Posted by Michael A. Kamperman on May 9, 2009
The official unemployment rate is now 8.9% and equal to the worst case assumptions for 2009 used in the Goldilocks stress tests of the banks. The tests were not too hot and not too cold for one reason and one reason only, so that more TARP money would not be needed in the near term. There is no clearer signal that the political will is lacking in Washington to confront this crisis head on. Treasury Secretary Geithner has been left with nothing more to work with than smoke and mirrors wizardry ala the Land of Oz. So what if no big bank is going under in 2009 or 2010. The banks accounted for only a fraction of the credit granted to the world economy over the last few years. The main driver for the rest of the creation of credit came from the asset-backed securitization market that relied on AAA ratings. It remains dead as a door nail if it doesn’t carry the implied or implicit backing of the U.S. Treasury. The source of the economic crisis was never the large commercial banks and declaring the banks alive and well has not resolved the problems in the economy. While the attempts to prop up confidence are necessary and admirable, confidence alone will not restore the loss of access to credit that like it or not is the lifeblood of our modern economy. As the banks rush to return TARP money they will have less to lend, not more.
It is shocking that the U.S. lost 539,000 jobs in April, with downward revisions to February and March, and people are saying it appears we are turning the corner and the worst may be behind us. President Obama should fire the political hacks who recommended he say ““the gears of our economic engine do appear to be slowly turning once again.” He should surround himself with advisors who have him declare the economic crisis continues and he will not rest until the country finds a way to get the gears of our economic engine to begin to slowly turn again. The latest weekly unemployment claims which will be part of the May unemployment report were 601,000. While that is down from the peak it still indicates more job losses are heading our way in May. We have yet to account for Chrysler closing all its factories a week ago and informing over 1,000 dealerships they will be permanently discontinued. A deeper look into the jobless numbers indicates the length of time out of work is rising. Also, if you work part-time you are counted as employed even if you would prefer full-time work but can’t find it. This number has skyrocketed in recent months. The point is not only are the total job numbers deteriorating, the quality of jobs is deteriorating too.
What sector outside of the federal government and perhaps healthcare will be adding jobs to this economy? Certainly not construction as the real estate market is overbuilt or manufacturing as the stunning contraction in the auto sector and other industries continues unabated. Exports won’t lead the way as our trading partners, especially Mexico, are in worse shape than we are. Retail is still contracting. The plan for the banks to raise earnings is more cost cutting. Even state and local governments are shedding jobs as their tax receipts whither and they do not have the power to print money. Our country needs a serious discussion of ways to escape the depression we are in rather than smoke and mirrors tricks designed appease the masses for the moment.
Posted by Michael A. Kamperman on May 7, 2009
I want the economy to get better. I keep looking for solid signs of recovery and so far I cannot find them. Many have recently talked of the green shoots they see that indicate the economy will be recovering soon. The most talked about green shoot is a slowing in the rate of economic decline. The global economy collapsed in the last 7 months. The rate of decline has to slow as one gets closer to the floor from the roof top. In February, Japanese exports fell almost 50% from year ago levels. Japanese industrial production fell 38% from year ago levels. U.S. auto sales are down almost 50% from 2006 levels. It is only natural that the rate of economic decline will slow.
Weekly jobless claims fell to 601,000 this morning. However, this number does not include the mass layoff from Chrysler, which filed for bankruptcy last Friday. Chrysler Financial is being liquidated and all of Chrysler’s factories have been shuttered until the firm emerges from bankruptcy. GM is up next and already plans to close most factories for up to 11 weeks this summer in an attempt to align supply with demand. A very good real time indicator of economic activity is industrial demand for natural gas. Since Chrysler closed its factories last Friday respected blogger Robry825 has reported on the investorvillage.com CWEI message board that demand from the industrial sector for natural gas has fallen below 19 Bcf for the first time during the economic collapse. This is an indication production is going lower, not stabilizing.
The coup de grace is today’s subpar auction of 30 year U.S Treasury bonds driving interest rates in the U.S. higher. If this continues it will end the benefits of lower mortgage rates. The reason the bond auction went poorly is partly a fear of inflation due to quantitative easing programs. But primarily it is the lack of available purchasing power in the bond market. The money doesn’t exist to absorb the new bond issues. The Federal Reserve missed an important opportunity when it failed to up the level of quantitative easing at its last meeting. Hopefully the next time they meet they will understand the green shoots they thought they were seeing were a mirage and significant additional action on their part is still required. Perhaps tomorrow’s unemployment report will serve as a wake-up call. Hopefully it will not be dismissed as a lagging indicator by those whose thirst for recovery is leading them to see mirages. Unless we understand the depth of the crisis we will not take the bold and controversial steps necessary to stabilize the economy.
Posted by Michael A. Kamperman on May 5, 2009
When Federal Reserve Chairman Ben Bernanke testified before Congress today there were many questions about whether or not the Fed was prepared to reign in its liquidity support for the markets before inflation takes hold. The Fed Chairman was forced to assure multiple members of Congress that plans were in place to pull away the punch bowl when it came time for the party to end. This is very disconcerting. Where were the questions about why the Federal Reserve has not done more and acted more quickly in the face of the largest and swiftest economic downturn since the Great Depression? Where were the questions about going further and doing more until the economy turned the corner? Far too many in Congress, in the media, and in the business of giving professional investment advice on Wall Street seem to think we are battling the stagflation of the 1970’s. Folks, we are at economic war with a debt induced deflationary depression akin to the battle our parents and grandparents fought in the 1930’s. Like ostriches we are sticking our heads in the sand. We seem to think that if we talk about green-shoots in the economy and early signs the rate of decline is slowing it will lead to an eventual near-term upturn in the economy. Nothing could be further from the truth. By not admitting the desperateness of our situation we delay the eventual debate on how to move forward and we delay the political will to make it happen.
There is no better example of how we are dreaming of green-shoots rather than actually seeing them than in a story appearing in today’s New York Times and linked to this site. The story is titled “Bright Spot in Downturn: New Hiring is Robust.” Sounds like the economy is about to turn the corner and things will soon be better. If your read the headline that would be your impression. But if you read the story you would be scratching your head at the forced attempt to take really negative news and gloss it over with a positive spin. For example, the story says the Cleveland Clinic with 40,000 employees has job openings for 500 people. Sounds great until you read that before the downturn they had job openings for 2,000 people. The story tells about a 29 year old construction worker who applied for a job at a new hamburger restaurant where the hiring of new workers in the economy landed him a job as a fry cook. His pay went from $15 an hour to $7.50 an hour. Could a story about a major hospital having a quarter of the normal job openings and a story about people having to take new jobs at half pay have ever been written before with a positive spin in the New York Times in the post World War II era?
A slowing in the rate of decline is not a positive. The modern global economy has never contracted as fast as it has during the last 7 months. These stories which are appearing in multiple news outlets in addition to the New York Times are doing more harm than good. Our country needs to muster the political will to take drastic action to revive a moribund economy and fix broken credit markets. The longer we stay in a state of denial the more pain we will inevitably suffer. We need massive quantitative easing and we need it now. The political will for action not only doesn’t exist in Washington, it doesn’t exist in the media either.
Posted by Michael A. Kamperman on May 4, 2009
Many economists attribute a worsening of the economic downturn in the 1930’s to “beggar thy neighbor” protectionists policies that stymied world trade. As economies contract and the political pressure increases on national politicians all over the world it is to be expected that efforts to keep jobs at home will hold sway. Today President Obama sought to increase taxes from foreign operations of U.S. corporations under the guise of protecting U.S. jobs. It won’t be long before such rhetoric requires even more action. “It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.,” President Obama said today. The message out of Washington is increasingly “buy American” and “keep the jobs at home.” Other countries such as Japan are paying for immigrant workers to be shipped back home. As the economic downturn worsens historical lessons will not stop world leaders from protecting the home turf first.
The U.S. suffered the most from protectionist impulses in the 1930’s. The U.S. was a creditor nation and ran large trade surpluses in the 1920’s that carried over into the 1930’s. However, today the U.S. is a debtor nation and runs far and away the largest trade deficits in the world. This means that if global trade contracts due to protectionism, the U.S. will not suffer nearly as much as those countries running large trade surpluses. Enhanced global trade makes the global economic pie bigger. But, if a country runs protectionist policies that country may stand to benefit at the expense of other countries. However, if all countries run protectionist policies it becomes worse for everyone. As economies continue to suffer it is almost impossible for politicians to resist protectionist policies that create and protect more jobs at home rather than abroad. Like the U.S. in the 1930’s, the countries that stand to suffer the most are those that run the largest trade deficits.
Today no country has larger trade surpluses than China. It only stands to reason that if global trade contracts China will be impacted the most. Ironically many countries are looking to China to spur global economic growth at the same time they are giving in to protectionist policies at home. The protectionist genie is already out of the bottle. If the U.S. government doesn’t quickly get in front of the curve a 1930’s rise in protectionism shrinking the world economic pie seems inevitable.
Posted by Michael A. Kamperman on May 2, 2009
Auto sales for April were very disappointing and indicate no upturn in economic activity. The WSJ reported “April sales totaled 819,540 cars and light trucks, a decline of 34% from a year earlier, according to market research firm Autodata Corp. The seasonally adjusted, annualized sales pace was 9.32 million vehicles, down from March’s 9.86 million rate.” The ways in which the statistics are reported belie the severity of the situation. The downturn in auto sales has been going on now for over two years. In April of 2007 auto sales in the U.S. declined a worse than expected 8% from a year earlier. In April of 2008 auto sales declined a worse than expected 14% from a year earlier. Now auto sales are down another 34% in April of 2009. The last two years have seen April auto sales drop 8%, followed by a decline of 14%, followed by another decline of 34%. Auto sales in the U.S. are down almost 50% from 2006 levels. The media should be reporting April 2009 auto sales are down 34% from 2008 levels and a total of 48% from 2006 levels.
There is no clear cut definition of what constitutes an economy moving from a recession to a depression. A recession is normally defined as two consecutive quarters of negative GDP. But with no agreed-upon definition as to what is and isn’t a depression, most economists won’t finally call it until well after the fact. I’m ready to call it now. To me vehicle sales in the U.S. clearly signal the U.S. economy has entered a depression and things are not getting better. I would imagine most economists would already concede the housing sector has entered a depression. With the two biggest items consumer’s purchase in a depression, and with the consumer accounting for 70% of the U.S. economy, it won’t be long before more and more economists begin to ask whether or not this is a depression rather than a long or great recession.
The reason semantics matter is because the longer the country believes we are in a more severe downturn of the normal business cycle rather than a debt-induced deflationary depression, the longer it will be before real action is taken to right the economic ship. So far the bulk of the efforts from the Obama administration center on the $786 billion stimulus bill, the $700 billion TARP, the too weak stress tests of the banks, and an effort by the Treasury to resume trading in toxic assets. The Fed has done much, but it remains far behind the curve. Would the Fed have stood still this week if they believed we were officially in a depression? While it is important to instill confidence in consumers and businesses, it is more important to correctly diagnose the economic situation and prescribe the proper remedies. The public will not accept the remedies necessary as long as they remain in the dark about the truth of our economic plight.
