An economic slowdown points to low inflation and declining Treasury yields

The January employment report augments other recent evidence indicating the pace of economic activity has slowed. Those reports, as well as other developments and trends in the US and around the globe suggest that a slower economic growth pace will persist. That will come as a pronounced disappointment to those depending on the mistaken consensus forecast of a strengthening US and global economy, a US capital investment boom, rising inflation and rising bond yields.

Instead, Treasury bond yields are likely to retreat further from their recent highs along with slowing inflation and sluggish commodity prices. Equity prices are vulnerable after last years spectacular price rise, which far outdistanced the pace of  GDP or corporate earnings. Also, the 10-average price-earnings ratio at the end of last year was an excessive 25, versus a long-term average of 16.5. And the January decline in equity prices far more often than not points to weakness by year end. Even with slowing inflation, gold prices are likely to benefit from the likely continuing economic upheaval in the emerging world and political uncertainties connected with Syria, Iran and Ukraine and elsewhere.

The January 113,000 rise in non-farm payrolls is up from a revised 75,000 increase in December. But, that is down from three-month average increases near 200,000 in October and November and even higher increases early last year. Though adverse weather may have been a  factor suppressing employment gains the past two months, a relatively steep January rise in weather-vulnerable construction employment suggests the overall weather impact was marginal. There are a number of long-term employment negatives potentially at work including the adverse impact of the health care act (Affordable Care Act), the anti-capitalism thrust of the assault on the one percent and increases in the minimum wage, which cuts employment.

The January unemployment rate edged down to 6.6% from 6.7% in December, close to the 6.5% cited by the Fed as an interim objective. But the decline in the unemployment rate has been overly influenced by the plunge to near three and a half decade lows in the labor force participation rate.That is a reflection of discouraged workers unable to find employment and just leaving the labor force, thereby artificially reducing the unemployment rate. If the labor force participation were at normal levels, the unemployment rate would still exceed 10%. The U-6 unemployment rate, which includes the discouraged unemployed and part-time workers who could not find the full-time work they preferred, has come down but is still an excessive 12.7%. The Fed recognizes the disparity between the official but misleading narrow unemployment rate and the real state of employment. Accordingly, while the scaling-back or tapering in Fed purchases of Treasuries and mortgage backed bonds may persist, there will almost certainly be no rise in the essentially zero Federal fund rate until late 2015 or 2016 or later.  There are many other reasons beyond employment weakness for expecting a continuing accomodative Fed policy. These include a more sluggish economic and inflation pace than widely anticipated.

Car sales have slowed, manufacturing orders have plunged, home sales have weakened with the rise in mortgage rates and still tight lending constraints. Inventories are high and retail sales have been disappointing. This no inducement for the projected rise in capital spending despite low and declining productivity gains. The problems of Detroit and Puerto Rico are causing restraint in employment and spending in state and local governments across the country.

And in the rest of the world there are also pronounced economic problems.China is just beginning to deal with its private banking credit explosion to finance grossly overbuilt real estate. China's GDP growth rate has slowed to 7%, with the risk of still slower growth after years of  faster growth and even double digit  gains. China's purchasing managers index fell to 49.5 in January, indicating contraction.  China's economic slippage has slowed global demands for many basic commodities, especially affecting commodity producing economies in the emerging market. Recessions are projected for Argentina and Venezuela.  Europe is still far from experiencing a robust recovery. Indeed, deflation remains a threat for Europe.It is already a reality for Greece, Cyprus, Latvia, Portugal, and Spain.  That is raising expectations of rate cuts by the European Central Bank.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square, #249
East Northport, New York 11731

I can be reached a Philipbraverman@Gmail.com

The economic and financial outlook remains uncertain

Despite a steep rise in bond market interest rates in recent months, the supposed reasons for the yield rise do not, in reality, adequately justify the move. That does not preclude a further bond yield rise, but it does suggest that the rise will be eventually reversed.

There are numerous factors behind the market's mistaken yield rise, including the Fed's indication that it will soon begin tapering its $85 billion monthly purchases of Treasury and  mortgage securities. The market reaction is both a response to the promised first step in an eventual reversal of the Fed's accomodative policy and a wrong-headed assumption that the Fed's decision indicates the economic recovery is not only turning more robust, but sufficiently to foreshadow accelerating inflation,which is a key determinant of bond yields. The Fed's expansion of money is also widely but mistakenly believed to make an upsurge in inflation a certainty. The slowdown in World economic growth was thought to have been the major force keeping that Fed induced inflation from occurring. But, disinflation prospects only appeared to be lightening with some dubious signs that the economy in Europe and China was improving  Another force behind the market yield rise has been panic selling by holders of troubled municipal bonds, both by individual investors and by mutual bond funds, which needed to get ahead of withdrawal requests. The rise in equity prices is an additional factor in a shift of investor funds from bonds to equities, which has contributed to the yield rise.

Let us look a little more critically at these various issues. Yes, the Fed is under pressure to at least begin the process of reversing its stimulus. The Fed is trying to prevent outright deflation and create some speedup of inflation. But, the realty is that the Fed expansion is merely replacing private debt in the extended deleveraging process that has years yet to go. There is no inflation risk. Not with huge excess, unused, capacity to produce and still massive unemployment and underemployment. Some cite the formula MV = PT (where M is the money supply, V is its velocity or turnover in terms of GDP, P is prices in GDP and T is GDP  transactions) to attempt to prove that the rise in M, money supply growth, with a stable V, or money velocity,  will necessarily produce a rise in P, prices, in other words, inflation. But, the velocity of the money supply is declining. Nevertheless, there are some in the Fed, and many outside the Fed who do not recognize that truth. However, in order to placate those pressures, Fed Chairman Bernanke has been willing to appear to begin the process. But, he and others likely to be at the helm at the Fed, after Bernanke leaves, including Summers and Yelen, recognize that the economic recovery is both fragile and vulnerable, with no inflation.  One of the few bright spots in the economy had been the recovering housing sector.  But, the rise in mortgage rates has curtailed the housing recovery. That and the still weak employment picture will keep the Fed maintaining an accomodative policy through next year and probably beyond. There is a pronounced shift in employment toward part-time work, of less than 30 hours a week, instead of full-time work. This undoubtedly reflects employer efforts to avoid health-care costs. The labor force participation rate, the percent of the population in the labor force, is at a 35-year low. The non-farm payrolls and unemployment rate are artificially improved by such perverse trends. With all this in mind, the tapering of Fed bond buying will be slight and slow and will certainly not be a precursor of a shift to a restrictive Fed policy for a very extended period of years.

As if this were not enough, the European economy is certainly not out of the woods. More signs of the true state of their economic problems will be evident after the German election. And China has a real estate bubble that has not yet burst. Also, there is a transfer of low cost manufacturing from China, where there are rising costs, to still lower cost producers, which will be disruptive to China's economy. In addition, there are economic uncertainties ahead introduced by the threat of  a US attack on Syria, the potential for a shut down of the Government over a stand off on the debt ceiling, worries over Puerto Rico's finances, unknowns over the Affordable Care Act, and the possibility of a strike against Iran's nuclear facilities.

Where do you invest in the midst of these and other potentially adverse developments. The July decline in durable goods orders to below year ago levels may portend weakness ahead, but it made GE bonds a better buy. One investment to consider is an investment grade Wells Fargo Corporation preferred issue (WFC+L ) with a coupon of 7.5%, yielding 6.7%, that is not callable, but that can be converted by Wells Fargo only when the underlying stock roughly quadruples.

Philip Braverman, President
Braverman Economic and financial Consulting
One Hewitt Square #249
East Northport, N.Y. 11731

The outlook is for further declines in Treasury and high grade bond yields

While the April employment report was stronger than the markets feared, it was certainly not an indication that the US economy is on a vigorous growth path. Indeed, the US economy remains sluggish and even vulnerable to retrenchment in response to a delayed reaction to Federal  tax increases, sequestration, the financial burdens of health care costs and the slowing global economy. That combination promises a continued pattern of restrained inflation (with a persistent risk of deflation), weak commodity prices, and a continued easy Fed policy.

April nonfarm payrolls rose 165,000, only seemingly strong in contrast to the 88,000 rise (before subsequent upward revision) originally reported the prior month. The unemployment rate edged down to 7.5% from 7.6% in March, and not as in the prior month because of a 496,000 plunge in the labor force. But this is hardly a truly strong employment report. This is certainly not an impressive employment gain.considering that it is not even sufficient to meet the job requirements of a normal pace of new entrants to the the labor force. Moreover, the entire rise in  employment contributing to the decline in the unemployment rate was due to a rise in "self employment"-which is often a questionable description of reality.  The broader measure of the unemployment rate, U-6, actually rose to 13.9% in April from 13.8 % in March. And equally significant, there is also an array of  recent weaker economic reports .Average weekly earnings and the average number of hours worked both declined in April, a potentially significant development. Factory orders, a leading indicator, fell sharply in March to 467.3, from 486.8 the month before.  Durable goods order were particularly weak. suggesting business caution. This seems confirmed by a decline in nonresidential spending in March.  While GDP rose at a  respectable 2.5% annual rate in the first quarter, if  recent reports persist the pace of real GDP will be significantly slower in the current quarter. The realty is that the US economy can not be counted on to be the vigorous engine of global economic recovery that many expect it to be.. Except for Germany, all of Europe is either in or at risk of falling into recession. The unemployment rate in both Greece and Spain are at 27%, depression levels. With austerity mandated as the price of  financial assistance, no  imminent economic rebound appears likely in Europe. Japan's economic outlook  remains questionable, despite bold monetary stimulus. And China's estimated GDP growth, reportedly at about a 7% rate, and of dubious validity, is weaker than anticipated. Moreover, China has its own construction bubble that has yet to burst.  This combination will keep inflation subdued and central banks around the globe committed to an easy money and credit policy for an extended period of time. That will not lead to an inflation surge, if at all, for years and years to come .  There is too much of a gap between production demand and capacity, too many unemployed and too much required  further deleveraging of excessive reliance on debt. As a consequence there will likely be a continued downdraft of commodity prices, probably including gold after its recent run-up after India's buying runs its course.

And though it may seem hard to believe, long term US Treasury and other high grade bonds will continue to improve in price and decline in yield as there is increased market recognition that the outlook is for low inflation,or worse, weak economies, commodity price doldrums and persistent central bank easing.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square  #249
East Northport, NY 11731

This and earlier reports can be accessed at philipbraverman@blogspot.com

The recent rise in Treasury bond yields will be reversed as economic data turn less buoyant

Signs of improvement in the economy are likely to prove fleeting. But the overwhelming consensus of economists and other forecasters is that the evidence of a step-up in economic activity is not only real but a harbinger of even more robust gains in employment,corporate profits,inflation and economic activity just ahead. It is no surprise then that the credit and equity markets are responding as if there is no doubt that the economy is on a sustainable and strengthening growth path. Thus, when there is the inevitable rude awakening to the realty that the economy is still struggling,keeping inflation only a distant threat and the Fed committed to its current easing course for an extended period,the recent rise in bond yields will be reversed. Much was made of the deceptive drop in the official February unemployment rate to 7.7%, down from,7.9% in January and 8.3% a year ago. However, the number employed is up a mere 1.04% over the past year. It is significant that this 1.04% annual employment growth is at or less than the normal trend growth in the labor force. Thus, the only reason the unemployment rate has declined is because the labor force trend growth has been cut in half to 0.45% over the past year. This is due to a greater than normal drop-out from the labor force of unemployed discouraged workers, early retirees and graduates returning to school. Even the recent growth in employment may be grossly overstated because of reconstruction employment connected to repair of storm damage and replacement demand. Inflated seasonal adjustments may also be responsible for the seeming recent signs of economic strength Also, the increase in Federal taxes and mandated cuts in Federal spending and other major adverse effects on employment have not yet had their impact. But they soon will. Together these depressants on economic growth will likely have a significant adverse effect on employment sufficient to raise the unemployment rate. In addition, other economic indicators cast an ominous shadow on the future. Conference Board Consumer Confidence,for example, showed an increase for February but is still down 2.8% from a year ago. But, the University of Michigan confidence conversely declined in early March to 71.8 from 77.6 in February. There is bound to be a further negative impact on employment and other measures of economic activity as business prepares for the financial burdens of the health care legislation. To prepare for healthcare some businesses will be downsizing, while others will be shifting to part-time workers. Added to these economic negatives is the deflating real estate bubble in China. The Chinese government has moved to restrict real estate speculation by limiting the purchase of investment apartments to one per family. But the damage has already been done with huge overbuilding of unoccupied cities that are too costly for the limited middle class population. The result is a sharp curtailment of the demand for basic resources used in construction. In the meantime, the recession in Europe persists and may well be deepening. In concert, these various developments and trends place a significant drag on the US economy. Philip Braverman, President Braverman Economic and Financial Consulting One Hewitt Square #249 East Northport, New York 11731 I can be reached at philipbraverman@gmail.com

The November employment report is an ominous portent of sluggish economic growth or recession

A decline in the November unemployment rate to 7.7%, from 7.9% the month before, and a still disappointing 146,000 November rise in non-farm payrolls were mistakenly viewed as signs of a strengthening economy. In response, yields in the US Treasury market rose and equity prices prices advanced. But, the realty is that the US economy is growing only feebly and remains vulnerable to slipping into stagnation or even recession. The unemployment rate declined in November only because of an ominous 350,000 plunge in the labor force, which more than offset a 122,000 decline in employment and a commensurate rise in unemployment in the Household survey. The 350,000 drop in the labor force reflects the continuing rise in the number of the discouraged unemployed, workers who have just given up looking for employment. Instead of declining, the reported labor force should be rising on a trend basis to reflect the growth of US population and school graduates. If the labor force had merely held stable in November, the unemployment rate would have increased to 8.0% instead of the dropping to 7.7% as reported. The percent of the population still in the labor force, termed the participation rate, is at record lows, a clear indication of the dire state of the employment situation. And the U-6 unemployment rate, which includes discouraged workers and those who unwillingly have taken part-time work because they cannot find full-time work, was 14.4% in November. The 146,000 rise in employment in the separate non-farm payroll survey is still disappointingly slow. Even if this rate of non-farm payroll rise were to persist, it would take years to return to full employment. And, there is a reasonable doubt that even this sluggish rate of employment gain will be maintained. There are too many negatives in the US and global economy for confidence that the pace of employment will significantly accelerate. And, there is certainly nothing in the November employment report to justify optimism that US economic growth will accelerate, or that inflation will intensify on a sustained basis. Instead, the US economy appears destined to either remain sluggish or slip into recession. There still must be a reversal of the excess indebtedness of all sectors of the US economy, including the debt of consumers, corporations, as well as the debt of the Federal, state and local governments. That alone mandates a slow economic growth pace. The expansion of Federal debt is, in effect, a cover for a lessening in the leverage of the other sectors of the economy. Consumers have to increase their savings rate as they scale back their high percentage of indebtedness to income. Corporations are likely to continue cautious over borrowing, despite historically low interest rates, as they limit their capital investment and employment expansion. The prospect of an increase in taxes and uncertainty over health-care and pension funding costs also deter business confidence. State and local governments are restrained by mandated requirements to balance their budgets, unfunded pension liabilities and high indebtedness as a percentage of their tax receipts, which constrain their access to market credit. There is little or no indication that a compromise can be reached before year-end to avoid the fiscal cliff's steep increase in taxes and sharp cuts in spending that will be imposed beginning in January. The fiscal cliff will impose an economic burden equal to some 4% of GDP, enough to push the economy into a recession. There are indications that both sides are continuing to play politics rather than offering serious compromises. For example, it is not necessary to raise marginal tax rates to increase tax revenues. Eliminating deductions will accomplish the same objective, as would eliminating subsidies to restrain spending. Europe appears to be slipping into a recession. The efforts to resolve their problems are designed to avoid the hard decisions and postpone the day of market failure. China's growth has slowed significantly. Though some recent data indicate a possible economic pick-up, The noted investor and analyst Marc Faber doubts that China's growth exceeds 4%, which would be a sharp growth slowdown from their prior pace. This, together with the recession in Europe and sluggishness or worse elsewhere, points to slow global inflation pressures,including commodity prices,and a possible global recession. In concert, this array of factors indicates a renewed decline in Treasury and other high grade yields. Municipal yields are benefiting from investors' efforts to protect themselves from the expected rise in marginal tax rates. However, there have been discussions that call for exempting tax-exempt income only up to the 28% tax bracket. That approach would impose a partial tax on currently tax-exempt income for those paying higher marginal tax rates. Grandfathering existing municipal issues from such an arrangement is possible, but has not yet garnered major support in discussions. If a US recession does materialize or we do go over the fiscal cliff, it would almost certainly lead to a cyclical decline in equity prices. Philip Braverman, President Braverman Financial and Economic Consulting One Hewitt Square #249 East Northport ,N.Y. 11731 This and prior reports can be accessed at Philipbraverman.blogspot.com I can be reached at Philipbraverman@Gmail.com

The September drop in the unemployment report does not preclude a coming US recession

The equity and credit markets mistakenly responded to the October 5 report of September employment as if the US economy is firmly entrenched on a strengthening recovery track. Nothing could be further from realty. The US economy continues to struggle with stall speed-real GDP growth of only 1.3% in the third quarter, even slower than the 2.0% growth in the second quarter. This near recession in US growth is certainly understandable with the contagion of a deepening recession in Europe, and weakening growth in China and elsewhere in Asia. And with the fiscal cliff of an up to 4% real GDP depressant from mandated Federal spending cuts and tax increases starting in January next year,and perhaps partially foreshadowed in the final quarter this year, a US recession has to be viewed as a likely prospect, even if admittedly not yet a certainty. The credit and equity markets are making a fundamental error in judgement in assuming that there will be a last minute compromise before year-end to avoid the fiscal cliff. There are too many reasons to believe otherwise, regardless of who wins the Presidency. With either winner it will take time to craft a reasonable two-party compromise. If Mitt Romney is the winner, he is likely follow the tradition for a new Presidential administration to take an impending recession early in its first term. And with the intransigence of Republicans in Congress to compromise, it is understandable that President Obama is reported to be inclined to accept a first quarter 2013 recession in order to strengthen his hand in forging a reasonable compromise with Congressional Republicans. There are two basic surveys in the monthly employment report. One of them, the non-farm payroll survey reported a rise of a mere 114,000 in September. This pace is not even adequate to create enough jobs for new graduates and other entrants to the labor force. It is certainly not a sufficient pace to rehire the massive net loss of over 4 million workers that employers shed in the recession. Many of these continuing unemployed, at least for the time being, have given up looking for work, and as a consequence are no longer technically considered included in the labor force. That realty makes it all the more inexplicable that the other employment report, the household survey, included an unbelievable drop in the September unemployment rate to 7.8% from 8.1% in August. This was due to a reported 873,000 September rise in employment in that survey. But most of that reported rise in this report was due to a rise in part-time work. Moreover, a number of analysts characterized this rise in employment and the resultant drop in the unemployment report as spurious. Though I doubt it, Jack Welsh,former head of GE, has implied that it is even possible that the drop in the unemployment rate was a put up job for political reasons. The equity market was boosted by the false inference from the unemployment report drop that the economy is strengthening. And that erroneously assumed economic strengthening was misinterpreted as raising the risk of inflation and an earlier end to Fed ease, which contributed to a temporary sell-off in US Treasury bond prices. But, not all the markets are moving in tandem. The corporate and municipal bond markets are continuing to improve in price and decline yield as the these markets respond to fears of a rise in marginal income tax rates and the intense search for yield. Philip Braverman,President Braverman Economic and Financial Consulting One Hewitt Square #249 East Northport, New York 11731