What's That Hissing Sound?
U.S. economy loses steam.
This week we will take a look at the confusing labor-market picture in the U.S. We will also look at the debate over the money supply. Is the Fed increasing the money supply at a reckless rate, fueling inflation fears down the road? All this and a lot more as we look at how the recession in affecting everyone and everything, from individuals to large businesses.
This week's letter is triggered by an amusing (but very flattering) note from a reader. Matt M. wrote:
"John, you have been my rock for the last few years. Will this decline be equal to the 1970's, the 1930's or the 1900's when we had a similar wealth disparity? I must use a line from Star Wars, 'Help me Obi-John, you're my only hope.'"
Well, Matt, there may be some who say that I am on the Dark Side of the Economic Force, but I don't think we are in for a repeat of the early 1900s or even the '70s. Yes, the economy is in recession and it is likely to get worse. Oil is at $106. Gold is close to $1,000 and the dollar is in the tank. Inflation has everyone looking for their old bell bottom pants and '70s disco music. But there are fundamental differences between now and the early 1900s or 1970.
The recession we are in is going to be its own unique event. Comparisons are not always useful and can be dangerous if you look back at what happened in 1973 and expect it to repeat. There are some things that in general accompany a recession, like a falling stock market and rising unemployment. But other events will likely unfold in different ways. We will not see as large a drop in manufacturing jobs as we did in the '70s, partly in that we have a lot fewer manufacturing jobs and also because many manufacturing jobs are tied to exports, which are rising, helped by the falling dollar. And we did not have two major asset bubbles deflate in the '70s.
A New Program for All Investors
So, with those things in mind, let's look at some of the data from this week. But first, a brief commercial. As I have been hinting for two years, I am excited (finally!) to announce that we have a program in place to help investors who have a net worth of less than $1.5 million find money managers who have an absolute return focus. I will be working with Steve Blumenthal and his team at CMG in Philadelphia to help you find money managers we have researched and can recommend to you.
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And as always, if you are an accredited investor with a net worth of over $1,500,000, you can sign up here, and my partners at Altegris Investments in the U.S., Absolute Return Partners in Europe, or Plexus Asset Management in South Africa will be able to show you a wide variety of hedge funds, commodity funds, and other alternative investments. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) And now back to our regularly scheduled letter.
The BS from the BLS
The BLS non-farms payroll report showed a loss of 63,000 jobs, which was considerably different than the positive 25,000 that the consensus expected. But the news is in the revisions. This month's report now shows 196,000 fewer jobs in the last three months than was originally predicted. But I predict that by next year the number for this February will be worse, for two reasons.
One, the BLS estimates that 135,000 jobs were created in their birth/death model (see #5). Remember, this is the "fudge factor" number to take care of jobs created by new and small businesses that are not part of the establishment survey. Because it's based on past performance, it tends to understate growth in employment when the economy is recovering from a recession, and overestimate it when the economy is going into a recession.
That 135,000 number includes an estimate of 9,000 new construction jobs and 10,000 new jobs in the financial world. It is far more likely these were negative numbers. Job loss will probably be revised to down over 100,000 by this time next year.
Remember, this is a survey of businesses. Once a year they look at actual data and revise the numbers from their original estimates. We will see the next annual revision
March 11. It is likely to show further declines in employment in the last half of the year. But the BLS data is lagging. For instance, California does their own estimate of employment in their state. The data is basically one month "fresher" when it is released.
Let's take the estimate for the Riverside-San Bernadino area of California. The BLS estimated that there were 32,400 new jobs in December in the area. But California, with more thorough methodology, saw job losses totaling 10,100. BLS estimates 56,000 more total jobs than California does in that one area alone. The data is even more stark in the major metropolitan areas. Now, this will all get resolved over time with revisions, but it does distort the current data. (Thanks to John Burns Real Estate Consulting for giving me that data.)
2,500,000 "Lost Jobs" and Counting
The reality is that there were probably closer to 2,500,000 "lost jobs" in February. How so? The Liscio Report notes that:
"Net changes in total employment over time are a function of gross job losses and gains. For example, in 2006, there was a net gain of 1.7 million jobs in the private sector, according to the BED program. (This number differs from the establishment survey.) But that net gain came from a gross gain of 30.8 million jobs, and gross losses of 29.1 million jobs. That's quite a furious pace of turnover under a rather placid surface."
If we take those losses for the year of 29.1 million and divide by 12 months, something like 2.5 million jobs were lost in an average month in 2006 (while 2.6 million jobs were found).
The Liscio Report goes on to show that total job turnover in the US was a remarkable 13.2% of the total labor market last year. But also, volatility is actually down from 15% in 2000. This demonstrates a remarkably robust employment marketplace, in which roughly 2.5 million people will change jobs in any given month. Granted, it is harder to find a job now than a year ago, but it helps to keep in mind that a lot of people are finding new jobs every month, even in a slowing economy. The economy is simply slowing down. It will not come to a halt.
As an aside, the unemployment rate dropped by 0.1%. How can it drop if we lost jobs? Basically, because the unemployment rate is estimated from a survey called the household survey. They literally call hundreds of thousands of homes and ask if anyone is working or looking for work. If you are not looking for work, then you are not counted as unemployed. This month the household survey showed a drop of 255,000 jobs (quite the difference from the headline survey); but an even larger number of people, 450,000, are not looking for a job, presumably because they do not expect to find one. So, even though fewer people are working, the data shows the unemployment rate falling. Go figure.
Taking a Long-Term Perspective
Now, let's get some perspective. Let's say GDP drops by 2%, which is quite possible (Gary Shilling thinks it will be 3%). In a $14 trillion economy, that is a drop of $280 billion. This is admittedly a large number, but the economy will recover. Look at the next chart from the Federal Reserve of St. Louis. It shows GDP growth since 1947. The grey areas are recessions. There have been 11 of them. We are in a 12th. Notice that some were deep and long. But also notice that the curve goes from the lower left to the upper right.
Click here to enlarge image
My back of the napkin estimate is that in 2022 the U.S. GDP will be $30 trillion (through a combination of real growth and inflation.) So, Matt, breathe easy. Free markets are the real force. We will only really alter that curve if we do something stupid, like start a trade war. And to listen to some politicians, that could happen.
The Democratic presidential candidates keep telling us that we need to do away with or renegotiate NAFTA, that it has cost the U.S. jobs. But the reality is that only 2.5% of the jobs that were lost last year were due to foreign competition. The remainder of the jobs lost, as Rod Hunter put it in the Wall Street Journal, "[were] caused by changes in consumer taste, domestic competition and technology." And more jobs were created by foreign companies coming here and investing and buying our goods than we lost. Trade is a net winner for the U.S.
Both Obama and Clinton talked about lost jobs in Ohio and blamed NAFTA. Notice they did not blame NAFTA in their Texas speeches, where trade has created hundreds of thousands of jobs. The vast majority of the jobs lost by Ohio went to states with far lower taxes and right-to-work laws, and not to foreign countries. There are reasons that General Motors (GM) is building a new plant for hybrids in Texas and not in Ohio or Michigan, and it is not NAFTA.
If Ohio wants to see real job growth, they could simply adopt the laws and tax structures of Texas or any of a dozen business-friendly states. The same could be said for California, which is also losing jobs due to high taxes and a burdensome bureaucracy.
Again, you can go to the St. Louis Fed database. Given the woes described by the politicians about the loss of manufacturing jobs, you would think the U.S. has barely any manufacturing left. However, what the data really says is that we manufacture more in real terms (accounting for inflation) now than at any time in history.
We are just doing it with fewer people. As a nation, we are far more productive today than at any time in history. At the turn of the century, it took 40% of the population to produce enough food to feed the country. Today it takes 2.5%. That is an amazing growth in productivity. Does anyone think that the loss of all those farm jobs was bad? Not to say that it was not difficult for people to change their lives. Those people who came off the farm had to learn how to work in a new environment. It is no different today. As Rod Hunter notes:
" … Mrs. Clinton and Mr. Obama … are tapping into popular anxiety about the economy. Rather than trying to shut the world out, however, the next administration needs to pursue the domestic reforms necessary to ensure that American workers can thrive in the knowledge economy. These include shoring up our education system, clearing obstacles to worker mobility by making health care and pensions portable, and replacing the hodgepodge of displaced worker assistance programs with a single support, training and relocation system. The American worker, not the job, is the national asset."
I couldn't agree more.
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