I remain pessimistic over economic and equity market prospects. And with ample reason. But, through Friday, the markets thought otherwise. That will soon change.
Though the Dow and S&P 500 were down slightly for the week, the equity markets nevertheless closed the week on a strong note. This is typically a sign of optimism because of the potential for adverse surprises over the weekend. This is an upbeat indication, as was the decline in the VIX volitilty index. Taken together these measures suggest more market confidence (even if misplaced), that the balance of forces will lift equity prices higher. In reality, the bear-market rally has relatively little room left on the upside. It will soon be time to reset short positions in ETFs, and not just because of the potential adverse consequences of the swine flu. Next week first quarter real GDP is likely to be reported down 6%, with more bad news to follow. The month of May begins a period of market vulnerability. One straw in the wind is a step-up in insider selling, typically an advance indicator of impending equity market declines. Similarly, a reported decline in equity market short positions undermines the market's potential to move higher or just maintain current market price levels.
Also significant was last week's rise in gold prices back above 900, with a current spot price of 913, and a jump in Treasury yields, with the ten-year yield back at 3.0%, the highest level since the Fed indicated its plan to buy Treasury bonds. These developments reflect a number of reports, events and beliefs. There was a report that China has substantially more official gold holdings (76% more)than previously thought. That bullish report on gold helped mitigate the market fear of impending gold sales by other central banks and official institutions to fund their assistance programs and stimulus efforts. Treasury yields are being boosted by the the coming sizable Treasury quarterly auctions usually slated for the second week in May. The so called "Duke of York effect" in which Treasury portfolio holders raise cash for the auction by selling nearby maturities. This raises yields on the new auction issues which effectively makes them more enticing to potential buyers. The reference is to the old English nursery rhyme that I believe goes "The Duke of York had 10,000 men. He marched them up to the top of a hill. Then he marched them down again." That process could push Treasury bond yields higher before they more than reverse the yield rise after the coming auctions. But, there are also likely other important and misleading forces at work in these latest developments.
Among these are erroneous market expectations of an early economic recovery and renewed inflation. These various misguided beliefs were influenced by outright official boosterism and a smattering of seemingly less dire economic reports. Some of these recent economic reports were the result of questionable seasonal adjustments that had the effect of artificially inflating the reports so they appeared less dire or even actually improved. However, if the seasonal adjustments for recent data merely borrowed strength from the presumed recovery later in the year, reports for that later period will only look worse than they deserve. Fed Chairman Bernanke's reference to spotting "green shoots" of recovery and Treasury Secretay Geithner's comparable remarks raised excessively optimistic expectations that had to be subsequently watered down. Secretary Geithner followed with a comment that it is "too early" to say risks have receded and that indeed more action needs to be taken to counter the worst financial crisis in generations. But, not everyone grasped the deliberately mixed message.
The banking system faces major financial distress that will be the source of new profound and deep declines for the US and global economy. Nevertheless, the markets' worries over the still to be released report of the bank stress tests were deceptively lightened by Treasury Secretary Geithner's seemingly offhand remark that all the 19 tested banks have adequate capital. They do not. Also the details of the stress test themselves suggested a low hurdle that all the major banks can pass.
The Administration is trying to have it both ways. They want to be credible. But, that objective can be at odds with their attempt to encourage spending, lending and investing. That explains their efforts to bolster more than warranted confidence in the stability of financial institutions and foster the mistaken belief that the worst of the recession is over and that we are in an economic bottoming process. To those ends the concept of the bank stress test was created. It was hoped that the clean bill of health given to those banks that passed (and all would) could be as effective as the restoration of confidence at the Depression era reopening of banks after the Bank Holiday.
Before you buy into that potential fiction let's look at some of the bank developments that do not get adequate press and their decidedly adverse financial and economic implications. Major banks are rapidly cutting their customers credit card and other lines of credit in their own deleveraging process. By some measures such lines have been cut in half. That critically reduces the availability of credit on which strapped consumers and businesses depend. Indeed, many consumers depend on their unused credit lines as their only emergency funds and reserves. Without access to such funds they will either turn far more cautious in their spending or default on their obligations. It is credit, not money, that is the driving force of the economy. If credit declines and it is, the expansion of the money supply will not make up for it or prevent deflation and economic contraction.
Banks are at the beginning of a new wave of delinquencies and defaults of credit card debt and non-residential commercial real estate debt. Commercial real estate prices are already down some 35%, wiping out owner equity and creating losses for even prudent lenders and certainly for those that lent 80% to 90% or more on overly generous appraised value. The home mortgage forclosure rate at many banks is rising at an accelerating pace after their self imposed moritorium on foreclosures ended. That only adds to downward pressure on home prices, already burdened by a 10-month overhang of unsold homes. Existing home sales fell an additional 3% in March, suggesting the residential market is not stabilizing. It is not likely to do so until next Spring.
Recent bank loss reports only appear less burdensome for many banks because of the favorable change in mark-to-market accounting rules. The improvement in banks' earnings from securites trading was partly due to a preannounced Federal decision to buy Federal Agency securities which allowed banks to stock up on them before reselling at a profit. There were other special factors that helped to artificially boost bank earnings, including a shift in fiscal year that in some instances reportedly omitted a month of unfavorable earnings. The increased yield spead between banks' cost of funds and lending rates is a source of profit. But it will take an extended period before such earnings are sufficient to allow adequate writedowns of losses against even enhanced capital.
Far too many banks missed the opportunity afforded by their exceptionally inflated earnings reports to raise new capital. They will regret it. The IMF estimates US banks will require $275 billion in additional common equity capital to meet or maintain its 4% of assets floor. At the same time the IMF estimates European banks require $600 billion more equity. In aggregate, Eurpean and US banks, it is estimated, will not turn a profit after projected writedowns until 2011. That presumably is consistent with the IMF expectation of a 1.3% GDP contraction in the global economy this year, a significant turnaround from a 0.5% increase previously predicted. Moreover, it does not expect a global recovery until next year. For the US, the IMF forecasts a 2.8% GDP decline this year and no growth next year. In my opinion the IMF could well be optimistic. In either case there is more pain to come.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, N.Y. 11731
Email address: philipbraverman@Gmail.com
This and earlier weekly reports can be accessed by going to internet explorer and typing the following: philipbraverman.blogspot.com
Friday, April 24, 2009
Friday, April 17, 2009
The deep recession will produce further deflation and other economic woes
Be forewarned. There will be major disappoinments ahead. I gave you a timely advance warning of this recession, as well as its pernicious nature and, most recently, an advance indication of the current bear market rally from its 666 S&P 500March 9 low point. I also indicated the probable size of the rally, to 875, just shy of the 879 level indicated by a 32% rise to roughly return that S&P 500 index back to its 200-day trend moving average. Now, with the S&P-500 index closing up at 869.60 on Friday, I am giving you an advance warning of an imminent new bear market nosedive that will at least retest the early March lows or, more likely, set new equity market lows. That will prompt new buying of Treasuries and renewed significant declines in yields. For example, the Treasury ten-year note yield at 2.95% on Friday, should decline to at least 2.5%.
These are far from consensus views. Instead, there is unjustified market confidence that the equity market is in a sustainable rally. For example, Ken Fisher, Chairman of Fisher investments expects the S&P 500 rally the past six weeks to be extended, from 870 currently to 1130, another 30% rise, by March 2010. Such views typically stem from an unwarranted hope that the economy is bottoming out, that the credit crisis has been resolved, that the banking system has been mended and that inflation is about to emerge, producing a renewed surge in commodity prices. In German there is an expression which to my way of thinking aptly applies to such views. It loosely translates into living on cloud nine cookooland. In other words, in my opinion, such views are nonsense.
The reality, as I see it, is that the equity market is vulnerable to a renewed and very steep decline. The economy remains mired in a deep recession. Despite the various Fed and Federal government efforts to provide assistance to the credit market and financial institutions,the credit crunch continues in full swing. Banks are still beset by pronounced losses that compomise their capital and restrain their lending. Deflation is already in evidence and is likely to worsen for an extended period. further undermining corporate profitability. That ever more onerous deflation pattern will, of course, keep the threat of inflation from being realized any time soon, most likely for years. A closer look at the forces at work should make the reasons for my views in each of these areas self evident.
The equity market has moved from being oversold at its early March low to being more than fully priced currently. The S&P 500 for example, has a projected income per share of some $40 this year. Even that level could yet prove optimistic. But, at $40 per share, current S&P 500 price levels translate into a price-earnings ratio level of almost 22, an excessively high level at any time and especially in the midst of the worst recession since the 1930s. One of the major driving forces of the rally the past six weeks was undoubtedly short covering, not a projected or realized recovery in earnings. But, now the sizable short position underpining of the rally has been substantially reduced. April is a seasonal period of rising equity prices, while May often ushers in a period of lackluster or disappointing equity price performance. That pattern even in more normal times helped create the dictum of sell in May and go away. That is likely to prove even more prescient than usual coming off a spectacular but unsustainable March-April equity market rally.
It was precisely the various market factors that caused me to predict a major bear-market rally before it ocurred in early March, that, having flip-flopped, now incline me to warn of an imminent reversal of the rally, probably beginning in May, if not before. Extremes of equity market overbearishness has reverted to overconfidence, unjustified overconfidence. The trigger for a renewed decline could be the 6% or so plunge in first quarter real GDP, to be released later this month. Other potential adverse market catalysts include a near 700,000 drop in April nonfarm payrolls and another sharp rise in the unemployment rate to be reported in early May, as well as disappointing corporate or financial institution earnings or the results of the bank stress tests, also to be released in early May, despite the rumored Treasury intention of giving them all a favorable review.
I am not alone in my negative view. A Morgan Stanley analyst went so far as to recommend selling "before it is too late" and Goldman Sachs' decision to issue stock this past week can be seen as a vote of no confidence in an extention of the rally.
The various presumed postive signs of impending or actual economic recovery are fanciful or due to inappropriate seasonal adjustments. This week, for example, initial claims for unemployment benefits fell 53,000 to 610,000 in the week ended April 11. But, that improvement may reflect nothing more than a good Friday holiday shortened week in a volitile series. Other presumed signs of recovery are equally misinterpreted. That is certainly true of supposedly favorable data for housing, which continues in deep distress.
Indeed, a new speed-up of home mortgage forclosures has begun. How can this be happening, especially when a rise in forclosures is not only counterproductive to the effort to stem the drop in home prices, it is contrary to the thrust of the Administration's intentions? It arises because a number of financial institutions have terminated their self-imposed temporary moritorium on forclosures. For example, J.P.Morgan Chase, Wells Fargo & Co., Fannie Mae and Freddie Mac have all reported an increase in foreclosures as their foreclosure moritoriums ended. Though there is still an array of different approches to delinquecies by mortgage holders, on balance, forclosure filings are up sharply. In February, the latest month for which data are available, foreclosure filings were up almost 6% from January and 30% from February 2008. Moreover, foreclosure sales are also rising, as are long-term delinquencies 120 days or longer, a precurser to foreclosure. To make matters worse, mortgage problems are increasingly cropping up in FHA conforming loans, not just in sub-prime loans, as the recession widens its depressing grip. The process of rising delinquencies, foreclosures and forclosure sales will continue to depress home prices as the overhang of unsold homes available for sale not only remains excessive but is destined to rise further. Given persistent housing distress, it is not surprising that housing construction fell 10.8% to an annual rate of 510,000 units, less than one quarter of the more than 2 million peak pace in 2006.
This past week the CPI was down 0.4% in the 12 months ended in March. This is the first such year over year decline in more than a half century. The decline in consumer prices now joins the declines in producer and commodity prices. This deflation pattern is likely to persist in view of the US and global excess of labor and productive capacity, which tends to keep prices for goods, services and commodities under downward pressure.
Despite some favorable bank and financial institution earnings reports, credit losses will persist. The wide yield spread on loans will have to persist for an extended period of time to create earnings sufficient to offset the losses on mortgage related paper, as well as the increasing problems with commercial real estate and consumer and credit card debt.
The bottom line is that there is still a distressing array of economic and financial negatives to contend with that will take a considerable length of time to resolve.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
My email address is philipbraverman@Gmail.com
You can access this and prior weekly reports by going to internet explorer and typing the following internet address: philipbraverman.blogspot.com
These are far from consensus views. Instead, there is unjustified market confidence that the equity market is in a sustainable rally. For example, Ken Fisher, Chairman of Fisher investments expects the S&P 500 rally the past six weeks to be extended, from 870 currently to 1130, another 30% rise, by March 2010. Such views typically stem from an unwarranted hope that the economy is bottoming out, that the credit crisis has been resolved, that the banking system has been mended and that inflation is about to emerge, producing a renewed surge in commodity prices. In German there is an expression which to my way of thinking aptly applies to such views. It loosely translates into living on cloud nine cookooland. In other words, in my opinion, such views are nonsense.
The reality, as I see it, is that the equity market is vulnerable to a renewed and very steep decline. The economy remains mired in a deep recession. Despite the various Fed and Federal government efforts to provide assistance to the credit market and financial institutions,the credit crunch continues in full swing. Banks are still beset by pronounced losses that compomise their capital and restrain their lending. Deflation is already in evidence and is likely to worsen for an extended period. further undermining corporate profitability. That ever more onerous deflation pattern will, of course, keep the threat of inflation from being realized any time soon, most likely for years. A closer look at the forces at work should make the reasons for my views in each of these areas self evident.
The equity market has moved from being oversold at its early March low to being more than fully priced currently. The S&P 500 for example, has a projected income per share of some $40 this year. Even that level could yet prove optimistic. But, at $40 per share, current S&P 500 price levels translate into a price-earnings ratio level of almost 22, an excessively high level at any time and especially in the midst of the worst recession since the 1930s. One of the major driving forces of the rally the past six weeks was undoubtedly short covering, not a projected or realized recovery in earnings. But, now the sizable short position underpining of the rally has been substantially reduced. April is a seasonal period of rising equity prices, while May often ushers in a period of lackluster or disappointing equity price performance. That pattern even in more normal times helped create the dictum of sell in May and go away. That is likely to prove even more prescient than usual coming off a spectacular but unsustainable March-April equity market rally.
It was precisely the various market factors that caused me to predict a major bear-market rally before it ocurred in early March, that, having flip-flopped, now incline me to warn of an imminent reversal of the rally, probably beginning in May, if not before. Extremes of equity market overbearishness has reverted to overconfidence, unjustified overconfidence. The trigger for a renewed decline could be the 6% or so plunge in first quarter real GDP, to be released later this month. Other potential adverse market catalysts include a near 700,000 drop in April nonfarm payrolls and another sharp rise in the unemployment rate to be reported in early May, as well as disappointing corporate or financial institution earnings or the results of the bank stress tests, also to be released in early May, despite the rumored Treasury intention of giving them all a favorable review.
I am not alone in my negative view. A Morgan Stanley analyst went so far as to recommend selling "before it is too late" and Goldman Sachs' decision to issue stock this past week can be seen as a vote of no confidence in an extention of the rally.
The various presumed postive signs of impending or actual economic recovery are fanciful or due to inappropriate seasonal adjustments. This week, for example, initial claims for unemployment benefits fell 53,000 to 610,000 in the week ended April 11. But, that improvement may reflect nothing more than a good Friday holiday shortened week in a volitile series. Other presumed signs of recovery are equally misinterpreted. That is certainly true of supposedly favorable data for housing, which continues in deep distress.
Indeed, a new speed-up of home mortgage forclosures has begun. How can this be happening, especially when a rise in forclosures is not only counterproductive to the effort to stem the drop in home prices, it is contrary to the thrust of the Administration's intentions? It arises because a number of financial institutions have terminated their self-imposed temporary moritorium on forclosures. For example, J.P.Morgan Chase, Wells Fargo & Co., Fannie Mae and Freddie Mac have all reported an increase in foreclosures as their foreclosure moritoriums ended. Though there is still an array of different approches to delinquecies by mortgage holders, on balance, forclosure filings are up sharply. In February, the latest month for which data are available, foreclosure filings were up almost 6% from January and 30% from February 2008. Moreover, foreclosure sales are also rising, as are long-term delinquencies 120 days or longer, a precurser to foreclosure. To make matters worse, mortgage problems are increasingly cropping up in FHA conforming loans, not just in sub-prime loans, as the recession widens its depressing grip. The process of rising delinquencies, foreclosures and forclosure sales will continue to depress home prices as the overhang of unsold homes available for sale not only remains excessive but is destined to rise further. Given persistent housing distress, it is not surprising that housing construction fell 10.8% to an annual rate of 510,000 units, less than one quarter of the more than 2 million peak pace in 2006.
This past week the CPI was down 0.4% in the 12 months ended in March. This is the first such year over year decline in more than a half century. The decline in consumer prices now joins the declines in producer and commodity prices. This deflation pattern is likely to persist in view of the US and global excess of labor and productive capacity, which tends to keep prices for goods, services and commodities under downward pressure.
Despite some favorable bank and financial institution earnings reports, credit losses will persist. The wide yield spread on loans will have to persist for an extended period of time to create earnings sufficient to offset the losses on mortgage related paper, as well as the increasing problems with commercial real estate and consumer and credit card debt.
The bottom line is that there is still a distressing array of economic and financial negatives to contend with that will take a considerable length of time to resolve.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
My email address is philipbraverman@Gmail.com
You can access this and prior weekly reports by going to internet explorer and typing the following internet address: philipbraverman.blogspot.com
Friday, April 3, 2009
March's surge in unemployment and other indicators point to a far deeper recession
With the global economy likely to have retreated in the first quarter, as well as for quarters to come, the extended outlook for US and global equities is far more pessimistic than this past week's continuation of the bear market rally might seem to suggest. The rally will soon end, to be most likely followed by a renewed decline amidst disappointing corporate earnings reports and persistent economic declines and financial problems. Expect at least a retest of the previous cyclical lows in both equities and Treasuries. And, hard as it may be to believe, given this weeks rise in equities and sell-off in Treasury prices, new lows in both equity prices and Treasury yields can not be ruled out.
Such views may be percieved as incredible amidst the seeming market positives of recent days. The cut in the European Central Bank's lending rate to 1.25%, rather than the 1.0% widely anticipated, is still considered a market positive. Similarly, the seeming agreement of the G-20 to paper over their differences and promise to implement initiatives to stimulate the global economy out of its Depression (though few as yet recognize the growing threat of that coming realty). It is no small matter that the initiatives are far from being fully funded and are likely to fail even if and when funded. The markets were instead favorably focused on the benefits to financial instutions of the appropriate softening in the needlessly harsh mark-to-market accounting rules. But, that is no panacea for banking's ills. Nor will the alphabet soup of Federal initiatives rescue the banking system and the economy any time soon and without the requisite pain that massive deleveraging will impose. Nor will the initiatives adequately spur renewed lending by institutions still attempting to rebuild their capital in order to survive. Moreover, the economy is far from bottoming out, not withstanding the recent smattering of slight improvement in some fictionalized seasonally-adjusted data. Housing, the hub of the recession-Depression's central cause, is destined to continue to worsen even with low mortgage rates,at least for those with pristine credit, and other incentives. Employment, a critical leading indicator of housing, is still getting worse and is likely to continue to do so until 2010 at the earliest.
The jump to an 8.5% March official unemployment rate from 8.1% in February and 7.6% in January indicates that even by this understated measure, the recession is deepening rapidly. That 0.9% pace of rise every two months in this unemployment rate rise in just the past two months would carry this official unemployment rate into the 10% territory by summer's end. That unemployment rate would be highly significant considering that the preceding post-world war II peak unemployment rate was 10.8% in 1982. But,that prior post-war peak level is likely to be exceeeded this recession, if that is still the appropriate term for it.
If not for the surprise drop in the labor force in March, contrary to the typical trend labor force rise, the March unemployment rate would have been at least 8.6%. And without the fictional, make that imaginary, 114,000 rise in employment attributed to companies that the Bureau of Labor statistics does not sample, the official unemployment would actually be 8.7%.
As if these varients on the official unemployment rate are not already high enough, by other realistic measures, the unemployment rate is in reality already far, far, higher, well into the teens, and well above 15%. Such alternative measures include as unemployed those who are employed only part-time, are in temporary jobs because they can not find the permanent full-time jobs they seek, or have become so discouraged at the lack of employment opportunities that they are no longer actively seeking employment. This unpleasant realty strongly suggests that the official unemployment rate grossly understates the economic and financial pain that the recession is imposing on workers and consumers.
Nonfarm payrolls fell 663,000 in March, after a 651,000 decline in February and a revised 741,000 drop in January. Except for an 8,000 rise in Education and health services employment, every major employment category, including government, declined in March. But the bad employment news is far from over. Weekly initial claims for unemployment benefits jumped to 669,000 in the week ended March 28, from 657,000 the prior week. This data came too late to be reflected in the March monthly employment report. That and a further rise in long-term unemployment suggests the April employment report will be as bad or worse than March.
Even more worrisome than the 663,000 decline in March nonfarm payrolls, the decline in March employment in the household survey, which is typically more reliable in recessions and from which the unemployment rate is derived, was a deep 861,000 for the month.
Still more significant, aggregate weekly hours worked declined 1.0% in March after a 0.6% decline in February. This indicator serves as a prime basis for forcasting real GDP. Its performance implies a steep drop in real GDP in the first quarter. The real GDP decline is likely to at least match or exceed the 6.3% fourth quarter drop.
There are other significant adverse elements in the economic and financial picture that also indicate a deeper and prolonged recession ahead, even with the increasingly expensive global economic stimulus and financial salvage operation. For example, there may be a further $1 trillion in loss charge-offs yet to be taken by financial institutions despite the huge volume of charge-offs of losses already taken by these institutions and the moderation of the mark-to-market accounting requirements. There is as yet relatively little advance fall-out from the losses still to be realized in consumer credit and commercial real estate, in addition to the persistent losses in residential real estate related paper.
In view of the coming holidays, the next weekly report will be dated Apri 17. Given that I was among the first to call this a bear market rally, even before it developed, as I was among the first anticipate this recession, as well as earlier recessions, keep my bearishness in mind. The rally will not persist. The economy and profits have much further to fall.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports by going to internet explorer and typing the following: philipbraverman.blogspot.com
Such views may be percieved as incredible amidst the seeming market positives of recent days. The cut in the European Central Bank's lending rate to 1.25%, rather than the 1.0% widely anticipated, is still considered a market positive. Similarly, the seeming agreement of the G-20 to paper over their differences and promise to implement initiatives to stimulate the global economy out of its Depression (though few as yet recognize the growing threat of that coming realty). It is no small matter that the initiatives are far from being fully funded and are likely to fail even if and when funded. The markets were instead favorably focused on the benefits to financial instutions of the appropriate softening in the needlessly harsh mark-to-market accounting rules. But, that is no panacea for banking's ills. Nor will the alphabet soup of Federal initiatives rescue the banking system and the economy any time soon and without the requisite pain that massive deleveraging will impose. Nor will the initiatives adequately spur renewed lending by institutions still attempting to rebuild their capital in order to survive. Moreover, the economy is far from bottoming out, not withstanding the recent smattering of slight improvement in some fictionalized seasonally-adjusted data. Housing, the hub of the recession-Depression's central cause, is destined to continue to worsen even with low mortgage rates,at least for those with pristine credit, and other incentives. Employment, a critical leading indicator of housing, is still getting worse and is likely to continue to do so until 2010 at the earliest.
The jump to an 8.5% March official unemployment rate from 8.1% in February and 7.6% in January indicates that even by this understated measure, the recession is deepening rapidly. That 0.9% pace of rise every two months in this unemployment rate rise in just the past two months would carry this official unemployment rate into the 10% territory by summer's end. That unemployment rate would be highly significant considering that the preceding post-world war II peak unemployment rate was 10.8% in 1982. But,that prior post-war peak level is likely to be exceeeded this recession, if that is still the appropriate term for it.
If not for the surprise drop in the labor force in March, contrary to the typical trend labor force rise, the March unemployment rate would have been at least 8.6%. And without the fictional, make that imaginary, 114,000 rise in employment attributed to companies that the Bureau of Labor statistics does not sample, the official unemployment would actually be 8.7%.
As if these varients on the official unemployment rate are not already high enough, by other realistic measures, the unemployment rate is in reality already far, far, higher, well into the teens, and well above 15%. Such alternative measures include as unemployed those who are employed only part-time, are in temporary jobs because they can not find the permanent full-time jobs they seek, or have become so discouraged at the lack of employment opportunities that they are no longer actively seeking employment. This unpleasant realty strongly suggests that the official unemployment rate grossly understates the economic and financial pain that the recession is imposing on workers and consumers.
Nonfarm payrolls fell 663,000 in March, after a 651,000 decline in February and a revised 741,000 drop in January. Except for an 8,000 rise in Education and health services employment, every major employment category, including government, declined in March. But the bad employment news is far from over. Weekly initial claims for unemployment benefits jumped to 669,000 in the week ended March 28, from 657,000 the prior week. This data came too late to be reflected in the March monthly employment report. That and a further rise in long-term unemployment suggests the April employment report will be as bad or worse than March.
Even more worrisome than the 663,000 decline in March nonfarm payrolls, the decline in March employment in the household survey, which is typically more reliable in recessions and from which the unemployment rate is derived, was a deep 861,000 for the month.
Still more significant, aggregate weekly hours worked declined 1.0% in March after a 0.6% decline in February. This indicator serves as a prime basis for forcasting real GDP. Its performance implies a steep drop in real GDP in the first quarter. The real GDP decline is likely to at least match or exceed the 6.3% fourth quarter drop.
There are other significant adverse elements in the economic and financial picture that also indicate a deeper and prolonged recession ahead, even with the increasingly expensive global economic stimulus and financial salvage operation. For example, there may be a further $1 trillion in loss charge-offs yet to be taken by financial institutions despite the huge volume of charge-offs of losses already taken by these institutions and the moderation of the mark-to-market accounting requirements. There is as yet relatively little advance fall-out from the losses still to be realized in consumer credit and commercial real estate, in addition to the persistent losses in residential real estate related paper.
In view of the coming holidays, the next weekly report will be dated Apri 17. Given that I was among the first to call this a bear market rally, even before it developed, as I was among the first anticipate this recession, as well as earlier recessions, keep my bearishness in mind. The rally will not persist. The economy and profits have much further to fall.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports by going to internet explorer and typing the following: philipbraverman.blogspot.com
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