Season’s Greetings happy business new year! Now is the business new year, since by the time 2012 actually hits in four months, it will be too late to plan for it. The start to 2012 is now as far as business-types are concerned. Budgets must be created, revised and funded before the new year commences. Now is the time to do that. It is also the new year for the financial markets. 2011 is essentially over as nearly everyone’s focus now shifts to 2012. 2011 is barely half over when it comes to statistical analyses of the numbers, but 2012 will begin to dominate everyone’s thinking. Usually, there is a new year’s celebration of a great start to a better than ever year. However, this year is being greeted with severe caution. Usually, when this happens, the caution has proven unnecessary. Let’s all wish a new year’s wish that this is another time when caution is better saved for when we feel a lot better about the upcoming year.
As a forecaster, we have always had to fight the urge to forecast the recent past. Obviously, what has recently happened is fresh in our minds and we are seeing nearly everything through the lens of the current situation. But, this seldom works. As some pundit somewhere sagely put it, the only sure thing is change.
Who among the long list of people now forecasting a weak US economic outlook was forecasting a very weak first and second quarter? No one is the short answer. At the start of the year, the forecasts were for solid if unspectacular growth nearer 3% than zero. But, we got nearer zero, at least from the data we have seen lately. Funny, it didn’t seem that weak when we were going through it. Just like most forecasters argue that things are better now than a few months ago. But, it doesn’t feel like it. Does it?
We had more job growth in the first quarter than we had had in any other quarter since the recovery began (with the exception of the census-influenced months in early 2010 which were quickly reversed). So, right as the economy was hitting the skids employment blossomed. Does this make sense to anybody? It doesn’t seem to jibe with the idea that employment is our ticket to a strong economy in the future.
This does make sense when we recall that employment is a lagging indicator of the economy, not a leading one. So, better growth in the latter months of 2010 led to better job growth in early 2011. Just as weak growth in early 2011 should result in poor job growth in latter 2011. Don’t worry about job growth if you’re forecasting the economy. A better economy will lead to more jobs.
None of this changes the idea that forecasting the recent past isn’t a viable way to go about the process. Rather, the way it is usually done is to seek out leading indicators of the economy and let them show the way. These leading indicators have been showing the way, by showing a distinct slowdown early this year and then stepping up again lately. The leading economic indicators rose by 0.5% in July after rising 0.3% in June and 0.7% in May.
We have an economy that has two major influences. One is the ‘new normal’ aspect of slower potential growth. The other is the reversal of huge government spending which gained little in growth but racked-up huge debts. Neither of these portends really strong growth in the immediate future, but neither do they lead inevitably to stagnation or recession. We can have an economy that muddles through. That is the best bet pretty much all the time.
Issue of the Week
So, what is the likely economic impact of a hurricane moving up the Atlantic Seaboard? Probably a lot less than most folks would at first expect. First, you have to ask yourself what would have happened without the hurricane? There would have been loads of tourists spending on lobster dinners and hotel rooms and Jet Ski rentals and the like. Those sales did not happen, or were at least dramatically reduced. That is a loss to those local economies.
In the coastal cities, there were all sorts of interruptions to all sorts of endeavors. People took that Thursday off from work to nail extra protection over their windows or lash-down their lawn furniture. Friday was spent preparing to have damage by Monday. Productivity was going to be low as much effort had turned to storm preparations rather than getting orders filled and product out the door.
New Yorkers spent Friday transfixed by their TV screens watching a huge storm slowly approach. Mandatory evacuations absorbed many emergency personnel in moving the sick and disabled to higher ground. Shutting down mass transit at midday compelled many to leave the city early or be stuck away from home.
One trouble with this storm is that it moved so slowly up the coast. On Thursday it was off-shore Florida and it took until Saturday to reach New York. Luckily, the storm weakened from Category 3 to a tropical storm before it reached New York. None the less, this storm is expected to have impacted one in four Americans. By skirting the coast all the way from Florida to New England, it affected the most densely populated part of the US. The size of the storm meant that even if the center stayed out over water, the edge brushed against the Appalachians from Georgia to Vermont. Over 20 inches of rain fell on parts of the East Coast over several days. Flooding will turn out to be the worst of the damage when everything is counted.
Though there will be plenty of damage from a storm like this, there will also be a sudden uptick in activity behind it. Whatever was lost in preparation for the storm and whatever the damage was, the offset will be a burst of activity on clean-up and repairs once the storm passed. The next several weeks of weekly data like initial unemployment claims will be jerked-around by this storm. But, when it comes to economic numbers, we will probably have a hard time finding it. By the time we put the third quarter in the history books, hurricane Irene will not materially impact the economy. If there is a small negative in the third, it will be more than made up in the fourth quarter.
Unlike the idea that spread after the earthquake and tsunami in Japan that the rebuilding from the disaster would spur growth, most folks are putting a negative spin on Irene. Maybe that is just one more sign that the difference is in ourselves rather than in the events. The damage from the earthquake and tsunami was far worse than anything Irene dished-out. The human toll was greater and the aftermath will take longer to repair.
From Vermont to Florida insurance company checks will soon start flowing into local communities. Building materials will be bought, equipment rented, men hired to fix the damage, all in the name of Irene. This shot in the arm may be of some short-term benefit to the communities involved. It might be enough to boost them out of their lethargy. We’ll see.
The Commerce Department reported personal income rose by 0.3% in July and consumer spending rose by 0.8%. We bought more cars and that made all the difference. Due to higher spending than income creation, our savings rate slipped to 5.0% from 5.5% the month before. The income number was a bit disappointing but the spending number was well above expectations. This marks a solid start to the third quarter.
S&P said Case-Shiller Home Prices rose 1.1% in June and 3.6% over the second quarter noted S&P in a report. 19 of 20 cities in the broad index showed gains. The index is still 4.5% lower than a year ago.
Federal Housing Finance Agency home prices showed a gain of 0.6% in the second quarter. This series differs from Case-Shiller because it uses Freddie Mac and Fannie Mae data that largely misses the urban areas followed by Case-Shiller. FHFA prices are 5.9% below where they were a year ago.
Consumer confidence fell in August to 44.5, the lowest level since mid-2009, according to the Conference Board. The drop was far worse than forecasted by economists. The protracted arguing about the debt ceiling was viewed as one of many factors that lead people to have a lower view of the economy. Luckily, consumer confidence is a lagging indicator so low readings usually don’t have a material impact on spending plans or investment decisions. Confidence is so late an indicator that it can be used as a contrary indicator, low readings are generally good for the markets.
The Institute of Supply Management (ISM) reported their August number at 50.6 versus 50.9 in July. This was better than expected (as most economists projected the declines in recent months into a sub-50 report) and better than the 50 level that augers a decline in manufacturing output. The Chicago PMI was 56.5. That was better than expected but still a decline from July.
European PMI fell to 49.0 from 50.4 in August. Most of the national PMI data fell for the month, but Germany, the Netherlands and Austria remained above the 50.0 level, indicating some growth. France, Spain and Italy fell below 50.0 as did Ireland and Greece.
Brazil cut interest rates in response to slowing growth and tame inflation reports.
Productivity fell by 0.7% in the second quarter. Hours worked rose 2.0% but output rose only 1.3% leaving a gap of 0.7% which is defined as a decline in productivity. Unit labor costs rose by 3.3% which is a combination of the 2.7% increase in hourly compensation on top of the decline in productivity.
Motor Vehicle sales in the aggregate were largely unchanged, however US nameplate cars sold especially well in the month. Shortages of popular models due to parts shortages from the earthquake and tsunami in Japan in March had finally been overcome. Japanese carmakers didn’t see the same boost in sales and they still do not have enough of popular models to meet demand.
The US Bureau of Labor Statistics reported employment in the US was unchanged in August. The unemployment rate was also unchanged at 9.1%. The strike of 45,000 Verizon workers and a decline in government workers just off-set any gain in private employment. The Verizon strike has already ended, so these workers will go back into the employment statistics next month (fat lot of good that does us today).
The average workweek fell by 0.1 hour to 34.2 hours. Average hourly earnings fell by 3 cents or 0.1% to $23.09.
This is the worst employment report since September 2010, when we lost jobs, due largely to the unwinding of census workers. We also saw a negative revision in both June and July of a cumulative 58,000 workers.
Government employment declined despite the return of thousands of Minnesota workers who were idled in July by a partial government shut-down. The decline of 17,000 government workers includes this shift, so the permanent decline was much worse, or better depending on how you view government workers. More than 22,000 workers in Minnesota were counted as unemployed in July and returned to work by August.
The White House Office of Management and Budget forecast that the unemployment rate would decline to 8.2% by the end of 2012. That would be really good news for the current occupant of the White House. But, for that to happen the economy would have to generate more than 250,000 jobs a month on average over the next 15 months. On average over a year, the labor force grows by something like 150,000 people each month through new entrants to the labor force outnumbering people leaving the labor force. Plus, to drop the unemployment rate from 9.1% to 8.2% would require almost 1% of the current labor force to find jobs, that is roundly 1.5 million people. So, we have to find 2.25 million jobs to absorb the growth in the labor force plus 1.5 million jobs to knock the unemployment rate down. We need 3.75 million jobs in 16 months. That would be great if it happens, but at the rate we’re going lately, that will not happen.
We have something of a quandary this week. What is the ‘week’ we should talk about? The first choice would be the calendar week, which was not too bad but not too good either. US stocks gave back the gains from Monday, Tuesday and Wednesday on Thursday and Friday to end the week mostly unchanged. Among foreign markets, most did better with gains in most developed markets, with the notable exception of Germany, which is facing a political crisis as the Christian Democratic government is facing much stronger opposition to providing further aid to the European Central Bank and to the indebted PIIGS. Most developing markets gained for the calendar week, except China which is fighting inflation and thus actively trying to slow their economy and possibly succeeding too well.
Treasury bonds were generally higher by week’s end, but that was only because of the action on Friday. Prior to that, bonds were having a terrible week. Corporate bonds followed the trends but not to the same degree. By week’s end, most bond categories were back to about where they started. Foreign bond markets generally did poorly as growth seemed to be back in vogue most places. The same exceptions noted above for stocks were mirrored in bonds with better action in Germany where a change may be underway.
We would much rather write about the long, month-end week that ended Wednesday, because that one was terrific for stocks, terrible for bonds and pretty good for just about everything else. But, that week seems so long ago now. Gains of multiple percents were common in risk assets while drops of a smaller size were seen in safe assets. Even gold was down for that week, by over a percent.
Oh well, we don’t always get to choose what we write about. It is often thrust upon us by circumstances. That’s the life of the pundit. It could be a lot worse.
Of note, Monday’s market in Europe and Asia was terrible. Fears of a break-up of the Euro-zone caused most developed markets to fall badly. A break-up of the Euro might be the best thing in the long-run for many of Europe’s strongest and weakest economies, but be careful what you wish for.
Yes, we’ve had another Labor Day in America. Labor Day is essentially the US version of May Day or International Worker’s Day. Both are the product of the labor strife that occurred in the 19th century as workers began to unite in labor unions and craft unions. May Day came about due to a riot in Chicago on May 4th 1886. A largely peaceful rally in support of striking workers turned into a riot when anarchists set-off a bomb that killed several policemen. The police began firing into the crowd and an unknown number of people were killed. Ultimately eight anarchists were tried and convicted even though prosecutors couldn’t prove that any of the men actually threw the bomb that started the riot.
Labor day was started by the Central Labor Union in New York City in 1882, but was made a national holiday by President Grover Cleveland as he tried to quell labor-related violence after killings by Federal troops and US Marshals during the Pullman Strike in 1894. Congress passed the law establishing Labor Day as the first Monday in September. So, we all enjoy a long weekend at the end of summer because a bunch of railroad workers were killed over a century ago.
Before we go one last annual reminder, this is the first day of school for millions of new students and the first day back to school for many millions more. Be especially careful when driving because there are a lot of very unfamiliar people on the roads now. They will figure it out given the chance. We are just asking you to give them that chance.
Another Bit of Bad News Before Summer Unofficially Ends
Today’s event that sparked the drop in equity prices was the employment report. Rather than the 53,000 new jobs expected, itself a disappointing number, we were stunned by zero net new jobs created in the US economy in August. Zero new jobs over an entire month! That is just too much.
As there always is in these numbers, there is a back story. August was impacted by a strike at Verizon that idles 45,000 union workers. Those workers were counted as unemployed by the Bureau of Labor Statistics (BLS) in their monthly count. Even though that strike ended before the month was over, those 45,000 detracted from the jobs picture since they were out during the survey week, mid-month.
We also had a large group of government employees lose their jobs in the month. That was partially offset by 22,000 Minnesota workers returning to work after a partial government shut-down in that state in July. A net 17,000 government workers were lost, so absolutely there were more like 40,000 lost government jobs in August. The BLS reports we have lost over half a million government jobs in the last two years, mostly at the state and local level.
A report from Automated Data Processing, a major processor of financial records for businesses, on Wednesday had estimated the private sector in the US had generated 91,000 new jobs during August. That raised hopes of many investors that the jobs picture was progressing albeit slowly. Along with reports from Challenger, Gray and Christmas, an outplacement firm, that major layoffs had increased in August, the jobs picture didn’t look too good.
We should remind ourselves that jobs are a lagging indicator. First you get economic growth, then you get jobs. Or in this case, first you get economic slowing and then you get no jobs. So, this should not be looked at as indicative of further weakening. We may get further weakening, but we may also get stronger numbers. The jobs situation won’t dictate either. Rather the economic outlook will dictate the jobs outlook going forward. The absolute worst jobs report from the recession was one month before the economy turned up.
Today’s market action was probably made modestly worse because so many senior professionals all across the investment industry were off starting their Labor Day holiday early. Maybe we all should have taken the day off and closed the market? Then we would have had the long weekend to digest the data and might have returned on Tuesday with a better outlook.
Have a great week.
Karl Schroeder, RFC, CSA
Investment Advisor Representative
Schroeder Financial Services, Inc.