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Posted by on Jun 5, 2009 in Economy | 6 comments

The Economy: The Good, The Bad, And The Ugly


Today’s unemployment report contained some of the first unequivocally good news that I’ve read in an economic report in a long time. The huge decrease in layoffs (“only” 350k jobs lost) was much better than expected, and while one month doesn’t make a trend, it does provide some hope things won’t disintegrate again like I think they will. The stock market may not go up much (indeed it may fall quite a bit over the next few weeks) but that is due to technical reasons and not much should be read into it.

Now for the bad in the report: the unemployment rate jumped enormously from 8.9% to 9.4%. This is both due to an increase in the workforce from people graduating and the increasing inability for those laid off to find new work. That jump was much worse than expected, and shows that while firings are decreasing, hiring is still nearly nonexistent. I’ve had both personal and anecdotal experience that completely backs this up.

Also, next month is a revision month where they correct the last six months and will most likely discover that they “missed” 500k-700k job losses (in actuality it’s due to false adding by insane models). With that, the unemployment rate will most likely go up to 9.7%-9.9%. Obviously in real life that impact is already felt, but the fact is that there is a good chance that the unemployment will have jumped up 1.0% in only two months, something that none of the banks’ nor economists’ models have taken into account. All those “stress test” passes were predicated on a peak unemployment rate that we may hit in the early fall — meaning that the financial system’s expectations are completely off.

Another bad to keep an eye on: the 10 year Treasury burst through its resistance level it had been maintaining and is currently at 3.8%. Unless things reverse soon, a 4-4.2% yield is likely, which will push mortgage rates above 6% and damper long term debt issuance. The mortgage blogs I read (e.g. this) are in a near panic as they are scared that everyone is going to walk away from the market. They are begging the Fed to step in and buy mortgages..although that’s definitely their perspective because all that will do is drive the dollar lower and make gas prices skyrocket even more (which they readily admit).

And as for the ugly? What green shoots?

Update: Here are some numbers behind my assertion about how long people are staying unemployed. Apparently it’s a record.

Update 2: Apparently hours worked were way down. “So, total labour input was much weaker than the headline payroll suggests and this is vividly illustrated in the aggregate-hours worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will not like discuss since this was actually worse than the 0.3% MoM drop in April; this takes the three-month trend to a -8.6% annual rate…Put another way, if companies had held hours worked constant in May instead of cutting them, to achieve the total labour input they achieved last month would have required — get this — a 927,000 payroll cut.”

I use the word “unequivocally” and look what happens!

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  • tidbits


  • tidbits

    Interesting to compare your take to that of Larry Kudlow at RCP where he argues that recovery is so inevitably and undeniably happening that we should rescind the stimulus package.

    • mikkel

      This article by him isn’t even coherent. First he argues that part of the reason for a run up in interest rates and oil is because of worries about money supply (I agree), then he has to defend the Administrations he agreed with by saying deficits don’t matter (without mentioning debt:GDP ratio)…but then tops it off by saying to rescind the stimulus? Wait, if deficits don’t matter then why would you rescind the stimulus?

      “Here’s the moral of this story: Excessive Fed pump-priming and over-the-top federal spending is what matters, not the budget deficit.”

      …This quote suggests he doesn’t understand what the deficit is. It’s truly amazing that he is taken seriously. Sorry for the mini-rant, he’s just one of the guys that gets so much face time that is so blatantly partisan and non-factual it drives me crazy.

      But yeah, in july/august of last year I kept reading how there was a huge disconnect between the bond markets and equities, energy and consumption, and how something had to give. It’s getting just as bad again except the currency/bond fluctuations are even crazier and that’s destroying the bank’s balance sheets. It’s crazy to think that things are about to recover strongly.

  • tidbits

    As you know from prior mental meanderings on your pieces, I tend to agree with your analysis, though not on timing. Kudlow is, indeed, more political hack than respectable economist at this point, though he commands a great deal of deferrence on the (extreme) right. Perhaps he keeps himself relevant, in a marketing sense, by espousing the outrageous.

    • mikkel

      What would change your mind on timing? What would change my mind on timing is if we see unemployment losses drop in half (today’s data point was very close, although it was highly massaged), personal consumption rise in Q3 and debt starting to expand again.

      The reason why I picked those is because they form the heart of the “real” economy right now: if job losses don’t abate then defaults will rise too fast to make it another few years, if people don’t spend money soon then there layoffs will intensify and I see spending taking place primarily through debt.

      Also, the one thing that I’ve been most wrong about was the timing of Eastern Europe blowing up. I was sure it was going to go in Feb or March. It is starting to rise again and is the primary “black swan” event that could change things overnight at any time. It’d have to be resolved before I was confident that there will be another few years without complete banking panics.

  • tidbits

    Nothing would change my mind. I’m never wrong………though I’m told that I’m sometimes a smidge arrogant.

    Just kidding. For me to move up the timing, the considerations would be fairly classical. I would look to a 25% plus fall off in equities (a leading indicator), a dramatic quarter-long run up in UE (though it’s a lagging indicator). There was a dramatic uptick in the UE numbers today but, like the job loss numbers, the UE % uptick was somewhat artificial. I would look for a falloff in durable goods orders, which has moved slightly up in recent reports (again a leading indicator). Finally I would look for a blackening mood in consumer confidence which has upticked in the early months of the new adminstration.

    While mostly illusory, as I believe you agree, there have been improvements in a number of areas (numbers and statistics) recently. Markets and consumers must first see through that illusion before the next phase of collapse can kick in. That could come about as the result of dramatic event, but more likely will come about over time as optimism wears thin and reality sets in. But, I repeat my thesis.

    Mikkel, let’s hope we’re both wrong and that a real recovery is underway. I’d be very pleased to have to admit that I was wrong. And if you and I are correct, and you are more correct on the timing, I’ll admit that too.

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