|What Will the US Unemployment Rate Be Prior to the Election?|
By John Mauldin MAR 26, 2012 8:30 AM
If the rate is between 7% and 8%, the winner of the presidential election becomes a toss-up. But how is the rate determined?
Sweden, the Socialist MeccaI was brought to Stockholm to speak for Swedbank. They arranged for me to meet a wide variety of local people, as well as to have dinner with readers. I talked with a number of people who were in positions of authority during the Swedish credit and debt crisis of the early 1990s. And a crisis it was. The currency was under attack, as the fundamentals were negative. This was at the same time that George Soros was attacking the British pound. Interest rates had been rising in Sweden, but the financial environment was being loosened. This meant that Swedish businesses and consumers could borrow in foreign currencies that had much lower interest rates, and borrow they did. The central bank made it very clear that they would protect the value of the currency, and everyone believed them. Remember, this is a relatively small country, and basically everyone knows someone who at least knows someone who was involved with the central bank. The central bank was adamant in its belief that it could protect the value of the currency, and it raised rates by 500% in order to do so.
What the US Needs Is a Good Swedish SocialistInterestingly, no matter the politics of the persons I talked with, there was universal disagreement (if not disdain) with how the US had handled its recent banking crisis.
"Europe Short of Magic Wands"
That was the headline in the European version of the Wall Street Journal. The front-page headline was "Data Suggest More Woes In Euro Zone." The Purchasing Managers' Index was down, against expectations.
"At a minimum, some analysts said, the recessionary signals make it appear that ECB officials were overly optimistic in recent statements that the euro bloc is on track for recovery and the central bank can start discussing ways to unwind its crisis measure. 'The euro zone is far from out of the woods' said Howard Archer of HIS Global Insight." (Wall Street Journal)
That is hardly a surprise. Italy is projected to contract at 1.3% this year. Spain is in recession. Germany and France are barely growing. Spanish interest rates are rising in spite of ECB action, with Spanish rates now above those of Italy.
Spain has been a major topic of discussion here in Stockholm. The conference I spoke at was attended mostly by large asset managers, both fixed-income and equities. Some rather savvy managers were openly wondering how Spain could solve its current woes.
The country is in recession. Unemployment is 20% and 50% among youth. The deficit is now projected to be 5.8%, up from the target the previous government agreed to. The EU is not happy with the new Spanish government, which signed the new fiscal agreements only to turn around in a few days and increase its projected deficits.
How can Spain enter into anything approaching a Greek-like austerity program? Its private sector debt is over 200% of GDP, and they are being forced to deleverage. If the public sector attempts to do so, it will make GDP much worse in the short term, which will increase unemployment. Spanish Prime Minister Mariano Rojay is in a no-win situation. If he cuts the deficit too much, he risks a deeper recession and a corresponding decrease in tax revenues (and rising unemployment costs), which of course makes the deficit worse. For an example, look to Greece to see how well such policies work.
But if he tells the EU to forget their deficit targets, he risks not merely their ire, which he can deal with, but the possibility that they demand a more austere budget in return for assistance.
One of my hosts suggested that Rajoy is in control and can do what he wants. I disagreed, noting that he is in a serious game of poker. He only has access to the bond market at rates that are even close to being sustainable as long as the ECB is buying Spanish debt and funding
Spanish banks, which are buying Spanish debt with complete abandon. Spanish banks raised their holdings of Spanish government debt by more than 10% in both December and January, a larger increase than for any other banks in the various nations of the eurozone. There is no reason to think that trend did not continue in February and this month.
Rajoy has pushed all of his chips toward the middle of the table in a gamble that the rest of the euro zone, and most notably Germany, will not really try and force Spain to take serious deficit reduction measures too quickly. "How can they force them?" I was asked.
"Very simply. They simply tell the ECB not to fund Spanish debt below a certain level of interest rates. Indeed, the recent interest-rate rise, well above that of similarly beleaguered Italy, may be more than a coincidence. It may be a less than subtle reminder to Rajoy as to who is in real control. Without ECB help, Spanish bond rates start to look like Greece's, and the end quickly approaches. The only options at that point are default and/or leaving the eurozone."
Which is of course the hand that Rajoy is holding. "Push me too far and let's see how you like a real banking crisis," as the "D" word (default) enters the Spanish vocabulary. THAT would create huge headaches and sleepless nights in capitols all over Europe. Rajoy is betting that Merkel will blink. While Europe can afford to lose Greece and even poor little Portugal (although there is a great deal of nostalgia and sentimental opinion when it comes to Portugal), for Spain to consider a European exit calls into question the whole euro zone project.
Will European (read German) voters agree to large bailouts of Spain? And large they would need to be. Can the banks and the ECB live with even a small debt haircut or payment holiday of Spanish debt? That is one of the more intriguing games of international negotiations being played today, far more interesting than Greece ever was. The conclusion to Greece was easily seen in advance. It is not clear what happens with Spain. Can Merkel get the German public to go along? Will she willingly buck her voters if it appears they won't? Will Rajoy hold his ground in the face of the costs of either default or exit? Once you start the default game, you had better cut enough to get to sustainability for some time into the future, unless you get ECB agreement to buy future bonds, because the private bond market will disappear.
We are once again to a point in Europe where there are no good choices, only very bad ones. But this time it is with a country that actually makes a difference. (No slight intended to Greece, but you are just small.) Spain has no good way to cut its deficit without things getting worse. But Europe must be willing to then fund Spanish debt, even if "only" through more LTRO actions by the ECB.
This is a topic we will sadly be revisiting on many occasions. Stay tuned.
What Will Be the US Unemployment Rate Prior to the Election?
A presidential election with an incumbent US president running is more a referendum on the sitting president than it is a true choice between two individuals. I see no reason that the coming election will be any different. I am on record as saying that if unemployment is over 8% and rising, I think Barack Obama loses. If unemployment is at 7% or below, I think Obama wins. In between 7% and 8% it becomes a toss-up.
So what will employment be? I came across a great interactive chart (courtesy of my friend Mike Shedlock) from Ross Perez at Tableau Software. You can choose what you think the jobs growth will be and what the increase (or decrease) in the pool of available workers will be, and the graph will give you the future unemployment rate (out to 2015).
As I have written in the past, it is an odd fact that the Bureau of Labor Statistics does not consider you unemployed if you have not looked for a job in the last four weeks. Or if you took a job for a short time working on your neighbor's lawn. To my mind, a job, even if temporary and for very low pay, is a job is a job, for statistical purposes. And the BLS is, after all, charged with giving us statistics.
Because people got discouraged during the recent Great Recession, they stopped looking for jobs, and thus were not counted as unemployed. Millions of people were considered "no longer in the work force and therefore not unemployed." If it was not for the loss of people counted as unemployed, the current rate of unemployment would be over 9%.
Does that seem mean-spirited or politically motivated (don't I just want the number to be worse than it is?) to simply point that out? But how can we really know? I will admit to not calling tens of thousands of homes and doing my own survey.
But then, luckily, I don't have to. The Gallup poll people also do a phone survey to US households. In fact, if memory serves me correctly, they use a methodology that corresponds to what any person living in the real world would use ("Do you want a job?"), and anyone but a BLS statistician would think that was reasonable. And Gallup finds the unemployment to be (drum roll) … 9%.
(Side note: expect to hear more about this during the presidential debates. My bet is that the public learns more about BLS methodology than they really want to know.)
As most economists who work on such numbers will tell you (including Ben Bernanke), the number of jobs needs to grow by about 125,000 a month just to keep up with population growth. What will job growth be in the next 8 months? Will it be over 200,000, as it has been the last three months? Will it be 160,000, as it was the in 2011? For those who are not on the internet as they read this, I will offer two charts with those assumptions. Are you more optimistic about job growth? Then put in your own number.
How many new jobs will be needed if those who are not counted as unemployed decide to look for a job? In February, there were 476,000 people who decided to look for jobs and re-entered the employment world. The household survey actually showed a much larger increase in employment than the establishment survey, which can be seen as quite bullish. People were thinking there was actually the possibility of finding a new job and decided to look. If you want to be bearish, you can see a very distinct correlation between the rise in the workforce and the end of unemployment benefits. The truth is probably somewhere in the middle.
The data that keeps coming in seems to be pointing to an improving economy, albeit improving more slowly than is normal this far into a recovery. But if you look at last year you find the three corresponding months saw above-average growth. Could we expect to see a continuation of 200,000 new jobs per month? I had this chart in my letter last week, without the total annual numbers, which Mish kindly added, so let's use his chart. Notice that the six months preceding November did not even average 125,000. If that pattern repeats, then we will likely see unemployment rise slightly.
Baby Needs a New Pair of ShoesI was late getting into London due to bad weather in Texas holding up my American Airlines flight, so I missed my connection to Stockholm and had to take the next plane on British Air. My luggage did not arrive with me. Other than a rather nice jacket, I was very casually dressed and had not been thoughtful enough to carry on a change of clothes just in case. I was told my bags would be there by early morning, as there were flights coming in after me later that evening. No problem. Except that come morning there was no bag.