Barton Biggs,the legendary Wall Street investment strategist formerly at Morgan Stanley, this week indicated that the worst is over for the economy and the equity markets. As readers of this blog know, I disagree.
But, lets examine Barton Biggs reasoning. First, he argues that the Fed has finished easing. And when that has occured in the past, the equity market averaged a 5% rise in the subsquent three months and 12% over six months.
Second, he argues that we are close to the cyclical bottom in new home sales and construction.
Third, he argues that there is a huge amount of liquidity waiting to invest.
And fourth, he contends that stocks are cheap.
But, he also points out that financial services are "busted" and that there will be more writeoffs.
Now lets examine these arguments. In the past the timing of the beginning and ending of Fed easing was far different than in this business cycle. Typically, in the past, the Fed firming in response to inflation concerns brings on a recession. But, there are usually extended lags before that recession is recognized. That allows the recession to become more entrenched. The Fed then eases, only ending its easing when it is clear the recovery is underway. The recession in the meantime has surpressed inflation concerns. This time the Fed easing was preciptated and propelled by a financial crisis, not a recession. But, that does not mean that a recession will be avoided. This time the Fed did not end the easing because the recession ended. Rather, the Fed paused in its easing because the dollar decline in response to lower interest rates was contributing to inflation fears stemming from higher oil and commodity prices. Thus, it would be a mistake to assume that the end of Fed easing, even if that assumption is correct, signals an all clear on the economy and corporate profits. A consumer led recession seems virtually inevitable considering that the housing meltdown has made the consumer poorer, has reduced his equity, and his borrowing power. The rise in energy and food prices has reduced consumer spendable funds on discretionary purchases more than the tax rebates will increase it. Consumer confidence has plunged with these burdens, rising unemployment and limited earnings prospects. Wage gains are actually decelerating, suggesting inflation pressures are not being embedded in wages and therefor the consumer is being financially squeezed.
There is no basis for assuming a bottom in the home price and contstruction collapse is close. Home prices are down at least 10% from their 2006 peak and are expected to decline 30% or more under the weight of still rapidly rising home mortgage delinquencies,defaults and foreclosures. Recent home price declines, if anything, appear to be accelerating.
There is reason to doubt that there is a huge amount of liquidity just waiting to invest. Though the Fed has increased liquidity in the economy, banks remain concerned over extending credit. They and other distressed members of the financial community are still scambling to rebuild capital after the huge writeoffs of bad debts and losses. Barton Biggs' forecast of further financial sector losses, a view I share, would argue against there being both ample liquidity and an earerness to employ it.
Lastly, stocks are not cheap by any stretch of the immagination. True stocks have been more expensive than they are currently. But, that does not make them cheap. Indeed, every time the average price-earnings ratio exceeded 20, it has subsequently fallen to below 10, not just to the long term average of 15. There were negative or subpar returns in the 5, 10 ,15 and 20 year periods following the previous price-earnings peaks of 25 in 1901, 32 in 1929, and 24 in 1966. You can draw the appropriate inference from the price-earnings peak of 44 in 1999. We have, at best, been in a bear market rally. And past experience suggests it will either persist or revert to a true bear market.
Philip Braverman, Presdent
Braverman Economic and Financial Consulting
One Hewitt Square, Suite #249
East Northport, New York 11731
Saturday, May 31, 2008
Sunday, May 25, 2008
Oil prices are breaking the economy's back
The equity market nosedived this past week, for the worst loss since February. This retreat reflected realistic fears that the surge in oil prices, on top of other economic problems, will significantly depress both consumer spending and corporate profits. Reports that sales of trucks and other gas guzzlers are plunging, and with it hopes for an early return to car maker domestic profitability is merely the latest of more bad news to come stemming from spiraling energy costs and other consumer burdens. Airlines and truckers in particular are feeling the financial strain. Crude oil prices spiked 4.9% in the latest week alone, extending the upswing in oil prices to eight of the last nine weeks. Thus, it was not surprising that much of the loss in equity prices was centered in consumer-related stocks. With this past week's experience many long-side equity market investers may well have wished they had heeded the old adage to sell in May and go away, and do not come back until October-to take advantage of any year end rally. Since in my view this is not a seasonal, but a pronounced cyclical problem, with the bulk of the looming recession still well ahead, it would be appropriate to be very cautious in your exposure to risk.
There were also other economic and market negatives reinforcing adverse investor sentiment this past week. The dollar, for example, after a few months of some stability, weakened sufficiently to turn even bullish attitudes near term bearish and turn bearish sentiment even more negative. The dollar was weighed down by the decline in equity prices, and especially by the rise in oil prices, which both dooms the econmy to a deeper recession than is thus far evident and raises inflation fears, also a clear dollar depressant. There were also signals that there are more losses to be announced from the sub-prime and related credit crunch debacle. The threat of imminent financial market collapse posed by Bear Steans has passed, but that has not ended the financial community's deep seated problems and their long and painful resolution.
The broad economy-wide inflation risk from oil prices is a more complicated story. While the rise in oil prices will raise energy-related inflation near-term, it will be offset by recession depressants. Rising unemployment, low and declining capacity utilization rates, weakening consumer demand, especially for big-ticket discretionary purchases, and the continuing credit crunch will tend to keep the jump in energy and food prices from significantly boosting core inflation measures during the extended recession and its immediate aftermath. That should keep generalized inflation a bay for the rsst of this decade at least, and perhaps even a year or two into the next decade. However, in 2011 or more likely 2012 the global economic boom is likely to come back with a vengence. After eating up any lingering excess capacity created by the global recession, inflation fears will then reappear, but this time with a decided inflation realty. While investors should keep an eye on these longer-term inflation prospects, the nearer term inflation risks are more benign than they seem amidst the current spike in energy and food prices.
The Fed this past week published its revised forecasts of economic growth and inflation. They are still forecasting essentially a growth recession, with real GDP of between 0.3% and 1.2% this year and a return to normal growth of 2.0% to 2.8% next year.They see the unemployment rate rising to between 5.5% and 5.7% this year and leveling out or dipping slightly to between 5.2% and 5.7% next year. The overall personal consumption deflator (PCE) they forcast at between 3.1% and 3.4% this year and between 1.9% and 2.1% next year, with core PCE between 2.2% and 2.4% this year and between 1.9% and 2.1% next year. In my view the recession will be significantly worse, last longer, produce higher peak unemployment rates and more moderate inflation than the Fed now forecasts. That will lead to new lows in Treasury bond yields and, most probably, further Fed easing, quite likely to a one percent funds rate.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
Email address: philipbraverman@Gmail.com
There were also other economic and market negatives reinforcing adverse investor sentiment this past week. The dollar, for example, after a few months of some stability, weakened sufficiently to turn even bullish attitudes near term bearish and turn bearish sentiment even more negative. The dollar was weighed down by the decline in equity prices, and especially by the rise in oil prices, which both dooms the econmy to a deeper recession than is thus far evident and raises inflation fears, also a clear dollar depressant. There were also signals that there are more losses to be announced from the sub-prime and related credit crunch debacle. The threat of imminent financial market collapse posed by Bear Steans has passed, but that has not ended the financial community's deep seated problems and their long and painful resolution.
The broad economy-wide inflation risk from oil prices is a more complicated story. While the rise in oil prices will raise energy-related inflation near-term, it will be offset by recession depressants. Rising unemployment, low and declining capacity utilization rates, weakening consumer demand, especially for big-ticket discretionary purchases, and the continuing credit crunch will tend to keep the jump in energy and food prices from significantly boosting core inflation measures during the extended recession and its immediate aftermath. That should keep generalized inflation a bay for the rsst of this decade at least, and perhaps even a year or two into the next decade. However, in 2011 or more likely 2012 the global economic boom is likely to come back with a vengence. After eating up any lingering excess capacity created by the global recession, inflation fears will then reappear, but this time with a decided inflation realty. While investors should keep an eye on these longer-term inflation prospects, the nearer term inflation risks are more benign than they seem amidst the current spike in energy and food prices.
The Fed this past week published its revised forecasts of economic growth and inflation. They are still forecasting essentially a growth recession, with real GDP of between 0.3% and 1.2% this year and a return to normal growth of 2.0% to 2.8% next year.They see the unemployment rate rising to between 5.5% and 5.7% this year and leveling out or dipping slightly to between 5.2% and 5.7% next year. The overall personal consumption deflator (PCE) they forcast at between 3.1% and 3.4% this year and between 1.9% and 2.1% next year, with core PCE between 2.2% and 2.4% this year and between 1.9% and 2.1% next year. In my view the recession will be significantly worse, last longer, produce higher peak unemployment rates and more moderate inflation than the Fed now forecasts. That will lead to new lows in Treasury bond yields and, most probably, further Fed easing, quite likely to a one percent funds rate.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
Email address: philipbraverman@Gmail.com
Saturday, May 17, 2008
The markets are reading too much good news into the bad news
Economic and financial news continues decidedly bearish. But the equity market is focusing instead on the few positive aspects of the reports to turn more hopeful that they see the light at the end of the recession tunnel. What they see is not daylight but the headlight of the recession train bearing down on them.
The continuing plunge in consumer confidence points to where the US economy is headed over the next six months or so. It is pointing in an ominous direction with a drop to 59.5 in the early May University of Michigan consumer sentiment index, from 62.6 the prior month. This marks the lowest level reach by this measure since June 1980, at the onset of a recession. But that was not just any recession. By many measures the 1980 recession, with both post World War II record unemployment and curtailed credit availability, was the most severe since the depression of the 1930's. Given the current plunge in consumer confidence, it is only prudent to assume that the consumer is already feeling the intense financial pain wrought by the worst decline in home prices since the 1930's, as well as by record food and energy prices and an increasingly dismal employment outlook. Indeed, consumers in early May were also sharply more pessimistic over the economy's prospects for the next six months. This loss in consumer confidence and growing economic pessismisn are almost certainly a prelude to a significant drop in spending once the tax refunds have come and gone. The GE decision to sell its consumer appliance division could be seen as a forecast of very tough sledding for discretionary consumer spending for an extended period, especially with a probable protraccted housing recession, a dreary forecast.
However, some observers chose to focus on a few misleading bright spots in the otherwise continuing dismal housing ptcture. April housing starts rebounded 8.2%. This was due entirely to a 36% jump in Multifamily starts, reversing a comparable March plunge. Single family starts dipped 1.7%, their twelth consecutive monthly decline. Though housing permits increased 4.9%, a component of the index of leading indicators, there is no reason to believe that housing is anywhere near bottoming out. And it is certainly is not the beginning of an upswing in housing. Housing starts were at a 1.03 million seasonally-adjusted annual rate in April, just under half their peak 2005 levels. But, at major builder Toll Brothers, new contracts in the latest quarter are running at under 30% of their peak 2005 level. With this weakness in new contracts and walk-through traffic at new home models reported at historic lows, further housing weakness ahead is a forgone conclusion. Thus, it comes as no surprise that The National Association of Home Builder Confidence index edged down to a very pessimistic 19 in May, just one point above its all-time low of 18 reach in December. The consensus real estate professionals forecast of a bottom to the drop in home prices by spring 2009 may be optimistic. Moreover, the price decline may be only half over. There is severe pain in this sector to come.
Industrial production plmmeted o.7% in April, more than reversing a 0.2% March rise and extending a 07% February decline. Even without the recessionary auto production sector, industrial production was still down 0.6% in April. This indicates a relatively broad economy-wide production decline. There were significant declines in business equipment and consumer appliance production. This suggests weakening demands for both business and consumer goods domestically that more than offset increases for exports due to the weaker dollar. Capacity utilization dropped to 79.7% in April from 80.4% in March. This is very far from the 88% or higher capacity utilization levels where production bottle-neck price pressure levels often begin to emerge, Thus, despite continuing inflation concerns, there is no indication of likely inflation pressures emerging from production or labor costs. The New York Fed maufacturing index declined to minus 3.2 in May from 0.6 in April. The Philadephia Fed general conditions index was minus 15.6 in May. While less dire than the 24.9 in April it, like the New York Fed index, hinted at a further contraction in industrial production in May.
The Fed is far from confident that it has done enough to turn the credit crunch around. That helps explain Fed efforts to persaude Congess to give it the authority to immediately pay interest on the reseves that banks hold at the Fed, rather than wait for its legislated start in 2011. Fed Chairman Bernanke warned that market fragility persists. He encouraged banks to build "generous" capital cushions, repair balance sheets, and extend "new credit, which supports economic expansion". William Dudley, executive Vice President of the New York Fed indicated that much of the new bank capital raised has been offset by new losses on loans and finanancial instruments.
More banks are revealing sizable losses, capital write-downs and the need for new capital raising efforts. Among the latest is the Mizuho Financial Group, Japan's second largest bank measured by assets. It reported a $6.1 billion loss related to sub-prime mortgages and mortgage-backed paper. This loss was 14% larger than it reported just a month ago and warned that the loss could be still larger. While primary attention has been focused on the largest financial institutions with exposure to the sub-prime mortgage meltdown, smaller banks are disprortionately exposed to the real estate market and potential losses. For example, banks with assets of $1billion or more on average have real estate loans on their books equal to one-fifth of their total loans. In striking contrast, banks with assets of under $1 billion on average have over two-fifths of their loan portfolio concentrated in real estate. On the face of it, these smaller banks are exposed to significantly more proportional risk of loss as home prices continue to plunge. The credit crunch is far from over and the recession is barely beginning.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
The continuing plunge in consumer confidence points to where the US economy is headed over the next six months or so. It is pointing in an ominous direction with a drop to 59.5 in the early May University of Michigan consumer sentiment index, from 62.6 the prior month. This marks the lowest level reach by this measure since June 1980, at the onset of a recession. But that was not just any recession. By many measures the 1980 recession, with both post World War II record unemployment and curtailed credit availability, was the most severe since the depression of the 1930's. Given the current plunge in consumer confidence, it is only prudent to assume that the consumer is already feeling the intense financial pain wrought by the worst decline in home prices since the 1930's, as well as by record food and energy prices and an increasingly dismal employment outlook. Indeed, consumers in early May were also sharply more pessimistic over the economy's prospects for the next six months. This loss in consumer confidence and growing economic pessismisn are almost certainly a prelude to a significant drop in spending once the tax refunds have come and gone. The GE decision to sell its consumer appliance division could be seen as a forecast of very tough sledding for discretionary consumer spending for an extended period, especially with a probable protraccted housing recession, a dreary forecast.
However, some observers chose to focus on a few misleading bright spots in the otherwise continuing dismal housing ptcture. April housing starts rebounded 8.2%. This was due entirely to a 36% jump in Multifamily starts, reversing a comparable March plunge. Single family starts dipped 1.7%, their twelth consecutive monthly decline. Though housing permits increased 4.9%, a component of the index of leading indicators, there is no reason to believe that housing is anywhere near bottoming out. And it is certainly is not the beginning of an upswing in housing. Housing starts were at a 1.03 million seasonally-adjusted annual rate in April, just under half their peak 2005 levels. But, at major builder Toll Brothers, new contracts in the latest quarter are running at under 30% of their peak 2005 level. With this weakness in new contracts and walk-through traffic at new home models reported at historic lows, further housing weakness ahead is a forgone conclusion. Thus, it comes as no surprise that The National Association of Home Builder Confidence index edged down to a very pessimistic 19 in May, just one point above its all-time low of 18 reach in December. The consensus real estate professionals forecast of a bottom to the drop in home prices by spring 2009 may be optimistic. Moreover, the price decline may be only half over. There is severe pain in this sector to come.
Industrial production plmmeted o.7% in April, more than reversing a 0.2% March rise and extending a 07% February decline. Even without the recessionary auto production sector, industrial production was still down 0.6% in April. This indicates a relatively broad economy-wide production decline. There were significant declines in business equipment and consumer appliance production. This suggests weakening demands for both business and consumer goods domestically that more than offset increases for exports due to the weaker dollar. Capacity utilization dropped to 79.7% in April from 80.4% in March. This is very far from the 88% or higher capacity utilization levels where production bottle-neck price pressure levels often begin to emerge, Thus, despite continuing inflation concerns, there is no indication of likely inflation pressures emerging from production or labor costs. The New York Fed maufacturing index declined to minus 3.2 in May from 0.6 in April. The Philadephia Fed general conditions index was minus 15.6 in May. While less dire than the 24.9 in April it, like the New York Fed index, hinted at a further contraction in industrial production in May.
The Fed is far from confident that it has done enough to turn the credit crunch around. That helps explain Fed efforts to persaude Congess to give it the authority to immediately pay interest on the reseves that banks hold at the Fed, rather than wait for its legislated start in 2011. Fed Chairman Bernanke warned that market fragility persists. He encouraged banks to build "generous" capital cushions, repair balance sheets, and extend "new credit, which supports economic expansion". William Dudley, executive Vice President of the New York Fed indicated that much of the new bank capital raised has been offset by new losses on loans and finanancial instruments.
More banks are revealing sizable losses, capital write-downs and the need for new capital raising efforts. Among the latest is the Mizuho Financial Group, Japan's second largest bank measured by assets. It reported a $6.1 billion loss related to sub-prime mortgages and mortgage-backed paper. This loss was 14% larger than it reported just a month ago and warned that the loss could be still larger. While primary attention has been focused on the largest financial institutions with exposure to the sub-prime mortgage meltdown, smaller banks are disprortionately exposed to the real estate market and potential losses. For example, banks with assets of $1billion or more on average have real estate loans on their books equal to one-fifth of their total loans. In striking contrast, banks with assets of under $1 billion on average have over two-fifths of their loan portfolio concentrated in real estate. On the face of it, these smaller banks are exposed to significantly more proportional risk of loss as home prices continue to plunge. The credit crunch is far from over and the recession is barely beginning.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
Saturday, May 10, 2008
The worst of the recession is still ahead
The credit crunch stage of this recession is far from over judging by the losses reported by AIG this week. Even more worrisome, the coming cyclical deterioration in consumer and business spending in the US and around globe has not even begun in earnest.
This cautionary point of view is clearly at odds with calming statements by public figures suggesting the worst of the credit crunch is over. Jamie Diamon of J P Morgan Chase, who has a boatload of Bear Stearns paper to sell at what he hopes are better than fire sale prices, indicated that the credit crisis was 75% to 85% over. Treasury Secretary Hank Paulson diplomatically said we are closer to the end than the beginning of the credit crisis. The obvious intent of these calming statements was to encourage risk taking and speculative buying of mortgage-backed bonds and other distressed financial paper.
Even if there were an element of truth in these calming statements, it would be primarily limited to "too big to fail" goliath-sized commercial banks with access to virtually unlimited Fed financial backing. These banks have a protected franchise. This includes a realively dependable source of substanial profit in the wide interest rate spread between low borrowing costs at the Fed or equally low-cost captive deposit funds on the one hand and lending rates on presumably prudent loans. But, even these major banks would be jeopardized if there are further surprise losses that outrun their ability to raise fresh capital. Citibank this week indicated a need to shrink its assets, presumably to avoid the need for still more capital.
Other types of financial institutions remain at risk. There are a sizable number of medium and smaller troubled banks caught up in the sub-prime mortgage and housing debacle that are on the watch list of the Fed and other bank supervisory authorities. AIG, the giant insurance company, this week reported a $7.8 billion loss, exceeding a $5.3 billion loss posted for the prior quarter, neccesitating their raising $12.5 billion in new capital. It, like other insurance companies, hedge funds, investment banks and other types of financial institutions may yet have other losses still to come to light. Other types of credit are also vulnerable, including credit card debt, auto loans and conventional conforming mortgages, which ought to be better risks than sub-prime mortgages.
Former Fed Chairman Greenspan this week indicated that the depth of the credit crisis depends on the extent of the drop in home prices. This is a realistic appraisal of the causal relationship of the worsening credit crunch. The sub-prime mortgage debacle the unwillingness or inability of homeowners to meet their mortgage payments. The decline in home prices, especially to below mortgage principal, undermines the commitment of borrowers to meet their mortgage obligations. It certainly precludes homeowners ability to continue using their homes as an ATM machine. At the same time falling home prices erode the value of mortgage-backed securities as well as contibuting to mounting mortgage delinquencies, defaults and foreclosures. Rising foreclosures, and the ultimate sale of the properties at distress prices, reinforce the credit crisis, as it further depresses home prices.
Thus, it is reasonable to expect a sustained turnaround in the credit crisis will depend on a bottoming, and still better, an improvement in home prices. Unfortunately, a bottoming in home prices is unlikely to be reached until next year or 2010. And a rise in home prices may well be delayed until 2011. This prolonged delay in a recovery in home prices is reinforced by the accelerated plunge in home prices in recent months reported in the Standard & Poors/ Case Schiller home price index, the liklihood of at least a further 10% to 15% home price drop nationally, a huge and rising inventory of unsold homes, rising foreclosures, a slowing home sales pace, and continued new construction.
As an aside, it is worth questioning why if Greenspan recognized the linkages,
he did not act to prevent the housing bubble from ballooning or prevent the banks from excessive and imprudent sub-prime related lending. This question seems especially relevant since Fed staffers reportedly prepared rgulations to accomplish such objectives which Greenspan refused to implement. It could also be asked why the Greenspan Fed did not act or even attempt to head off the equity market bubble of late 1990s, the bursting of which contributed to the last recession.
Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
This cautionary point of view is clearly at odds with calming statements by public figures suggesting the worst of the credit crunch is over. Jamie Diamon of J P Morgan Chase, who has a boatload of Bear Stearns paper to sell at what he hopes are better than fire sale prices, indicated that the credit crisis was 75% to 85% over. Treasury Secretary Hank Paulson diplomatically said we are closer to the end than the beginning of the credit crisis. The obvious intent of these calming statements was to encourage risk taking and speculative buying of mortgage-backed bonds and other distressed financial paper.
Even if there were an element of truth in these calming statements, it would be primarily limited to "too big to fail" goliath-sized commercial banks with access to virtually unlimited Fed financial backing. These banks have a protected franchise. This includes a realively dependable source of substanial profit in the wide interest rate spread between low borrowing costs at the Fed or equally low-cost captive deposit funds on the one hand and lending rates on presumably prudent loans. But, even these major banks would be jeopardized if there are further surprise losses that outrun their ability to raise fresh capital. Citibank this week indicated a need to shrink its assets, presumably to avoid the need for still more capital.
Other types of financial institutions remain at risk. There are a sizable number of medium and smaller troubled banks caught up in the sub-prime mortgage and housing debacle that are on the watch list of the Fed and other bank supervisory authorities. AIG, the giant insurance company, this week reported a $7.8 billion loss, exceeding a $5.3 billion loss posted for the prior quarter, neccesitating their raising $12.5 billion in new capital. It, like other insurance companies, hedge funds, investment banks and other types of financial institutions may yet have other losses still to come to light. Other types of credit are also vulnerable, including credit card debt, auto loans and conventional conforming mortgages, which ought to be better risks than sub-prime mortgages.
Former Fed Chairman Greenspan this week indicated that the depth of the credit crisis depends on the extent of the drop in home prices. This is a realistic appraisal of the causal relationship of the worsening credit crunch. The sub-prime mortgage debacle the unwillingness or inability of homeowners to meet their mortgage payments. The decline in home prices, especially to below mortgage principal, undermines the commitment of borrowers to meet their mortgage obligations. It certainly precludes homeowners ability to continue using their homes as an ATM machine. At the same time falling home prices erode the value of mortgage-backed securities as well as contibuting to mounting mortgage delinquencies, defaults and foreclosures. Rising foreclosures, and the ultimate sale of the properties at distress prices, reinforce the credit crisis, as it further depresses home prices.
Thus, it is reasonable to expect a sustained turnaround in the credit crisis will depend on a bottoming, and still better, an improvement in home prices. Unfortunately, a bottoming in home prices is unlikely to be reached until next year or 2010. And a rise in home prices may well be delayed until 2011. This prolonged delay in a recovery in home prices is reinforced by the accelerated plunge in home prices in recent months reported in the Standard & Poors/ Case Schiller home price index, the liklihood of at least a further 10% to 15% home price drop nationally, a huge and rising inventory of unsold homes, rising foreclosures, a slowing home sales pace, and continued new construction.
As an aside, it is worth questioning why if Greenspan recognized the linkages,
he did not act to prevent the housing bubble from ballooning or prevent the banks from excessive and imprudent sub-prime related lending. This question seems especially relevant since Fed staffers reportedly prepared rgulations to accomplish such objectives which Greenspan refused to implement. It could also be asked why the Greenspan Fed did not act or even attempt to head off the equity market bubble of late 1990s, the bursting of which contributed to the last recession.
Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
Saturday, May 3, 2008
Employment and the recession are worse than the latest data suggest
The latest economic reports were widely misinterpreted, triggering a relief rally in equities. Some observers even unwisely concluded the economy was already on the mend because the unemployment rate edged down to 5.0% in April from 5.1% in March and April nonfarm payrolls declined only 20,000 following an average 80,000 per month decline in the first quarter. Some analysts further mistakenly surmised the economy would escape recession entirely since the initial estimate of first quarter real GDP was up 0.6%, matching the 0.6% fourth quarter rise.
It would not only be premature to draw the conclusion that the recession is or will be mild or brief, it would be wrong. Even at best,the Fed easing and fiscal stimulus could concievably delay the onset of a far more convincing and pronounced economic contraction until after the November elections. Indeed, there should be no doubt that from the point of view of Congressional and Senate incumbents, that would be a very desirable outcome. Pulling out all the stops of monetary and fiscal policy as they have might just pull it off. But, even in that event, it would only delay the inevitable. After monetary and fiscal stimulus has exhausted its impact, housing and other recessionary forces will still be in place to deepen and extend the recession next year.
The realty is that the data below the surface suggest the economy was in recession in April. Whether the income tax rebates are stimulative enough to reverse that for the remainder of the second quarter remains an open question.
It would certainly be a gross error in judgement to take the official United States Department of Labor employment headline report as a realistic measure of the actual April employment situation. The mere 20,000 decline in nonfarm payrolls does not include the 306,000 increase in workers who could not find the full-time jobs they were looking for and were forced by harsh realty to instead accept part-time work in April. This represents a sharp acceleration from the 71,000 average per month increase in workers who were forced to take this part-time work expedient over the past year. If the April increase in unwilling part-time workers were added to the unemployment rate the total would have increased to 5.2% instead of delining. Indeed, if the 5.2 million total of unwilling part-time workers who could not find full-time work are added to the unemployed, the unemployment rate would soar to 8.3%.
As if the forgoing is not enough of a problem with the employment report, there is an even worse error in periods of economic weakness, as now. As I have indicated in prior blogs and elsewhere, the monthly payroll data include an estimate of net hiring by new and small firms that are not sampled. This estimate for April, really a sheer and foolish guess, was a rise of 267,000 jobs. Without this fictional increase, which artificially inflates payrolls, there was actually a steep 287,000 nonfarm payroll plunge in April. The employment situation is not improving. It is deteriorating.
It is an understatement to say the seeming moderation in layoffs suggested by the April 20,000 dip reported in nonfarm payrolls is out of step with other employment reports. This gross disparity is evident in the continuing hefty April layoffs indicated by weekly initial claims for unemployment benefits, which ended the month on a worsening note. Indeed, this worsening is likely to be better reflected in the May employment report. That prospect is reinforced by a startlingly sharp two-thirds increase in April layoffs versus March reported by Challenger Gray and Christmas, the outplacement firm. Also in April the jobs index of the ISM fell to 45.5, the lowest level since May 2003, as companies are turning so cautious they are laying off workers to trim costs even if it means an increase in the backlog of unfilled orders. The job outlook component of the Conference Board's Consumer Confidence index plunged to -23.8% in April,the lowest level in years and a clear indication that the job situation is worsening dramatically.
The April employment report was also inconsistant with the notion of moderating economic weakness in other ways. The April index of aggregate hours worked fell a sharp 0.4% from March. In manufacturing the April drop was 1.2%. If not reversed in subsequent months, such declines typically indicate a decline in real GDP for the quarter. Average weekly earnings in the private sector fell 0.2% in April, a marked departure from the 0.6% increase in March. Considering that these earnings are not adjusted for inflation, in real terms April income plunged, an indicator of consumer financial distress.
The first quarter 0.6% real GDP rise would have been negative if it had not been boosted by unintended and speculative inventory building and panic food and energy purchases by consumers and others fearfull of shortages and still higher prices.
The housing sector is far from bottoming. In the latest report, the S&P/Case-Shiller index of home prices in 20 metropolitan areas was down 12.7% from a year earlier. And ominously, the pace of price decline accelerated in the latest month. Home foreclosure filings more than doubled from a year earlier in the first quarter, puting additional downward pressure on home prices. The economy is not likely to be on the mend until the housing sector has at least hit bottom and beginning to improve. As Warren Buffet quipped referring to the economy it will be a long hard slog.
Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
It would not only be premature to draw the conclusion that the recession is or will be mild or brief, it would be wrong. Even at best,the Fed easing and fiscal stimulus could concievably delay the onset of a far more convincing and pronounced economic contraction until after the November elections. Indeed, there should be no doubt that from the point of view of Congressional and Senate incumbents, that would be a very desirable outcome. Pulling out all the stops of monetary and fiscal policy as they have might just pull it off. But, even in that event, it would only delay the inevitable. After monetary and fiscal stimulus has exhausted its impact, housing and other recessionary forces will still be in place to deepen and extend the recession next year.
The realty is that the data below the surface suggest the economy was in recession in April. Whether the income tax rebates are stimulative enough to reverse that for the remainder of the second quarter remains an open question.
It would certainly be a gross error in judgement to take the official United States Department of Labor employment headline report as a realistic measure of the actual April employment situation. The mere 20,000 decline in nonfarm payrolls does not include the 306,000 increase in workers who could not find the full-time jobs they were looking for and were forced by harsh realty to instead accept part-time work in April. This represents a sharp acceleration from the 71,000 average per month increase in workers who were forced to take this part-time work expedient over the past year. If the April increase in unwilling part-time workers were added to the unemployment rate the total would have increased to 5.2% instead of delining. Indeed, if the 5.2 million total of unwilling part-time workers who could not find full-time work are added to the unemployed, the unemployment rate would soar to 8.3%.
As if the forgoing is not enough of a problem with the employment report, there is an even worse error in periods of economic weakness, as now. As I have indicated in prior blogs and elsewhere, the monthly payroll data include an estimate of net hiring by new and small firms that are not sampled. This estimate for April, really a sheer and foolish guess, was a rise of 267,000 jobs. Without this fictional increase, which artificially inflates payrolls, there was actually a steep 287,000 nonfarm payroll plunge in April. The employment situation is not improving. It is deteriorating.
It is an understatement to say the seeming moderation in layoffs suggested by the April 20,000 dip reported in nonfarm payrolls is out of step with other employment reports. This gross disparity is evident in the continuing hefty April layoffs indicated by weekly initial claims for unemployment benefits, which ended the month on a worsening note. Indeed, this worsening is likely to be better reflected in the May employment report. That prospect is reinforced by a startlingly sharp two-thirds increase in April layoffs versus March reported by Challenger Gray and Christmas, the outplacement firm. Also in April the jobs index of the ISM fell to 45.5, the lowest level since May 2003, as companies are turning so cautious they are laying off workers to trim costs even if it means an increase in the backlog of unfilled orders. The job outlook component of the Conference Board's Consumer Confidence index plunged to -23.8% in April,the lowest level in years and a clear indication that the job situation is worsening dramatically.
The April employment report was also inconsistant with the notion of moderating economic weakness in other ways. The April index of aggregate hours worked fell a sharp 0.4% from March. In manufacturing the April drop was 1.2%. If not reversed in subsequent months, such declines typically indicate a decline in real GDP for the quarter. Average weekly earnings in the private sector fell 0.2% in April, a marked departure from the 0.6% increase in March. Considering that these earnings are not adjusted for inflation, in real terms April income plunged, an indicator of consumer financial distress.
The first quarter 0.6% real GDP rise would have been negative if it had not been boosted by unintended and speculative inventory building and panic food and energy purchases by consumers and others fearfull of shortages and still higher prices.
The housing sector is far from bottoming. In the latest report, the S&P/Case-Shiller index of home prices in 20 metropolitan areas was down 12.7% from a year earlier. And ominously, the pace of price decline accelerated in the latest month. Home foreclosure filings more than doubled from a year earlier in the first quarter, puting additional downward pressure on home prices. The economy is not likely to be on the mend until the housing sector has at least hit bottom and beginning to improve. As Warren Buffet quipped referring to the economy it will be a long hard slog.
Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731
philipbraverman@Gmail.com
Subscribe to:
Posts (Atom)