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3 million jobs and counting

This has been one of the weakest recoveries in modern times, but nevertheless it has generated about 3 million new private sector jobs. This is shown in the top chart, which compares the results of the household and establishment surveys of private sector jobs. These two surveys don't always track each other closely, but over time they do tend to tell the same story. Over the past six months, the growth rate of private sector jobs according to the two surveys has been almost identical: 1.5% annualized. And since the recovery started, the household survey has found 3.2 million new private sector jobs, while the establishment survey has found 2.9 million. Call it 3 million new jobs and you're on pretty solid ground. We are still 6 million jobs shy of reaching a new high, however.

At the current 1.5% growth rate for jobs, the economy is on track to post real growth of 2.5-3.5%, since productivity tends to average about 2% per year, but it has only been 1% over the most recent 12 months. This isn't all that great, but it sure beats zero growth, and it is progress.

Meanwhile, the public sector continues to shed jobs. This is good news, since it shows that the U.S. economy is already undertaking the unpleasant task that faces many European economies, by shrinking its bloated public sector. If we could only be cutting spending the way we have been cutting government jobs, our deficit outlook would be dramatically improved. Regardless, we have only begun to scratch the surface of the problem: public sector jobs have only shrunk by 2%, while private sector jobs are still 5% below their 2008 high; and private sector jobs haven't grown at all for the past 10 years, whereas public sector jobs are still up over 3%.

The unemployment rate has dropped from 10% to 8.6%, which is more than would be expected given the relatively tepid rate of jobs growth, since the labor force tends to grow about 1% per year. But unfortunately, the labor force hasn't grown at all in the past four years, so tepid jobs growth translates into a larger decline in the unemployment rate. Apparently lots of folks have become discouraged and dropped out of the labor force. (Or maybe dropping out has been made easier by the huge increase in food stamps and unemployment insurance benefits.)

Today's jobs reports provide solid evidence of an economy that is growing at about a 3% pace. That's very slow given how many people are still looking for jobs, but it is better than a lot of other developed economies. And of course, there is no sign of the dreaded double-dip that so many have been calling for. We could be doing a lot better if we had more growth-oriented policies, but it is a testament to the dynamic nature of the U.S. economy that it has been able to grow in spite of all the headwinds it has faced: massive and wasteful "stimulus" spending, a 25% increase in federal spending as a % of GDP, a wrenching housing market collapse, a big increase in regulatory burdens, great uncertainty over the future course of monetary policy, and a historically weak dollar.

Perhaps more importantly, the U.S. economy today is in far better shape that it was expected to be just three years ago. As 2008 was drawing to a close, financial markets were priced to a global economic armageddon; credit spreads were predicting that as many as half of the companies in the U.S. would be bankrupt in 5 years' time; at 2.1%, 10-yr Treasury yields were priced to years of deflation and a multi-year depression; and the one-year forward-looking PE ratio of the S&P 500 was a mere 12.6. Yet despite all the improvement, the forward PE ratio of the S&P 500 today is only 12.1, and the 10-yr Treasury yield is only 2.06%. By these measures, the market is even more concerned about the future today than it was three years ago. In short, the market is expecting the fallout from Eurozone sovereign defaults to be worse than anything we have seen so far.

Auto sales remain strong

November auto sales exceeded expectations (13.59M vs. 13.40M) and are up almost 11% in the past year. From the disastrous low in early 2009, sales are up almost 46%. They are still well below their pre-recession levels, but double-digit growth rates are nevertheless impressive.

Eurozone pulls back from the brink

This chart gives an overview of the current state of 2-yr yields in the PIIS countries (I exclude Greece because there appears no hope of avoiding a significant default, with 2-yr Greek yields trading at about 120%). One thing stands out, and that is the recent decline in yields on Italian and Spanish debt. They have pulled back from the 7+% brink (France down about 100 bps from its recent highs, Spain down 130 bps), but they are still elevated. Both countries appear serious about controlling spending and reducing their deficits, but it will take a long time to convince skeptical investors that these countries have really changed their spendthrift ways. Eurozone 2-yr swap spreads have only declined marginally, from a recent high of 115 bps to 109 bps today; Europe is still facing enormous challenges.

The chart above shows that 2-yr French yields have sharply reversed, an indication that France remains almost as solid as Germany and is not likely to turn into another Italy. French spreads to Germany had blown out to 140 bps a few days ago, but are now back in to about 75 bps. That is a very welcome improvement, but in a normal world the spread would be close to zero.

Meanwhile, Eurozone equities are up some 15% from their recent lows. This is a palpable sign of relief—a decent pullback from the brink of an awful abyss. But it is probably premature to conclude that conditions in Europe will continue to improve in a straight line from here, even though its tempting to think. As a long-term investor, however, I think it makes sense to bet that the Eurozone economies will eventually do the right thing, and that makes today's equity valuations very attractive.

Economic news roundup

The November ISM manufacturing index was a bit stronger than expected (52.7 vs. 51.8), and it reinforces the growing list of indicators which point to moderate growth and not a double-dip recession. As the chart above suggests, the current level of the ISM index is consistent with real economic growth in the current quarter of 3% or so, which is also consistent with the views of an increasing number of forecasters.

Construction spending was flat in October. Residential construction spending has been flat since mid-2009, continuing its worst performance on record. Total construction spending is now a mere 2% of GDP, also the lowest on record. This sector has been down and out for so long now that the only question is when the rebound will start. The more time passes, the more likely we are to see a rebound, and when it gets underway it could be very powerful. But that good news will probably come after we have seen more good news from other sectors of the economy.

Weekly claims for unemployment haven't changed much in the past few weeks, but the next few weeks could be very interesting. Seasonal adjustment factors anticipate a surge in claims in the coming week, so if actual claims don't surge, then the adjusted number will decline. Seasonal factors then anticipate another surge in claims towards the end of December and the first two weeks of January. If actual claims don't almost double from current levels in the next 6 weeks, then reported claims will decline. I suspect that companies are running at very lean and mean levels, and that would suggest that actual claims will not surge by as much as they have in the past around this time of the year. Something to look forward to in any event.

Monetary ease takes the edge off the panic

A coordinated easing move by the world's major central banks was well received by most markets today. Lower interest rates can't solve all problems, however, and they won't fix the fundamental problem of bloated Eurozone government spending, but they can take the edge off the panic by backstopping the financial markets. 2-yr swap spreads are a good indicator of the tensions in financial markets, and today they dropped by over 10 bps in the U.S. Eurozone swap spreads remain quite high, however, as do yields on PIIGS debt. The wider gap between U.S. and Eurozone swap spreads indicates an increased likelihood that the U.S. economy will be insulated from the fallout of a PIIGS default, and that is a very positive development. With lots of recent economic indicators showing marginal improvement in the U.S. outlook, any steps taken to foster continued improvement in the U.S. economy also provide some indirect support for the Eurozone economy as it struggles toward a solution. A solution which in the end must consist at a minimum of restructured debt and meaningful cutbacks in government spending. There is no painless way to fix the PIIGS' problems, but avoiding financial market panic is a good way to allow the process to proceed.

The chart above show the ratio of the Vix Index and the 10-yr Treasury yield, which is a good measure of panic (a high Vix index signals panic) and despair (a low 10-yr yield signals little or no hope for growth). We're still in red-zone territory, but it would appear that there has been some progress toward a resolution.

The employment outlook is improving modestly

I haven't seen any recent reports from the folks at ECRI, but I've got to believe they are getting nervous about the recession call they made a few months ago. Today's news from ADP was a definite upside surprise, in which they report that private sector jobs grew by 206K in November (vs. expectations of 130K), and they revised upwards the prior two months by 35K. Of course even these levels of job growth are puny compared with what we would expect to see in a normal recovery, but it sure is nice that things are improving—however modestly—instead of deteriorating as so many have been fearing. 

The Challenger survey of announced corporate layoffs in November also confirmed that there is no sign of any deterioration in the jobs market.

While I'm on the subject of good news, it is also nice to see that the mortgage purchase index (above chart) has registered some solid improvement in the past several months, albeit from very low levels. Things could be a lot better, to be sure, but a 20% pickup in new mortgage applications—which is echoed in a pickup of pending home sales—is a sign that consumers are able to respond to record-low mortgage rates, and the housing market is clearing.

Putting PIIGS debt into context

These two charts distill the essence of what is currently mesmerizing markets and economies around the world: the growing likelihood of one or more PIIGS defaults, which could potentially involve several trillion dollars worth of debt. Surely, the thinking goes, a multi-trillion dollar default would absolutely devastate the Eurozone economy, dragging most other economies down into an abyss even worse than the one we teetered on the edge of in late 2008.

Although "trillions" is undoubtedly a pretty huge number of dollars, the value of liquid, global bond and debt markets is about $110 trillion. The chart above shows the market cap of global equities, currently some $45 trillion. According to Merrill Lynch's indices of liquid bond markets, there are some $42 trillion of investment grade global bonds, and $21 trillion of high-yield global bonds. As the chart above also shows, the destruction (and creation) of trillions of dollars of equity cap happens routinely, sometimes on a daily basis. In one month alone (mid-September to mid-October '08), $15 trillion of global equity market capitalization was wiped out—not to mention the trillions that were erased from U.S. mortgage-backed securities—yet it was only a matter of 7-8 months before a global recovery got under way.

The world is a pretty big place, and markets are very deep. Italy's entire national debt is only 2% of the value of global capital markets, and much less if we add in the value of global property markets. Can the relatively tiny PIIGS tail seriously wag the huge global economy dog?

Stocks and bonds represent claims on future cash flows, and those cash flows in turn are generated by economies that are driven by billions of industrious workers utilizing hundreds of trillions worth of factories, roads, bridges, telecommunications systems, etc. Wiping out a few trillion of claims on those cash flows does not erase an economy's productive potential. It would be extremely disruptive, to be sure, but it's highly likely that at least 95% of those working today would be working and producing in the days, weeks, and months following even a multi-trillion dollar PIIGS default.

A big PIIGS default doesn't need to be earth-shattering. One important consideration that is often overlooked is that the world has had some 18 months to prepare for this. It won't be a "black swan" event that catches the world by surprise. The worst part of the financial collapse in late 2008 was just that: it came out of nowhere, totally surprising all but a very few, and the ensuing panic selling made things far worse than they otherwise would have been.


My apologies to those who frequent this blog and by doing so "contribute to our national paralysis." In his NY Times column yesterday, former editor-in-chief Bill Keller laments that one of the downsides of the internet is that it brings out the worst in economic commentary, distracting us from the unifying principles of "mainstream economics." If the only ones to comment were "serious scholars," then we could solve our national economic problems quickly. Instead, "lesser economists are thrust forward for their moment of fame as witnesses on behalf of dubious claims." As an example, he cites the 132 economists who agreed that Speaker Boehner's policy approach would "do more to boost private-sector job growth in America in both the near-term and long-term than the ‘stimulus’ spending approach favored by President Obama."

Reputable number-crunchers like Moody’s Analytics and some top-tier economists of both parties said Boehner’s statement would have little or no impact on the short-term employment problem. So who were these 132 economists? With a few exceptions they were academics from off-the-beaten-path colleges (no offense to Dakota State University), bloggers (the Calafia Beach Pundit?) and economists from devoutly libertarian think tanks.

And he went on to say:

Surely this dilution of authority contributes to our national paralysis. At the very least it befogs the discussion and fosters a pervasive cynicism.

I hasten to add that while Bill Keller and I graduated from Pomona College within a year of each other, I would like to think my training in philosophy (under the expert hand of the late Professor Fred Sontag) allowed me to keep a more open mind. Wisdom and experience do not come only to those in positions of "authority."

UPDATE: Another of the 132 signers of Boehner's letter writes a devastating critique of Keller's use and mis-use of economic theory in his Forbes column.

Housing price update

The September release of housing price indices reveals that prices appear to be still in a gentle decline, especially after adjusting for inflation. But after adjusting for the fact that real incomes are growing and borrowing costs are at all-time lows, housing prices are more affordable today than at any time in recent decades, as shown in the chart (below) of housing affordability (when the index is 100, that means a family earning the median income has exactly the income needed to purchase a median-price resale home using conventional financing; levels higher than 100 mean that a median-income family has that much more income than needed).

Commodity recap

With the future of mankind supposedly hanging by a Eurozone sovereign debt thread, paying attention to anything other than the political struggles in Europe to avoid default would seem silly. But since the damage has already been done, all we are witnessing these days is a game of financial musical chairs: who will be the unfortunate holder of PIIGS debt once it is eventually restructured? The economic losses have already occurred, since the PIIGS spent their borrowed money in very inefficient and non-productive ways. Debt defaults occur all the time, and they needn't imply the end of the world as we know it, even if they are huge. That's mainly because a debt default does not destroy demand, it simply makes lenders poorer and borrowers less poor—debt is a zero-sum game. But meanwhile there is no reason why a combination of defaults—surely Greece will default on a significant portion of its debt—restructurings, and more prudent fiscal policies couldn't allow the global financial markets to avoid a total collapse. And if the fiscal policy changes are growth-favorable (e.g., they avoid higher tax rates, and focus instead on flattening the tax code and cutting back on the size of spending relative to GDP), the global economy might even emerge from this mess in better shape.

So while we wait for the music to stop to find out who the winners and losers are, it might be worthwhile to review the action in the commodity markets.

Crude oil still trades at about two-thirds of what it briefly was worth in mid-2008, but it is still orders of magnitude more expensive than it was 12 years ago.

In constant dollar terms, crude is worth about 15% more today than it was in the early 1980s.

But we spend about one-third less for energy today than we did in the early 1980s, thanks to huge gains in energy efficiency. So on balance, energy prices do not represent an unprecedented burden on the economy.

Non-energy spot commodity prices are down 16% from their April '11 highs, but are still way above the levels that prevailed throughout the 1980s and 1990s.

Copper prices are about 25% off their highs, but still way above the levels of 10 years ago.

The problems in Europe may well have taken some of the edge off commodity prices, but by just about any measure, commodity prices are still relatively high. I think that reflects the fact that a) global demand remains sturdy, and b) monetary policy at most central banks remains very accommodative. I fail to find any sign in the commodity markets of a significant deterioration in the underlying economic fundamentals.

Consumers continue to deleverage

According to the Fed, delinquency rates on consumer loans have fallen significantly since the last recession. This is a sure sign that consumers have been actively deleveraging, and that is good. The most recent reading on all consumer loans, 3.15%, is below the 3.5% average since this series began in 1987. The most recent reading on credit card delinquencies, 3.5%, is substantially below the 4.5% average since the series began in 1991. As I've noted before, this is also evidence that deleveraging does not destroy demand or otherwise necessarily weaken an economy. When a borrower pays down his debt, the lender must do something with the money received; either loan it to someone else or spend it on goods and services. Indeed, consumer deleveraging is a very normal part of a business cycle recovery, as this chart illustrates; it is not something to be feared.

HT: Mark Perry. And as he notes, if we could only get the U.S. government to demonstrate the same kind of financial responsibility as U.S. consumers have....

The demise of the euro has been greatly exaggerated

With all the talk these days about the eurozone crisis, a coming eurozone crash, the death of the euro, etc., I thought it might be helpful to include this chart of the history of the euro from its inception through today, vis a vis the dollar. Maybe both are going down together, but the euro is still strong relative to the dollar. From the looks of this chart alone, you would never guess the euro is in serious trouble. Perhaps because it's not?