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A tale of two jobs reports


The establishment survey of payrolls has been disappointing of late, finding an average monthly gain of only 105K new private sector jobs over the past four months. (I focus on private sector jobs because that's where the action is; the public sector workforce has been shrinking for the past three years due to budget cutbacks, and I view that as a good thing.) In contrast to the establishment survey, the household survey has registered a relatively strong average gain of 235K jobs over the same period. Since the jobs recovery began in early 2010, the household survey has registered about 5.1 million new private sector jobs, while the establishment survey has recorded 4.3 million. This discrepancy between the two surveys is large, and somewhat troubling. One survey says jobs growth is weak, the other says it is decent. Which one to believe?

The household survey is typically better at picking up new jobs in the early years of a recovery, since it is based on a sampling of the entire population, whereas the establishment survey only samples known businesses. So if there are lots of new businesses being formed, especially small ones, the household survey will find those but the establishment survey won't find them until a year or so from now when it is recalibrated to match IRS data. I'm inclined to trust the household survey more than the establishment survey right now, and so I conclude that the economy is still growing at a modest/moderate pace—nothing to get excited about, but nothing to get upset about either.


Another encouraging aspect of the June jobs report is that the labor force (all those with jobs plus those who are looking for jobs) is once again growing. Over the past year, the labor force has grown 1.1%, which is roughly its long-term average. Over the past six months, however, it's up at an annualized rate of 1.7%, and it has now reached a post-recession high. The overall growth of the labor force since the recession started is of course still miserable—the worst performance in modern times—but the change on the margin is now quite positive.

A weak dollar points to need for supply-side policies

The dollar is very weak, which is good evidence that monetary policy in the U.S. is very accommodative. But at the same time, the demand for Treasuries is very strong, which suggests that the market is extremely risk averse. What's needed is fiscal policy inspired by supply-side principles, not more monetary ease.


This chart shows the dollar's inflation-adjusted, trade-weighted value against a very large basket of currencies (over 100) and against a basket of major currencies. This is arguably the best the way to measure the dollar's value vis a vis other currencies. No matter how you slice and dice the numbers, the dollar remains at or near its lowest levels ever. A weak dollar measured against almost all currencies in the world is a prima facie evidence that dollars are in abundant supply relative to the supply of other currencies. There is no shortage of dollars; the Fed is not restricting the supply of the dollars, either intentionally or unintentionally. This observation can be confirmed by measuring the dollar's value relative to almost any commodity.



The price of gold and the value of the CRB Spot Commodity Index are both much higher than they were a decade ago when monetary policy was intentionally tight—whether measured in nominal or in constant dollars. It takes a lot more dollars today to buy these commodities.



The same can be said for the price of crude oil, which, although it has weakened some this year, is still very close to an all-time high in real terms.



In stark contrast, the extremely low level of Treasury yields tells us that the demand for Treasuries is extremely strong, and that Treasuries are relatively scarce. Real yields on 10-yr TIPS are negative, which means that those who buy TIPS today are willing to sacrifice 0.5% of the future purchasing power of the dollar per year in order to be sure of not losing even more by investing in other things. There are plenty of dollars in the world, but there is a relative shortage of risk-free, interest-bearing securities, and Treasuries are still the standard against which all other securities are measured.

How can Treasuries be in short supply if there is over $11 trillion of Treasury debt held by the public? (The Fed only holds about 10% of the Treasuries held by the public, hardly enough to make a significant difference in the relative supply of Treasuries.) The answer is that the demand for Treasuries is extremely strong, and that implies that the world is extremely worried that the return on alternative investments is likely to be very low—which can only be true if the prospects for economic growth are miserable.

In other words, it is almost certainly not the case that the prospects for growth are miserable because the Fed has not been generous enough with the supply of dollars. The Fed has increased the supply of bank reserves to such an extent that there are now $1.5 trillion of excess reserves—reserves that are not needed to back up bank deposits, and which are being held by banks because they are still very risk averse. If the Fed were to engage in yet another round of quantitative easing (which would involve the purchase of more Treasuries and the creation of more bank reserves), this would only exacerbate the relative scarcity of Treasuries, and would not likely do much if anything to increase the relative supply of dollars, which are already in abundant supply. More monetary ease could also exacerbate the problems already caused by an extended period of super-accommodative monetary policy, as the eminent John Taylor explains in his WSJ op-ed today:

... loose monetary policy was likely a big factor pushing up commodity prices. The current sharp slowdown in most emerging markets coincides with an inevitable bust of this easy-money induced boom, and the decline of foreign demand for American goods is now feeding back to the U.S. economy.

Indeed, one reason that global growth prospects are dismal is precisely because monetary policy has been so accommodative. Think about this: all currencies are weak relative to gold and commodity prices, not just the dollar. Central bankers can only do so much to stimulate growth, and they have probably done too much already. That might explain why the market's reaction to today's coordinated easing by the central banks of England, the Eurozone, and China was tepid if not negative. Enough with the easy money stuff, what we need is a reason to be genuinely confident about the future. In the absence of any clear vision in Washington or the Eurozone for fiscal policies that could accomplish that, what we are left with is a market that is extremely risk averse.

From my supply-side perspective, what's needed is fiscal stimulus that shrinks the relative size and scope of the public sector (yes, cutting government spending from its current lofty level is quite likely to be stimulative because it allows the private sector to more efficiently deploy the economy's scarce resources), reduces the burden of regulations, broadens the tax base, and lowers and flattens tax rates. We've had enough money printing and faux-stimulative Keynesian policies. Going forward, governments need to step back and give the private sector a chance to work its magic. Unfortunately, Romney only imperfectly understands this, while Obama believes in the exact opposite. The market is pointing politicians in the right direction, if they would only pay attention to its signals.

Service sector disappoints, but ADP beats

Today's news was mixed, with the biggest disappointment coming from the ISM service sector report. Other releases, however, were generally positive. Overall, I don't think this provides any new insights into the economy's health, but there is very little if any support here for the view that the economy is once again slipping into a recession. It's just more of the same: an economy growing at a disappointingly slow pace.


The ISM service sector survey (top chart) came in below expectations, and definitely looks weak; it might support the case for another recession. However, the employment index (second chart) picked up a bit. With a plunge in new orders driving the decline in the overall index, this might be a case of Eurozone-induced anxiety rather than any fundamental deterioration in the economic fundamentals.


The ADP employment report was quite a bit stronger than expectations (176K vs 100K). As the chart above suggests, this points to a payroll report tomorrow that could be stronger than the 100K expected. That would definitely rule out a recession.


Weekly unemployment claims were on the low side of expectations, and there is no sign that the downtrend that began over three years ago has come to a halt or reversed. Nonseasonally adjusted claims (chart above) were down over 13% from year-ago levels, and the 52-week average of claims continues to decline. No sign here of any incipient recession. Moreover, the total number of people receiving unemployment insurance has dropped by 1 million (over 15%) over the past year, and that means that the incentive to find and accept jobs continues to rise. 


The Challenger tally of announced corporate layoffs fell, and as the chart above shows, this index is quite low, showing no signs of any unrest in the corporate sector.

Apple has trounced MSFT


This is the most powerful evidence I've seen that Microsoft has been trounced by Apple. See the full story here.

UPDATE: Here is a chart which makes the same point from a different perspective. Apple's $574 billion market cap is now more than double Microsoft's.


Gloomy 4th at the beach


It's a "May-June gloom" day at Calafia beach today, unfortunately. Water temp 65ยบ, cloudy skies, but decent surf. That hasn't stopped thousands of people from flocking to beach however. Here's a shot from near the San Clemente pier, which shows how one enterprising group has claimed a choice bit of beach front in order to watch the fireworks tonight—and furnished it with astroturf, patio furniture, and a gas BBQ!

Auto sales remain strong


June auto sales beat expectations (14.05 million vs 13.9), and the increase over the past year was a very impressive 23%. Sales never move in a straight line up or down, so it's the trend that is most important, and there is no sign that the trend has faltered. From the recession low of early 2009, sales are up over 50%. That's a robust gain of an annualized 14.5% rate, and strong evidence that the economic fundamentals are improving. The economy is still in recovery mode, to judge by this indicator.

The decline in gasoline is just about over


This chart compares wholesale gasoline futures (orange line) with the AAA nationwide average price of regular gasoline at the pump (white line). Futures naturally tend to lead retail prices, and now that futures prices have been flat for the past month, the big decline in pump prices is just about over. Crude prices have ticked up this past week on Middle East tension, which is more reason to suspect that the decline in gasoline prices is essentially over for now. At these levels, gasoline prices don't present any particular threat to the economy, and may even be a source of some comfort.

Factory orders are weak, but fear is declining



Nondefense factory orders in May proved to be stronger than expectations (+0.7% vs. 0.1%), and capital goods orders were revised a tiny bit higher, but neither series shows any meaningful growth. This is more confirmation of the already-known fact that economic growth has been weak in recent months. We've seen slowdowns and pauses such as these before without it being the precursor to a recession, so this does not necessarily bolster the bearish case for the economy.


I think it's more likely that the recent economic weakness is the by-product of Eurozone fears, rather than the beginnings of a recession. Fortunately, those fears are once again subsiding, as the chart above suggests. Spanish 2-yr yields are down almost 150 bps in the past two weeks, as the near-term likelihood of a Spanish default has dropped meaningfully. The Vix/10-yr ratio has backed off its recent highs at the same time, driven mainly by a decline in the level of market fear—the Vix index has dropped from a high of over 27 a month ago to 16.4 today. 2-yr Eurozone swap spreads are in the low 70s, which is still elevated, but substantially lower than the 100+ numbers we saw at the end of last year. 10-yr Treasury yields remain extremely low, however, which means that the rise in risk assets of late (commodities are up over 8% in the past two weeks, and the S&P 500 is up over 7% in the past month) is being driven by a decline in pessimism, not a rise in optimism.

Why the iPhone proved so disruptive

The iPhone recently celebrated its fifth birthday. In the brief span of 5 years it has truly been revolutionary, and is now selling at the rate of more than one million per day. The always-perceptive John Gruber explains why:

What’s happened over the last five years shows not that Apple disrupted the phone handset industry, but rather that Apple destroyed the handset industry — by disrupting the computer industry. Today, cell phones are apps, not devices. The companies that were the most successful at selling cell phones pre-iPhone are now dead or dying. “App” is now a household word.

Indeed. The iPhone was never just a better phone, it was a better computer—totally portable and always on. Making and receiving phone calls is just one of the amazing things this pocket computer can do.

Housing price update



Mark Perry has a nice post detailing the May CoreLogic report on housing prices. It's very similar to what the Radar Logic series is showing: over the past year, the decline in housing prices appears to have come to a halt. CoreLogic actually shows prices increasing 2% in the year ended last May. I've created the two charts above, which cover data going back to 1976, to provide some long-term perspective. I note, for example, that prices today are about 30% below their 2005 high, but still 540% above their 1976 low. That represents an annualized gain in real terms since 1976 of about 1.2% for the typical home, and that does not seem out of line given the larger size and more feature-laden homes of today.

Construction spending continues to improve


Construction spending continues to improve: over the past year, total spending on residential and nonresidential construction is up 7%, with residential spending up at 9.5% annualized pace over the past six months. The sector has been very weak for the past several years, but is now enjoying a nice rebound that should have legs. Construction subtracted from overall economic growth for roughly 5 years, but now it is contributing, albeit only very marginally.

Manufacturing sector slows


The June ISM survey of the manufacturing sector came in substantially below expectations (49.7 vs. 52). This is the first time it's been below 50 (the point at which, according to the PMI people, the manufacturing sector begins to contract instead of expand) since Dec. '07, which was just before the last recession began. As my chart above suggests, however, it takes a reading below 46 before the entire economy is likely to be contracting. Today it is saying that with the manufacturing sector having weakened—with most of the impact related to Eurozone problems—the economy is likely growing at a 2% pace or perhaps a bit less. That happens to be where the current consensus of opinion is, I believe, so in that sense today's ISM report is not new news.

I note that the correlation between the manufacturing sector and real GDP has not been as strong in recent years as it has been during other business cycles, with manufacturing being much stronger in general than the overall economy. Perhaps that pattern is changing (i.e., manufacturing now tending to move more in line with the rest of the economy), but even so today's news is not a clear-cut recession indicator. It mostly confirms what we already know: the U.S. economy is growing at a very slow rate, and the troubles in Europe are one big source of anxiety.


The export sector is the main source of weakness in the manufacturing sector.


Weak commodity prices are the main source of the decline in the prices paid index.


The employment index continues to be a bright spot in the manufacturing sector. Why would this be so strong if the overall manufacturing sector is supposedly on the verge of contraction? One guess is that the weakness that is surfacing in the PMI indices is being exaggerated by the very visible problems in Europe. Everyone knows that the Eurozone is experiencing tremendous difficulties, and that a good part of the region (the southern region) has been in recession for awhile now. Yet the Eurozone accounts for only 12% of U.S. exports, with Spain, Italy, Portugal and Greece accounting for only a small fraction. Even if those economies were in total collapse the impact on the U.S. economy would be minor. But right now the specter of a Eurozone collapse has had a debilitating impact on everyone's confidence—thus the weak PMI reports, which are at times influenced by psychology. The employment index may be less influenced by psychology and instead more driven by facts; after all, manufacturing payrolls have been steadily increasing so far this year, rising at a 3% annualized pace.


This last chart compares the ISM indices for the U.S. and the Eurozone economies. Is the Eurozone tail finally beginning to wag the U.S. dog? That has been and remains a key question. I'm not terribly worried, and I note that Eurozone swap spreads have improved substantially so far this year, suggesting there has been meaningful improvement in the Eurozone fundamentals.