Friday, May 8, 2009

Green Shoots Or Rose-Colored Glasses

Just like yet another posthumous multi-platinum Tupac record, David Rosenberg resurfaces on Zero Hedge... Although, unlike Tupac, this is almost guaranteed the last incarnation of Rosie while a Merrill employee, doing what he does best - talking about employment trends and the consumer.

This is a boom compared to the post-Lehman collapse

Only the most ardent optimist would lay claim that the employment report today was a green shoot. Yes, yes, the -539,000 was broadly in line with ‘whispered’ estimates and certainly is less negative than the -707,000 average over the prior three months. If the benchmark for economic revival is the aftermath of the Lehman collapse when the credit market froze, suppliers went AWOL and consumers became comatose, then indeed, this looks like a virtual boom.

Nothing in today’s jobs report gives us that much comfort

But, in fact, all that has changed is the slope of the line when it comes to employment, output, spending or income. It is no longer pointing straight down in Wile E. Coyote fashion, but the fundamental trend is still down. Green shoot advocates miss the point. Recessions only end when the improvement in the second derivative morphs into something less fragile and more agile like improvement in the first derivative. Real cyclical bull markets only start once we are within 4-5 months of that improvement in the first derivative. Nothing in today’s jobs report gives us that much comfort.

January’s 741K decline was likely the worst we will see

At the risk of shooting the green shooters, let’s really assess the situation. Barring a catastrophe, it certainly looks as though the -741,000 print we saw in January was very likely the worst decline we will see in this recession. We won’t dispute that. But when you look at other cycles in the post-war era, what we see is that four months after the largest payroll decline, the losses are either negligible or we are actually swinging to positive job growth.

Employment has never been this weak before at this stage

So, the most appropriate way to examine the data is to see what the labor market looks like at this stage – four months after the biggest monthly collapse – and we have news for you: We are losing 539,000 jobs, or 0.4% of the workforce. In fact, employment has never been this weak before at this stage – a full four months after the worst figure. Not once. This post-credit collapse/asset-bubble burst cycle remains an enigma, and we strongly believe that investors today who are buying stocks and selling bonds in anticipation of a sustained reflation trade are going to end up as disappointed as they were under similar conditions in 2002.

Headline was actually worse than revised forecasts

As for the payroll report, the headline data was flattered by the addition of federal Census workers, which bolstered government payrolls by 72,000. The BLS birthdeath adjustment, when properly adjusted, also ‘skewed’ the number by nearly 60,000. So basically, adjusting for the Census workers and the Alice in Wonderland B-D adjustment, the headline payroll figure was really closer to -670,000. This means that the number was actually quite a bit worse than the post-ADP revised forecasts were calling for (shhh …don’t tell Mr. Market).

Widespread declines in private sector payrolls

Private sector payrolls actually sank 611,000 in April. The declines remain remarkably widespread with the diffusion index at 28%, which means we still have nearly four industries shedding their labor requirements for every industry that is bulking up on staffing (though admittedly a moderate improvement from the prior few months). Moreover, the data just do not square with the conventional wisdom permeating the investment landscape at the present time.
To wit:

You couldn’t tell we are in the midst of a commodity boom from this report, with employment in natural resources down 11,000.

And, we can see what an exciting 34.4 print on the ISM employment index brought manufacturing workers last month – 149,000 additional pink slips.

If the tech sector is back in revival mode, as we are told, then someone forgot to tell the HR departments at the firms that dominate this space because payrolls were cut 12,000. This was even worse than the 8,000 decline in March.

We keep hearing about how the real estate market is nearing some sort of bottom, and yet construction payrolls fell 110,000 and there were also 15,000 fewer real estate agents putting up ‘For Sale’ signs.

The leisure/hospitality stocks have been really hot of late. Here, we see that this industry laid-off 44,000 busboys, bell captains and bartenders last month in one of the worst numbers this sector has turned in during this down-cycle.

We would only have to assume that retailers were not fooled by the late timing of Easter in artificially underpinning their April sales results because they shed 47,000 workers on top of the 167,000 folks who were let go in the first three months of the year.

We keep hearing about how global exports and trade flows are now on a renewed uptrend, but again, there was no evidence of this in the payroll report considering that transportation services/warehousing employment tumbled 38,000. This was the very worst showing since right after 9-11. Green shoots for some economists, perhaps, but yellow weeds for any rational observer of what is really going on in the most crucial market of all for the economy – the labor market.

Even sectors that had been solid growth performers are now feeling the
spreading impact of this new world of frugality. Job gains of 15,000 apiece in education and health care are but a fraction of what were seeing before the credit collapse.

Amount of labor market slack is growing by the month

What is important about the employment data is that it provides us with so many clues as to what the inflation backdrop really looks like. So many market pundits draw their conclusions from the CRB index but there is no commodity that is any match for the labor market when it comes to determining the sustainability of any inflation pressure in the system. Even though the headline employment data are becoming “less negative”, if that is what turns you on, the reality is that the amount of slack in the labor market is growing by the month.

The unemployment rate jumped from 8.5% in March to a 26-year high of 8.9% last month – hard to believe it was sitting at 5% on the nose just this same time last year. Even here, the ‘official’ jobless rate grossly underestimates the degree of excess capacity in the labor market. The U-6 unemployment rate, which includes all forms of resource slack in the jobs sphere, edged up to a new lifetime high of 15.8% April from 15.6% in March.

Slack in labor market filtering into wages

This growing slack in the labor market is filtering through into wages. We see that average hourly earnings barely eked out any increase at all in April. This suggests that in real terms, personal income fell at least 0.1% during the month. That would make it four declines in a row for this critical 90% chunk of the economy. Not only that, but the steep slide in manufacturing payrolls – even with a pickup in overtime – spells for another 1.2% decline in industrial production for April. This, in turn, would take the capacity utilization rate – the ‘unemployment rate’ for industrialists – down to a record low 68.5% from 69.3% in March.

We maintain our constructive stance on Treasuries

As economists relying on data back to 1950, we have to admit that at no time have we ever seen the broad unemployment rate so high and the CAPU rate so low, and to think that any worker has any bargaining power or that any business has any pricing power given the massive amount of spare capacity in the labor and product markets is truly unfathomable. So it is against this deflationary backdrop that we maintain our constructive stance on safety and income and at a reasonable price, acknowledging that the Treasury market has moved aggressively against our view over the near-term. We are not swayed.

The duration of unemployment is surging

We can also see the strains from other pieces of the report. The male unemployment rate hit the 10% mark for the first time since June 1983. For both genders, the average length of time it is taking the ranks of the unemployed to find a new job has risen to 21.4 weeks from 20.1 weeks in March and 19.8 in both January and February – this is the highest level on record. The share of the unemployed who have been out of work for at least 15 weeks jumped 43.5% in March to 45.9% in April. The comparable figures for those who have been out of work at least a half-a-year jumped to 27.2% from 24.2% and up 5 percentage points since the turn of the year.

Job openings are practically non-existent

So, beneath the headline, what is so painfully obvious is how hard it is to find a new job – openings are practically non-existent. And what is truly grim is that the longer someone is out of work, the more discouraged they become, and over time, completely disengaged. For example, the number of permanent job losses has now approached almost six million for the first time on record and is up 176% over the past twelve months.

Most of these jobs lost will not be coming back

So, sadly enough, not only have we lost 5.6 million payrolls this cycle, shrinking the workforce by more than 4%, but the fact that there are so few opportunities as businesses adjust their production schedules to a new and permanently lower sales trendline, the data within the data reveal that most of these jobs are not going to come back anytime soon. While it is part of human nature to be hopeful, we can’t imagine that anyone can really put any sort of positive ‘spin’ on this report, but whoever does ostensibly didn’t get to Table A-8 on the complete unemployment picture.

We’re out of the hurricane, but it is still raining

There may be a growing sense that because the stock market has enjoyed a nice bounce, credit spreads have come in and new issue activity has perked up, that somehow things are going to get better in the real economy. Not so fast. We may be out of the hurricane, but it’s still raining outside. The economy bottomed in the summer of 1932 but the Depression did not end for another nine years and as a reminder, by the end of that decade, after seven years of grandiose New Deal stimulus, the unemployment rate was still at 15%, consumer prices were deflating at a 2% rate and we still had yet to reach the pre-Depression peak in GDP.

We must brace ourselves for a much more frugal future

Better does not mean good, and we must all brace ourselves for a much more frugal future. This does not mean the world falls apart. It means that lifestyles are going to change: frugality replaces frivolity, the family budget plan includes more savings for retirement and education, attitudes towards credit and discretionary spending shift, and owning the largest home on the block and the flashiest car is no longer going to be fashionable.

Focus on high-quality securities

For investors, this means focusing on high-quality securities – not the ‘junk’ that has led the way in this impressive but, in our view, still-vulnerable rally in risky assets. For those that missed the big nine-week move, don’t worry. Be patient. The story was right – the tortoise always wins the race.

Another 550,000 payroll plunge in May

As for the near-term employment outlook, some believe that the jobs data are about to look better because the markets have enjoyed a nice two-month rally. We will forecast the data on the tried, tested and true leading indicators on the ground. The still record-low workweek, at 33.2 hours, the 66,000 downward revisions to the back data (which tends to feed on itself) and the 63,000 slide in temp agency employment, coupled with the levels of both initial and continuing jobless claims, are foreshadowing a further 550,000 payroll plunge when the May data roll out in early June. That green shoot just turned into a dandelion!

Needles in the proverbial haystack

We don’t want to finish up on such a dour note. As with every report, there were some needles in the proverbial haystack. For example, the Household survey showed a 120,000 employment pickup but in reality, it was only a modest retracement from the 861,000 slide in March, not to mention the cumulative 2.5 million jobs lost in the first four months of the year. Even here, there is less than meets the eye, because three-quarters of the gain in the Household survey was people taking on a second job. Again, as we peel off the layers of this onion, we learn that whatever good news there may have been wasn’t so good. Best to stop there … and smell the weeds! Sphere: Related Content
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