately, the track record of government programs actually achieving real net benefits is horrendous and made much worse by prevailing wage laws, notably the Davis Bacon Act.

Prevailing Wage Lunacy

Please note that Davis Bacon is yet another program designed to advance a socially useful outcomes (increase wages). However, the bill is now bankrupting cities, counties, and states.

I discussed Davis Bacon in Illinois Construction Workers Make $50-68 Hour, Strike for 15% more.

.... Any way you slice it, the whole prevailing wage concept is madness. It guarantees taxpayers pay the highest rate possible for every job filled by a union worker.

If given the chance, people would be lining up for miles for the jobs at $2 more than minimum wage.

There is a three-fold solution to this madness

1. Make Illinois a right-to work-state
2. Scrap Davis-Bacon
3. Require competitive non-union bidding on all projects involving Federal funds.

Please see Thoughts on the Davis Bacon Act for more on the insanity of prevailing wage laws.

In 1999 Ron Paul introduced a measure to repeal Davis-Bacon. Someone needs to try again, and again, and again, until that mad relic of the Great Depression is repealed.

Actually public unions should be banned completely.

Government should try to provide the most services for the least amount of money, not the fewest services for the greatest amount of money.

Sadly, public unions, in conjunction with prevailing wages laws, collective bargaining, and corrupt politicians all combine to insure taxpayers get the least for their hard earned dollars. Adding insult to injury, public unions have the gall to whine about it.

Misallocation of Public Resources with Mind-Numbing Speed

Hussman commented "Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed."

I certainly concur, and will up the ante by placing Congress in the same boat. How else do you get a $1.6 trillion deficit?

Why Government Stimulus Fails

Because government is never held accountable for costs, and because only the free market has any real chance of determining economically viable projects, Keynesian stimulus is always doomed to fail, creating "two dollars of debt outstanding (the original debt, and a newly issued government security) for every dollar of debt that should have defaulted".

Common Sense Policies

If Congress wants to do something that makes sense, how about lower wages for government workers (preventing many state layoffs), coupled with slashing corporate income taxes on profits generated and kept in the United States? The latter would promote hiring.

Current tax policy favors moving both jobs and capital overseas. Small businesses who cannot move workers or profits overseas, pay a hefty price.

The idea is to get the most from public spending, not the least. Those in the public sector who can find better opportunities elsewhere can leave.

Sadly, the Obama administration is busy with nonsensical stimulus ideas selected on the basis of speed rather than productivity while raising taxes and placing more burdens on small businesses.

Every one of those is a policy error, and as I have pointed out before, Policy Errors Cause Depressions.

As a direct result of those policy errors, the economy is doomed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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San Jose Mayor Ponders Selling Water System; San Jose College 'Director of Institutional Effectiveness' Works Another Job While on Sick Leave

San Jose has budget troubles and is considering selling assets to help balance the budget. Mercury News reports San Jose considering plan to sell water system.

San Jose officials are considering leasing or selling the city's water system. Mayor Chuck Reed says the idea could help balance the budget. A sale could bring in $50 million or more—but also higher water bill for some residents.

One potential buyer is the private San Jose Water Co., which supplies 1 million people in San Jose and neighboring communities. The company's president sent the mayor a letter of interest in April but noted a sale would mean increasing some water bills—possibly by 29 percent.

A sale also would require a public vote.

San Jose's Structural Problems

San Jose needs to fix structural problems first because one-time fixes will not address the root cause of its budget woes: union wages and pension benefits.

I suggest San Jose outsource its entire police and fire departments to cut costs. If that does not work, then bankruptcy seems like a fine option.

San Jose college executive worked elsewhere while on sick leave

Please consider San Jose college leader worked at DeAnza College while on sick leave

A top executive at the financially troubled San Jose/Evergreen Community College District earned a full salary while on sick leave this spring — yet, during that same period, she earned a separate salary teaching at another nearby district.

Bayinaah Jones, whose title at SJECC is executive director of institutional effectiveness, earned $30,672 on sick leave there, but was apparently healthy enough to hold down a $5,775 teaching position in the Foothill-DeAnza Community College District.

The revelation comes at a time of economic hardship at community colleges, where students are shut out of classes due to budget cuts — and a mere $800 can provide a student with a valuable certificate in cosmetology or dental hygiene. It follows a searing state audit of the SJECC District's books, which was critical of spending by former Chancellor Rosa Perez — whose live-in partner is Jones.

Perez also took paid sick leave — for eight months, earning $25,000 each month — until retiring last Wednesday due to health reasons.

Records show that Jones took sick leave from her $123,000 position — "per my physician's order," she wrote in an e-mail message — in April, May and June of 2010. She remains sick, "until further notice."

In 2005, Perez hired Jones to be her executive assistant. She was quickly promoted to a newly created job as executive director of institutional effectiveness. The two women live together in a home they own in San Francisco.

In the last several years, according to documents obtained by KGO-TV, they took 18 business trips together to places such as El Salvador, Scotland and West Palm Beach — paid with district credit cards.

Criminal Fraud

The actions of Bayinaah Jones and Rosa Perez constitute criminal fraud in my opinion. Both should be prosecuted. Moreover, the idea that there needs to be an executive director of institutional effectiveness is ludicrous in the first place. The greed of this pair is galling.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Vancouver Home Sales Drop 30 Percent , Calgary 42 Percent - First Comes Volume, Then Comes Price; Canada Housing Peak is Finally In

The Globe and Mail reports Vancouver home sales drop sharply.

The Real Estate Board of Greater Vancouver reported yesterday that home sales fell 30.2 per cent in June from the inflated levels of a year earlier, and 5.8 per cent from May. New property listings rose 1.2 per cent from May and 32 per cent from a year earlier.

The Calgary Real Estate Board, meanwhile, reported sales of single family homes fell 16 per cent in June from May and 42 per cent from June of 2009, while condo sales fell 14 per cent from a month earlier and 40 per cent from a year earlier. Notable is that sales of high-end properties worth $1-million or more are rising, the group said.

“We are seeing continued moderation in Calgary’s home sales in the face of higher mortgage rates, increased inventory levels and a decreasing number of first-time home buyers entering the market,” said board president Diane Scott.

This pattern is quite similar to how things cascaded in the US once the top was in.

Housing Collapse Cascade Pattern

• Volume drops precipitously
  
• Prices soften a bit
• Inventory levels rise slowly
• High-end home prices remain relatively steady for a brief while longer
  
• The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
  
• Bubble denial kicks in with media articles everywhere touting the "fundamentals"
• Stubborn sellers hold out for last year's prices as volume continues to shrink
• Inventory levels reach new highs
• Builders start offering huge incentives to clear inventory
• Some sellers finally realize (too late) what is happening
• Price declines hit the high-end
• Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
• Gimmicks do not work
• Price declines escalate sharply at all price levels
  
• The Central Bank issues statements that housing is fundamentally sound
• Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt

Some of those may happen simultaneously or in a different order, but the whole mess starts with a huge plunge in volume.

I am now confident the peak in Canadian housing insanity is finally in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The Craigslist Jobs Indicator

Here is an email from "Taperwood" who has been tracking Craigslist classified ads for the Los Angeles and Seattle areas as a proxy for job openings and business demand.

Taperwood writes ...

Hello Mish

The Friday Craigslist Los Angeles and Seattle job listings I track are down considerably over the past month.

From the lows of 2009, where they averaged 700-800 in LA and 500's in Seattle, they spiked to over 1000 in LA and to 800 in Seattle starting around January/February 2010 until as recently as this May.

Then job listings started a gradual decline into the 900's in LA and 700's in Seattle. Last Friday, the numbers were barely 800 in LA and 580 in Seattle.

These numbers are getting uncomfortably close to the numbers of 2009.

Thanks Taperwood.

This informal indicator echoes the slowdown we saw in the June Services ISM released this morning.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Services ISM Growth Slows - Jobs, Imports, Export Orders Contract; Manufacturing vs. Services ISM - Which is More Important and Why?

In yet another sign the economy is cooling substantially, three components of the June Services ISM are now in contraction, with the overall index declining much faster than economists expected.

From the June 2010 ISM Report On Business®:

In June, the NMI registered 53.8 percent, indicating continued growth in the nonmanufacturing sector for the sixth consecutive month, but at a slightly slower rate than in May. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.



Employment activity in the nonmanufacturing sector contracted in June after one month of growth. ISM’s Non-Manufacturing Employment Index for June registered 49.7 percent.

Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically based personnel contracted in June after three consecutive months of growth.

ISM’s Non-Manufacturing Imports Index contracted in June after three consecutive months of growth.

The above link also contains the Manufacturing ISM.



Recovery Withers on the Vine

There is really not much to like in either of the ISM reports.

Inquiring minds also note Factory Orders Fall More Than Expected; Recovery Withers on the Vine

You should not have to be a genius to figure out the rebound in manufacturing was a result of four factors now withering on the vine.

• Inventory replenishment
• Unsustainable stimulus
• Housing incentives pushing demand forward on appliances
• Rebound in auto sales from extremely depressed levels

Is Europe going to lead the world recovery? China? US Consumers?

The answers are No, No, and No

Manufacturing was the one bright spot but its best days are now long gone. Moreover China Manufacturing Slows for Second Month; US ISM Weaker than Expected; Weekly Unemployment Claims Stubbornly High; Existing Home Sales Plunge

Budgetary Murder

This depression (and we are in one, masked only by safety nets galore), is The Price We Pay For Budgetary Murder.

Unfortunately, the budgetary murder continues unabated, and that will prolong this depression.

Japan is in its mess because of Keynesian and Monetarist stimulus, we are in this mess because of Keynesian and Monetarist stimulus, and the UK is in its mess because of Keynesian and Monetarist stimulus. Yet the Keynesian clowns want more Keynesian stimulus and the Monetarist clowns want more Quantitative Easing.

No policy ever performs badly enough to cause its disciples to abandon it.

Manufacturing ISM vs. Non-Manufacturing ISM

Of the two reports, Non-Manufacturing ISM is the more important. Here are a couple of key points from a Video Discussion by Bloomberg Economist Rich Yamarone about the Services ISM.

1. 55% of all consumption is services based
2. Private employment is well over 85% in services

Contracting services employment is a big thing. Yamarone noted that contracting employment will affect consumer attitudes which in turn will affect consumer spending.

Actually, consumer attitudes affect consumer spending which in turn affects business hiring plans. Attitudes lead the way.

This report was weakest where it matters most: employment, imports, and exports.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Illinois Construction Workers Make $50-68 Hour, Strike for 15% more

Illinois construction workers live in fantasy land of business-as-usual. They are demanding 15% pay hikes when everyone of them ought to be fired with their jobs outsourced to the cheapest non-union shop.

Please consider Construction Workers Go On Strike.

Here in the Chicago area the highway construction workers went on strike....the reason they want a 5% raise each year over the next three year contract.....to cover the cost of increase healthcare cost!

The current salary for construction workers is between $50.00 and $68.00 per hour which include benefits.

Illinois is suffering from one of the worst recessions since the depression.... over 700,000 unemployed....Walmart has just announced they plan to build 24 new stores in the Chicagoland area.....most of the new jobs will pay $9.50 per hour....and there are conversations to raise this salary to $10.50 per hour....hundreds of unemployed workers have expressed willingness to take on these new jobs....with pleasure.....many people just want to work and get a paycheck.

Prevailing Wages

I am trying to get a more specific handle on the wages of an average construction worker. It is difficult because Illinois goes by prevailing wages (by county). Moreover, there are approximately 70 different labor classifications for Cook County, none of which is construction worker.

Click here the Illinois Department of Labor Prevailing Wage Documents.

Cook Country Highway Operating Engineer base pay ranges from $38-46 with benefits amounting to approximately another $20, not counting overtime, holiday pay, etc.

Interestingly, Cook Country painters get $38 an hour with health care benefits amounting to $8.35 an hour and pension benefits at $9.40 an hour.

The general category of Cook Country laborer gets $35.20 an hour with $9.13 in health care benefits and another $8.37 in pension benefits.

One also has to factor in pension and health care benefits to arrive at the totals mentioned in the first article.

However, given that many in the private sector do not have health care and most do not have pension plans anywhere close to what public workers get, favoring in pensions and health care benefits is the correct thing to do.

Any way you slice it, the whole prevailing wage concept is madness. It guarantees taxpayers pay the highest rate possible for every job filled by a union worker.

If given the chance, people would be lining up for miles for the jobs at $2 more than minimum wage.

There is a three-fold solution to this madness

1. Make Illinois a right-to work-state
2. Scrap Davis-Bacon
3. Require competitive non-union bidding on all projects involving Federal funds.


Please see Thoughts on the Davis Bacon Act for more on the insanity of prevailing wage laws.

In 1999 Ron Paul introduced a measure to repeal Davis-Bacon. Someone needs to try again, and again, and again, until that mad relic of the Great Depression is repealed.

Actually public unions should be banned completely.

Government should try to provide the most services for the least amount of money, not the fewest services for the greatest amount of money.

Sadly, public unions, in conjunction with prevailing wages laws, collective bargaining, and corrupt politicians all combine to insure taxpayers get the least for their hard earned dollars. Adding insult to injury, public unions have the gall to whine about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List




Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Obama Hails New Solar Energy Jobs at Taxpayer Price Tag of $1,333,333 Each

Hallelujah! Obama is cheering the news of 1,500 permanent jobs. The only problem is those jobs are going to cost taxpayers $1,333,333 each.

Please consider Obama awards $2B for solar power, hails new jobs

The government is handing out nearly $2 billion for new solar plants that President Barack Obama says will create thousands of jobs and increase the use of renewable energy sources.

"We're going to keep competing aggressively to make sure the jobs and industries of the future are taking root right here in America," Obama said.

The two companies that will receive the money from the president's $862 billion economic stimulus are Abengoa Solar, which will build one of the world's largest solar plants in Arizona, creating 1,600 construction jobs; and Abound Solar Manufacturing, which is building plants in Colorado and Indiana. The Obama administration says those projects will create more than 2,000 construction jobs and 1,500 permanent jobs.

Obama has said that to bring the nation's economy back from the brink of a depression, it was necessary to add to the country's debt in the short term.

Ignoring marginally attached workers, discouraged workers, and those working part-time who want a full-time job, there are approximately 14.6 million unemployed.

Counting 1,500 permanent jobs at $1,333,333 each, it would only cost $1.94666618 × 10¹³ ($19.47 trillion) to have full employment. That qualifies as aggressive in my book.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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UK Unions Face Budget Cuts, Pay Cuts, Massively Reduced Severance Benefits

As the UK continues with its austerity program, British public unions are screaming loudly.

The Telegraph reports Ministers to slash pay-offs for civil servants.

Generous “golden goodbye” payments to civil servants are to be cut drastically to make it cheaper for ministers to lay off thousands of public sector staff, The Daily Telegraph has learnt.

The changes, which will provoke a major confrontation with the unions, come as government departments are drawing up plans for budget cuts of up to 40 per cent.

With hundreds of thousands of state employees facing the sack, Civil Service managers have been told that tough new restrictions on redundancy payments will be in place within weeks.

Under existing Whitehall rules, some civil servants are entitled to severance payouts worth as much as six years’ salary. Ministers want to shrink those packages to bring them in line with the private sector, where workers who are made redundant typically receive the equivalent of a few months’ or even weeks’ pay.

Treasury figures suggest that more than 600,000 jobs will be lost in the public sector over the next five years as almost £100 billion is cut from public spending.

Ministers have identified the traditionally high cost of laying off staff as a major obstacle to enacting their plans for cuts and improving efficiency.

Some ministries have “pools” of several hundred workers who do not have allocated jobs but who are not sacked because of the cost.

I commend the UK for finally doing something about its bloated public union problem.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Do Grades Matter? How About the College? One Company Says the Answer is No

On this long 4th of July weekend, here is an Email from "KC" regarding the costs of education. "KC" writes ...

Hi Mish,

I've emailed you before on this subject. Today, I came across an article where a small company has started recruiting directly out of high school.

If education costs soar, I believe this is the future. I've been suggesting to many people for a while now that it's a win-win for both employer and student to hire straight out of high school. The student gets four years of work experience and income which is a tremendous head start compared to the debt of a four-year degree. As the author suggests, after two years the quality of work is indistinguishable between one of his recruits and someone with a degree. For the company, the benefit is lower salaries and a more stable work force, at least until other companies start hiring directly out of high school also.

With fewer students, education costs must come down and this will make it possible for those who want to become academics to pursue a meaningful and rewarding career; academic salaries are just not high enough to compensate for the debt burden while retaining the talented.

Keep up the good work.

KC

Recruiting at Zoho/AdventNet

"KC" was referring to How We Recruit - On Formal Credentials vs Experience-based Education

I was recently interviewed on Fox Business News. The anchor Liz Claman told me one of the things that interested them about Zoho/AdventNet is our recruitment model. It is a subject I am passionate about -in fact, I spend about as much time on it as our products or technology. After all, AdventNet has about 700 people, and we are hiring at a steadily increasing pace, so recruitment, motivation and retention are important topics for us.

Our company in India always faced trouble recruiting, because most college graduates, particularly from well-known colleges, would prefer big-brand-name firms. Simply out of sheer necessity, we started to disregard the kind of college a person graduated from, and the grades they obtained. In India, that task was made even easier, because much of the Indian industry is boringly conventional, and job advertisements that specify things like "Must have a minimum of 80% average in college" are fairly common (so if you got only 79%, don't bother to apply). As a result, we get a lot of the arbitrarily-cut-off category applicants. What we found over time was that there is a lot of really good talent in that pool, which the industry had overlooked. Based on a few years of observation, we noticed that there was little or no correlation between academic performance, as measured by grades & the type of college a person attended, and their real on-the-job performance. That was a genuine surprise, particularly for me, as I grew up thinking grades really mattered.

Over time, that led us to be bolder in our search for talent. We started to ask "What if the college degree itself is not really that useful? What if we took kids after high school, train them ourselves?"

That proved to be an outstanding success. Within 2 years, those students would become full time employees, their work performance indistinguishable from their college-educated peers. We have since expanded the program, with the latest batch of students consisting of about 20, recruited not just from Chennai but smaller towns and villages in the region.

Keeping the US Education Bubble Alive

While Zoho is hiring out of college, President Obama is hellbent on keeping the
education bubble alive by throwing more money at Pell Grants.

Education is generally a good thing, but a policy that pushes everyone receive a 4-year degree is certainly the wrong policy. Countless graduates have found that out the hard way.

Pell Grants are part of the problem as is any policy that helps keep the cost of education up. Worse yet, students graduate from college, deep in debt, unprepared for the real world, and poor job prospects to boot.

I am quite certain that education costs and administrative costs are both going to fall like a rock at some point simply because the current system is unsustainable. What cannot be sustained by definition won't be.

As always, timing of the setup is problematic. However, locking in the cost of a 4-year degree now for kids still in grade school seems unwise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Trichet Reiterates Austerity Message; Germany Plans More Borrowing Cuts; Will the Treasury Rally Last?

Once again and with greater force, Europe has snubbed its nose (and rightfully so) at the Keynesian clowns in US academia and the Obama administration.

Bloomberg reports Trichet Calls on EU Governments to Reduce Budget Deficits to Boost Growth.

European Central Bank President Jean- Claude Trichet pressed governments to trim their budget deficits, saying such action would boost economic growth by improving confidence of consumers and investors.

“We are in a period where we have to manage budgets very tightly,” Trichet told journalists in Aix-en-Provence, France. “I have no problem with austerity, rigor. I call this good budgetary management.”

Trichet said today that deficit reduction won’t choke growth and a failure to stem budget gaps would be equally risky for the recovery.

“Confidence is key for growth, and if you cannot have confidence in the sustainability of the fiscal policies then you have no growth because you have no confidence,” he said. “The two things are complimentary.”

Germany to Reduce Deficit by 80 billion euros ($100 billion) over five years

Reuters reports Germany plans to cut new borrowing in savings drive

Germany plans to cut net new borrowing by some 80 billion euros ($100 billion) over five years, reducing supply of Europe's benchmark debt and adding pressure on other euro zone members to tighten their own public finances.

The draft budget for 2011, which the cabinet plans to approve on Wednesday for ratification in parliament in November, will anchor a 34 billion euro reduction in new issuance over the next two years compared to earlier plans.

The federal government also aims to cut spending to 307.4 billion euros next year, a 3.8-percent decrease from plans made before a "debt brake" law was passed in 2009, details of the draft made available to Reuters on Sunday showed.

The budget is the latest chapter in Germany's drive to consolidate public finances, a move that has drawn criticism from some other large countries that say it is too early to withdraw support enacted during the financial crisis.

Unions have promised stiff resistance and industrial action looks likely -- a threat that could rise as cuts in social services deepen and health care costs rise as planned.

In addition, some politicians from within Merkel's ruling coalition say the measures are unfairly aimed at the poor, whose benefit cuts make up the largest part of the savings planned through 2014.

Besides the spending cuts, the budget's planned reduction in new borrowing to 65.2 billion euros this year and 57.5 billion euros in 2011 will put the onus on other countries that share the euro currency to follow suit.

Can the Bond Rally Last?

MarketWatch says Bond rally reflects gloom - but don't bet on it lasting

The recent steep rally in U.S. Treasury bonds, helped by investor jitters over European debt and weakening U.S. economic data, isn't likely to last, say some bond investors and strategists.

They expect longer-term rates to rise in coming months as investors pull back from bonds -- whose prices rise when their yields fall -- because growth turns out to be better than markets anticipate. This shift should support the stock market.

Short-term Treasury yields dropped to a new record low in recent sessions as bad news piled up about consumer confidence, manufacturing and the job market. In the six months ended Wednesday, an index of Treasury debt had the biggest half-year gains since 1995. Some strategists, however, are betting that these clouds will clear in the second half, and that yields are on their way back up.

"Staying in safe haven assets right now might feel like the best thing to do, but that's wrong," said Jim Caron, head of global interest-rate strategy at Morgan Stanley. "The second half of the year is going to surprise most people as we get the growth that will lead to higher yields."

"Ultimately, we think equity markets do come back and rally," he said.

The appropriate questions at this point are

1. What does ultimately mean?
2. Equity markets will "come back" from what level?
3. Since when has Morgan Stanley ever been right?

Let's address that last question.

Morgan Stanley expects 10-year yields to rise 220 bps in 2010

Let's flashback to November 20, 2009: Morgan Stanley expects 10-year yields to rise 220 bps in 2010

Our forecasts look for bond yields to rise in 2010: Our US economics team expects bond yields to rise to 5.5% by the end of 2010 – an increase of 220bp that outstrips the 137bp increase in the fed funds rate expected over the same horizon

That was a pretty pathetic forecast by Morgan Stanley on both counts.

Now Morgan Stanley is back at it, preaching a rally in equities and a bond selloff. I believe they are wrong on both counts. Of course they did say "Ultimately" although I might point out Japan is still waiting for "ultimately" as well.

Morgan Stanley is seriously underestimating the upcoming weakness in Europe, China, and the US in my opinion.

I am sticking to what I said in Factory Orders Fall More Than Expected; Recovery Withers on the Vine

The Price We Pay For Budgetary Murder

How Policy Errors Cause Depressions (and how "in isolation" some things Krugman says make sense)

This recovery is over, and it wasn't much of one to begin with. Indeed, there is a decent chance we do not have a double-dip recession for the simple reason the NBER may not call the end of the first one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies 2010-07-04: Partied Out

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wells Fargo, Wachovia Involved in Numerous Mexican Drug Laundering Schemes

If you or I was involved in drug laundering of as little as 2 dollars and fifty cents we would be in prison.

Wachovia bank, now part of Wells Fargo via a merger, has laundered countless sums of Mexican cartel drug money and will get off with a slap of the wrist. The reason ...Wells Fargo is too big to fail.

Please consider Banks Financing Mexico Gangs Admitted in Wells Fargo Deal

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern U.S. by 1900. After the Great Depression, some people in North Carolina called the bank “Walk-Over-Ya” because it had foreclosed on farms in the region.

Wells Fargo regrets that some of Wachovia’s former anti- money-laundering efforts fell short, spokeswoman Mary Eshet says. Wells Fargo has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators, she says.

The bank declined to answer specific questions, including how much it made by handling $378.4 billion -- including $4 billion of cash-from Mexican exchange companies.

The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts.

No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

That's a large snip but I assure you there is much more to see including charges against bank of America, Western Union, American Express, murders in Mexico and more.

The most galling thing is how a director at Wells Fargo reported this was happening and was ignored. Here is one more clip for the road.

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

Wachovia and Wells Fargo will both get off the hook on grounds of being too big to fail.

The whole war on drugs is insanity in and of itself of course, but the blatant hypocrisy and favoritism certainly beats all.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List-drug-money

California Showdown - Court sides with Schwarzenegger on minimum wage; L.A. council Fires 232 Workers; Illinois Stops Paying Bills Keeps Digging Holes

Fortunately a California appellate court came down in favor of sanity and sided with the governor when Schwarzenegger Ordered 200,000 State Workers be Paid Minimum Wage until a budget was passed.

Please consider Court sides with Schwarzenegger on minimum wage

A state appellate court on Friday sided with the Schwarzenegger administration in its attempt to temporarily impose the federal minimum wage on tens of thousands of state workers.

It was not immediately clear how the ruling would affect Gov. Arnold Schwarzenegger's order a day earlier to pay 200,000 state workers the federal minimum of $7.25 an hour as the state wrestles with a budget crisis.

The state controller, who cuts state paychecks, has refused to comply with the order. Friday's ruling affirms a lower-court decision in favor of the administration in a lawsuit filed two years ago after the governor's first attempt to impose the minimum wage.

The latest ruling from the California 3rd District Court of Appeal in Sacramento concludes that state Controller John Chiang cannot ignore the minimum wage order from the state Department of Personnel Administration.

But Chiang said in a news release that he interpreted the court ruling to mean that his office would not have to comply with the executive order if it was practically infeasible to do so.

Schwarzenegger's minimum wage order will not affect all of California's 250,000 government employees. The 37,000 state workers represented by unions that recently negotiated new contracts with the administration will continue to receive their full pay. The contracts, including one with California Highway Patrol officers, contain pay cuts and pension reforms.

Salaried managers who are not paid on an hourly basis would see their pay cut to $455 a week. Doctors and lawyers who work for the state will not be paid at all until a budget is signed because minimum wage laws do not apply to those professions.

Schwarzenegger is pushing for minimum wage based on a 2003 California Supreme Court ruling. In White vs. Davis, the court held that state employees do not have the right to their full salaries if a state budget has not been enacted. At the same time, the state cannot ignore federal wage laws.

Chiang has maintained that the minimum wage order is illegal, even in the face of court decisions indicating the opposite.

He has taken in more than $190,000 in campaign contributions from labor groups representing state employees and other unionized workers so far in his 2010 re-election bid. Those donations accounted for about 22 percent of all his contributions, according to campaign reports through May 22.

Chiang also has said California's computerized payroll system cannot handle the change, specifically because it cannot cut some checks at full pay and others at minimum wage.

Chiang's payroll claims seem a bit far fetched. However, we are talking about government systems and California on top of that, so I suppose a payroll system could be that pathetic, but right now I have my doubts.

L.A. council turns back last-minute plan to delay layoffs

Please consider L.A. council turns back last-minute plan to delay layoffs

Union leaders are angry over the decision, which means that 232 workers, mostly in the library department and the city's child care centers, will lose their jobs with the start of the new fiscal year.

One day before an estimated 232 employees at Los Angeles City Hall were slated to be laid off, the City Council on Wednesday turned back a last-minute proposal to delay the cuts for three months.

With scores of employees scheduled to lose their jobs at 12:01 a.m. Thursday, the council fell two votes short of the 10 votes needed to reverse course. The vote was 8 to 4, with council members Bernard C. Parks, Jan Perry, Greig Smith and Dennis Zine opposing a new discussion of the cuts.

Opponents of Thursday's layoffs, which coincide with the start of a new fiscal year, contend they will cost the city $3 million more than they will save in salaries. Under its salary agreement with the Coalition of L.A. City Unions, the moment a single member is pushed out, the city must pay an estimated $27 million in raises to coalition members who remain on the payroll.

Matt Szabo, deputy chief of staff to Mayor Antonio Villaraigosa, said those numbers are accurate but predicted there probably would be more salary savings in the coming months after a second round of layoffs occur.

To Hell with the Union Leader

Union leaders are pissed but so what?

By the way, what kind of administrative idiot would approve a contract whereby "the moment a single member is pushed out, the city must pay an estimated $27 million in raises to coalition members who remain on the payroll."

That is water over the dam right now and thus the correct decision is to fire as many as it takes to make up for the lost $27 million. Hell, The correct policy decision is actually to fire every one of them and outsource every job to the low bidder.

Showdown in California - Court sides with Schwarzenegger on minimum wage; L.A. council Fires 232 Workers; Illinois Stops Paying Bills and Keeps Digging Holes

Illinois Stops Paying Bills

I have said this before but by now it should be obvious to nearly anyone. Illinois is insolvent. Yet it keeps making promises, especially to unions that it has no way of keeping.

The New York Times reports on this sad state of affairs in Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole

Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

He picks the papers off his desk and points to a figure in red: $5.01 billion.

“This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

Public colleges and universities occupy a fiscal sickbed all their own. This year they muddled through without $668 million expected from the state; the University of Illinois has yet to receive 45 percent of its state appropriation. Legislators made no pretense of promising to pay this bill soon. Instead they authorized colleges to borrow against the expected state payments.

Legislators this year raised the retirement age and slashed benefits. Though changes apply only to future employees, the legislature claimed immediate savings.

“Savings upfront and reforms down the road,” said Mr. Hynes, the state comptroller. “It’s just bad habits and bad practices.”

There is much more in the three page Times article. Disgusted minds prepared to be even more disgusted will want to give it a look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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House Holds Nose, Passes War Funding Bill after Pressure from Pelosi; Why the Afghan War is Lost

I did not vote for President Obama, I wrote in Ron Paul.

Nonetheless, the two things I was confident President Obama would do right were reduce military spending and get us out of Guantanamo Bay Cuba.

I was wrong on both counts. Worse yet, the President appears to be as much a warmonger as Bush although admittedly he did not start any wars.

The one thing that bothers me most is how the Democratic sheep go along with anything Obama wants, even if it is against their core beliefs.

Here is a stunning example to prove that charge. Please consider House-OK'd war funding bill faces Senate trouble.

Despite pessimism that the war in Afghanistan is turning out to be a quagmire, Democrats controlling the House muscled through a plan Thursday to finance President Barack Obama's troop surge, but only after sweetening the measure with last-ditch moves to salvage their faltering jobs agenda.

Long delayed, the approximately $80 billion bill was passed amid building pressure on Democrats to act before their weeklong Fourth of July break begins. But the Senate approved a significantly slimmer measure in May and it'll take additional weeks to reconcile the differences between the two battling chambers.

The crucial vote to advance the measure under unusually convoluted floor rules came on a 215-210 tally to bring up the nearly $60 billion Senate-passed measure for debate. Democrats added more than $20 billion for domestic programs late Thursday, including $10 billion in grants to school districts to avoid teacher layoffs, $5 billion for Pell Grants to low-income college students and $700 million to improve security along the U.S.-Mexico border.

House Republicans supportive of the Afghanistan effort voted against the measure, angered that Democrats were using the must-pass legislation to try to advance unrelated spending.

"The Democrat majority is treating this troop funding bill like a cash-cow for their election-year wish-list," said Rep. Jerry Lewis, R-Calif.

But top Democrats such as Obey and Speaker Nancy Pelosi, D-Calif., insisted on adding the domestic dollars, viewing the war funding bill as their last, best shot to resuscitate their faltering jobs agenda. The money was critical to winning support from Democrats frustrated over deepening Senate gridlock that has killed, among other ideas, $24 billion in aid to cash-starved states to help governors avoid tens of thousands of layoffs.

The GOP opposition required Democratic leaders such as Pelosi to round up votes from anti-war lawmakers.

"Every dollar we spend in Afghanistan, every life we waste there, is a waste," said Rep. Jerrold Nadler, D-N.Y., who backed the measure anyway in the crucial vote to bring it up for debate.

"An intelligent policy is not to try to remake a country that nobody since Genghis Khan has managed to conquer. What makes us think, what arrogance gives us the right to assume that we can succeed where the Moguls, the British, the Soviets failed?"

Rep. Jerrold Nadler, D-N.Y. makes a tremendous case for voting against the bill yet buckles under pressure from House Speaker Pelosi.

Does anyone have any sense of duty to vote how they feel is right as opposed to how they are instructed to vote.

The worst part of this mess is we are likely to get the worst of both worlds: more ridiculous Pell Grants, more absurd stimulus efforts, and foolishly wasting money attempting "to remake a country that nobody since Genghis Khan has managed to conquer."

Is it any wonder polls show the public is totally fed up with Congress?

Why the West Lost the Afghan War

Please consider Why West Lost Afghan War by Michael Scheuer, the author of ‘Imperial Hubris’ and former chief of the CIA’s Bin Laden Issue Station.

Recent events surrounding Afghanistan shouldn’t confuse anyone, as the reality of the situation still lies in one simple statement: The US-NATO coalition has lost a war its political leaders never meant, or knew how, to win.

After nine years, it is utterly impossible to restart Western policy in Afghanistan. Too many Afghans are dead; too many Afghans and non-Afghan Muslims have joined the Taliban-led insurgency; too much pro-Taliban money is pouring into Afghanistan from wealthy donors on the Arabian Peninsula and across the Muslim world; too much Western funding has been stolen and sent abroad by Karzai’s cronies; too much popular support for the war in the West has been squandered; too many U.S.-NATO troops are dead or maimed; too much has been done by the West to push Pakistan toward the abyss by demanding its military do Western dirty work; and too much time has been wasted on counterinsurgency theories and policies that avoid killing the enemy and his civilian supporters. The one thing the West ‘can start over completely’ is a revision of the plans for withdrawal that moves up the departure date.

The bottom line is that the United States and NATO stand defeated in Afghanistan. Under McChrystal, Petraeus, or Obama himself the counterinsurgency strategy now being flogged has been intellectually bankrupt from its inception.

The tragedy of this reality is that it would have taken no highly classified intelligence data or deeply penetrating brain power to predict its occurrence. A week’s reading at the local library about the occupations of Afghanistan by Alexander the Great, the British Empire and the Soviet Union shows each empire was sooner or later defeated and evicted—Alexander lasted longest because he built Greek colonies—by the most basic Afghan trait which has been transparently and overwhelmingly dominant since the 4th century B.C.: Afghans refuse to tolerate foreign occupation and rule.

We should declare the war won and get the hell out. Instead, even Democrats who fully understand how stupid this war is, are willing to vote for it after pressure from Pelosi. Is this insane or what?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Factory Orders Fall More Than Expected; Recovery Withers on the Vine

The "nascent recovery" was led by manufacturing and now the one bright spot is showing signs of age, just as state payrolls are about to get clobbered.

Please consider Orders to U.S. Factories Declined in May More Than Forecast.

Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.

The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.

Estimates of total orders in the Bloomberg survey of 70 economists ranged from a decline of 2 percent to a gain of 1.5 percent. The decrease in May was the first in nine months.

Manufacturing in June expanded at the slowest pace this year as factories received fewer orders and demand from abroad slowed, a report showed yesterday. The Institute for Supply Management’s manufacturing gauge fell to 56.2 from 59.7 a month earlier. Readings greater than 50 indicate expansion. The Tempe, Arizona- based group’s new orders measure fell to the lowest level since October.

Demand for durable goods, which make up just over half of total factory demand, decreased 0.6 percent in May. Shipments of durable goods fell 0.3 percent.

Bookings of non-durable goods, including food, petroleum and chemicals, decreased 2.1 percent. The decline reflected a drop in the value of orders for petroleum products, clothing, fertilizers and beverages.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent after a 2.8 percent drop in April. Shipments of these goods, used in calculating gross domestic product, rose 1.4 percent after rising 0.4 percent.

Factory inventories declined 0.4 percent in May, and manufacturers had enough goods on hand to last 1.25 months at the current sales pace.

Recovery Withers on the Vine

You should not have to be a genius to figure out the rebound in manufacturing was a result of four factors now withering on the vine.

• Inventory replenishment
• Unsustainable stimulus
• Housing incentives pushing demand forward on appliances
• Rebound in auto sales from extremely depressed levels

Is Europe going to lead the world recovery? China? US Consumers?

The answers are No, No, and No

Manufacturing was the one bright spot but its best days are now long gone. Moreover China Manufacturing Slows for Second Month; US ISM Weaker than Expected; Weekly Unemployment Claims Stubbornly High; Existing Home Sales Plunge

I am almost amazed at the number of talking heads still yapping about and believing in the "recovery". Let's recap some points from How Policy Errors Cause Depressions (and how "in isolation" some things Krugman says make sense).

European Policy Errors

In Europe, the ECB made similar policy errors in attempting to bail out French and German banks in deep slop over poor loans to PIIGS, primarily Greece, Portugal, and Spain.

The correct policy decision in Europe (assuming the foolish loans were already made) was to restructure the bad debts at a pace that could actually be paid back. Instead the ECB insists that Greece, Spain, and Portugal pay back those loans in full, something that I guarantee you will not happen.

Here is a simple point-by-point analysis that shows how that policy error will effect on the entire global economy.

How Policy Errors Cascade

• As long as the ECB's "extend and pretend" policy is in play, Greece, Spain, and Portugal will remain wrecked while burdened by loans they will eventually default on anyway.
  
• In that timeframe, European growth will be anemic at best. Indeed, it is far more likely that Europe will slide back into a deep recession than simply sputter along.
• As long as European growth is weak, China will be weak because Europe is China's largest trading partner.
• If China's exports decline, China will need fewer imports from Australia and Canada.
  
• If China and Europe are weak, there will not be tremendous demand for US exports.
• Global job growth will remain weak.
• Fiscal stimulus measures will fail.
  
• Earnings estimates will surprise to the downside and the global equity markets will be extremely vulnerable to further losses.
• Further equity losses in conjunction with absurd pension benefit assumptions will bankrupt many city, state, and municipal pension funds.
  

This is the insanity of "extend and pretend" measures not only in Europe but in the US as well.

Extend and Pretend Policy Errors Everywhere

The lesson of Japan (not just something economists have forgotten but rather something economists never learned in the first place), is that you cannot spend one's way to a recovery. Demand can be pushed only so far forward before it collapses, just as it has now.

You cannot pave roads to prosperity, nor can you start a recovery by stimulating housing when there is too much housing inventory already. Public payrolls are overly bloated, an actual drag on overall employment and the economy, yet the administration is foolishly attempting to preserve public sector jobs.

Budgetary Murder

This depression (and we are in one, masked only by safety nets galore), is The Price We Pay For Budgetary Murder.

Unfortunately, the budgetary murder continues unabated, and that will prolong this depression.

Japan is in its mess because of Keynesian and Monetarist stimulus, we are in this mess because of Keynesian and Monetarist stimulus, and the UK is in its mess because of Keynesian and Monetarist stimulus. Yet the Keynesian clowns want more Keynesian stimulus and the Monetarist clowns want more Quantitative Easing.

No policy ever performs badly enough to cause its disciples to abandon it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Decrease by 125,000, Rise by 100,000 Excluding Census; Unemployment Rate Drops to 9.5%; A Look at the Details

This morning the BLS reported a decrease of 125,000 jobs. However, that reflects a decrease 225,000 temporary census workers. Last month there was an increase of 411,000 temporary census workers. Next month will also likely be negative due to the dismissal of more temporary workers.

Excluding the census effect, the economy added 100,000 jobs but interestingly 20,500 of them were private temporary jobs. Temporary jobs have become a way of life.

Excluding the census effect, government added 17,000 jobs. That is going to change in the coming months (possibly dramatically depending on Congressional stimulus actions) as states are forced to layoff workers for budgetary reasons.

That will be a good thing because Firing Public Union Workers Creates Jobs. Unfortunately, politicians and Keynesian clown economists will not see it that way.

Hidden beneath the surface the BLS Black Box - Birth Death Model added 145,000 jobs.

However, as I have pointed out many times before, the Birth/Death numbers cannot be subtracted straight up to get a raw number. It contributed to this month's employment total for sure, but the BLS will not disclose by how much.

On the whole, this was an OK jobs report (depending on your expectations), yet perhaps as good as it gets for a while.

The unemployment rate dropped only because of a declining participation rate. Last month the number of unemployed was 15 million. This month it was 14.6 million. Clearly the economy did not add 400,000 jobs.

The drop in participation rate was not that surprising because (as I expected) some of the long-term unemployed stopped looking jobs, or opted for retirement.

Nonetheless, I still do not think the top in the unemployment rate is in and expect it may rise substantially later this year as the recovery heads into a coma and states are forced to cut back workers.

Employment and Recessions

Calculated risk has a great chart showing the effects of census hiring as well as the extremely weak hiring in this recovery.



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The dotted lines tell the real story about how pathetic a jobs recovery this has been. Bear in mind it has taken $trillions in stimulus to produce this.

June 2010 Report

Please consider the Bureau of Labor Statistics (BLS) June 2010 Employment Report.

Total nonfarm payroll employment declined by 125,000 in June, and the unemployment rate edged down to 9.5 percent, the U.S. Bureau of Labor Statistics reported today. The decline in payroll employment reflected a decrease (-225,000) in the number of temporary employees working on Census 2010. Private-sector payroll employment edged up by 83,000.

Unemployment Rate - Seasonally Adjusted



Nonfarm Payroll Employment - Seasonally Adjusted

Since September 2009, temporary help services employment has risen by 362,000.

Establishment Data



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Highlights

• 125,000 jobs were added
• 22,000 construction jobs were lost
• 9,000 manufacturing jobs were added
  
• 91,000 service providing jobs were added
• 1,000 retail trade jobs were added
• 46,000 professional and business services jobs were added
• 17,000 education and health services jobs were added
• 37,000 leisure and hospitality jobs were added
  
• 208,000 government jobs were added

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

Production and non-supervisory work hours was flat at 33.4 hours and average hourly earnings
was flat at $19.00.

Birth Death Model Revisions 2009



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Birth Death Model Revisions 2010



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Birth/Death Model Revisions

The BLS Birth/Death Model methodology is so screwed up and there have been so many revisions and up it is pointless to further comment other than to repeat a few general statements.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

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).

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another.

Household Data

Both the number of unemployed persons, at 14.6 million, and the unemployment rate, at 9.5 percent,edged down in June.

In June, the number of long-term unemployed (those jobless for 27 weeks and over) was unchanged at 6.8 million. These individuals made up 45.5 percent of unemployed persons.

The number of unemployed reentrants to the labor force fell by 286,000 in May, offsetting an increase in April.

The civilian labor force participation rate fell by 0.3 percentage point in June to 64.7 percent. The employment-population ratio, at 58.5 percent, edged down over the month.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 8.6 million, was little changed over the month but was down by 525,000 over the past 2 months. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

[Mish Note: In January the number was 8.3 million]

Persons Not in the Labor Force

In June, about 2.6 million persons were marginally attached to the labor force, an increase of 415,000 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.

Table A-8 Part Time Status



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The key take-away is there are 8,627,00 of workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



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Grim Statistics

The official unemployment rate is 9.5%. 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 16.5%.

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, economists will not see it that way, nor will the politicians.

Recap

All things considered, this report looks OK on the surface (depending of course on what your expectations were headed into the report). Beneath the surface, a close inspection of the details shows problems like government hiring and temporary employment hiring.

The reported jobs were barely enough to hold the unemployment rate steady, yet the unemployment rate only dropped because workers opted out of the work force.

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