A recession in 2012 is increasingly likely. The US economy continues to expand at close to stall speed, making it highly vulnerable to a myriad of coming economic depressants. Various forms of economic stimulus expire at the end of this year. Consumer income and job growth are nowhere nearly strong enough to sustain the economy's current meagre growth pace, let alone sufficient to withstand the coming economic headwinds.
The sovereign debt crisis in Europe will force a recession throughout the Eurozone. Indeed, there are already signs of a contraction. The EU manufacturing purchasing managers index is down to 46.4, while its services index is down to 46.4. Both below The economic growth Germany may be one of the few exceptions to recession. But, their growth may be limited to a mere 1% next year. The credit and economic contagion effect of the overall eurozone recession will depress economic growth in the US as well as with Europe's other trading partners. Unfortunately, US banks have reportedly issued a huge volume of credit default swaps, which are insurance policies, against the default of European sovereign debt. These insurance policies, which are estimated to be in the hundreds of billions of dollars, would seriously reduce the capital of major US banks if the countries were to default on their debt. Thus, the uncertainty over the outlook will tend to keep the current pronounced bank-lending caution very much in place. It is credit availability and credit flows that determine economic growth, not liquidity.
China has taken various steps to slow its overheating economic growth pace and credit expansion. Off and on control of china's bank lending pace has created pronounced strains and curtailed economic growth. Indeed, China's purchasing manager index fell to 49.0 from 50.4 in October. The Shanghai index declined for the fourth week in a row and is now close to its low for the year. These are indications of an actual decline in China's manufacturing economy, not just a slowing in their growth rate. Moreover, these data have a reputation for being more reliable than their official government statistics. That is slowing growth for China's trading partners. For example, China has announced a pause in major foreign purchases, including, for the time being,an end to china'a purchases of GE's electricity generating windmills.
You might not believe that a US recession next year remains likely, especially given last week's bouyant equity market performance (with the Dow and S&P 500 index up 7%) and the recent array of seemingly stronger economic reports. The equity markets were especially impressed by the strength of retail sales on black Friday, the day after Thanksgiving. That consumer buying performance at the nation's retailers appeared to imply that the US consumer will continue to spend, buoying the economy. However, the extreme bargain prices offered simply accelerated purchases, borrowing from future purchases. The compensating slowing in sales will come next year, probably in January. This would mirror the experience with the Federal cash for clunkers program, which accelerated car purchases into a few months, followed by a compensating slowdown.
The decline in the unemployment rate to 8.6% in November from 9.0% in October was greeted with equity market enthusiasm. But, the reality is that the details of the employment report are far from reassuring. The labor force, which had fallen by 5 million over the last five years,fell by an additional 315,000 in November. This decline in the labor force came despite a 172,000 increase in civilian noninstutional population, which under normal circumstances would have significantly boosted the labor force. However, the decline in the labor force largely reflects an increase in truly discouraged workers, who have just given up looking for work. Thus, the drop in the labor force is an indication of profound economic weakness. If the labor force had not declined in November, the number of those reported as unemployed would have increased to 13,618,000, 315,000 more than the 13,303,000 actually reported.
Other less than optimistic details in the employment report include 0.1% November declines in both aggregate weekly private payrolls and weekly hours worked, and a still weak 120,000 increase in nonfarm payrolls. The U-6 unemployment rate, which includes those who took part-time work because they could not find full-time and discouraged workers,declined to 15.6% seasonally adjusted from 16.2%. But, that is still a very distressed unemployment level. The manufacturing employment diffusion index, which measures the number of firms hiring versus those cutting employment, fell to 49.4 in November from 52.5 in October, and the third decline in the past four months. Thus, more companies are firing than hiring workers. This further undermines the significance of the decline in the unemployment rate and effectively counters a rise in the ISM manufacturing index.
One economic positive often cited is that recessions are relatively rare in Presidential reelection years, obviously because incumbent Presidents have typically had immense power to stimulate the economy. But, next year is likely to prove different. The huge Federal budget deficit, the pressure to reign in government spending, raise taxes and cut the deficit will effectively limit the ability of the President to boost economic growth, even temporarily.
The agreement of the Fed, the European central bank and others to increase global liquidity were taken as a major positive for the equity market. Never fight the Fed is a long standing motto for equity investors. However, the central bank actions do not resolve the European credit crisis. That will require unlikely actions to unify the budget, taxing and spending authority of Europe. The political will for that is lacking. The necessary loss of sovereignty and the loss of special interests, including trimming pensions, salaries, public employment and raising taxes all argue against an effective resolution of the problems any time soon. It is almost inevitable that market disappointment will set in. Perhaps as early as following this coming week's EU summit.
The credit market was not particularly impressed with recent events. In the past it has generally been the credit market, rather than the equity market, that has made the best judgement call in assessing economic and financial prospects. This time is likely to prove no exception. That points to further declines in Treasury bond yields and renewed declines in equity prices as well, as weakness in the US and global economy becomes evident next year. This view may appear out of step with the huge increase in equity prices last week, which reversed the sizable gains the week before. Despite last week's the impressive price gains, this extreme equity market price volitility is itself a market negative.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
I can be reached at internet explorer by typing in: philipbraverman@gmail.com
This and prior reports can be accessed at philipbraverman.blogspot.com
Saturday, December 3, 2011
Sunday, October 9, 2011
Recession risk is still mounting despite September's employment report
The risk of recession is mounting. The Economic Cycle Research Institute's propriatary leading index, developed by legendary statistician Joeffrey Moore,indicates the US is already tipping into a new recession. Though it may not be evident for three to six months, or perhaps even longer, Laksman Achuthan, managing director of the Economic Cycle Research Institute, indicated that nothing can be done to head it off.
In my view, among the reasons for a new recession: The outlook for US exports and the US financial sector will be depressed by the prospect of growing debt problems in Europe, not just Greece, a slowdown in China's growth, a continuing morass in the US housing sector and an inability of Congress to resolve its differences. That points to one or more quarters of negative GDP growth,renewed declines in equity prices, commodity prices, and last, but not least, lower Treasury and high-grade bond yields. The recent back-up in Treasury, and high-grade muni and corporate yields will be reversed. The yield back-up was partly due to a mistaken belief both that Europe's financial problems will be resolved and that the US economy is really stronger than it is. In addition, there were a spate of municipal bond offerings. The maturity yield spread between short- and long-term bond yields will narrow to new cyclical lows. The difference between Treasury ten- and thirty-year yields, for example, will likely decline significantly from the current 1.0% to perhaps 0.5%, as the Fed's operation twist, entailing Fed buying of longer term bonds, persists.
The equity and credit markets greeted September's unchanged 9.1% unemployment rate and 103,000 rise in nonfarm payrolls as if the risk of a US recession had disappeared. True there were upward revisions of August's nonfarm payrolls to a 57,000 rise (after having been originally reported as unchanged), following a scant 42,000 increase in July. But, even if these official reports were not inflated (and they were), they would still leave US employment in a dire situation. Desperation over the lack of jobs is a major component of the motivation for the Wall Street sit-ins, now spreading across the nation.
More than half of the latest month's 103,000 rise in nonfarm payrolls was temporary or fictional, boosted by 45,000 striking Verizon workers returning to work, and 26,000 construction workers who owed much to temporary storm repair work. Also, the nonfarm payroll "estimate", which is what it actually is, was boosted by a Bureau of Labor Statistics mere guess of hiring by unsampled new small business. However, small businesses are not likely to have done much if any new hiring at all, considering that small business optimism has plunged. In order to sustain a cyclical economic recovery, nonfarm payrolls need to be rising well above 200,000 a month, probably 300,000 a month, for an extended period.
There are ominous signs that the pace of employment gains is likely to either remain very sluggish or even decelerate further before actually declining again. Manufacturing payrolls declined 13,000 in September, a reflection of the prospect of faltering exports. A 34,000 September decline in Goverment employment reflects the required efforts of State and local governments to balance their bloated budgets. As these problems worsen with an extended economic malaise both here and in Europe, there will undoubtedly be more such employment cuts. Perhaps most striking, as US corprations are faced with reductions in earnings, further declines in payrolls are inevitable. That will produce a rising unemployment rate, probably back to and above the 10% peak.
Perhaps the most realistic measure of the employment situation is the U-6 unemployment rate, which jumped to 16.5% in September from 16.2% in August. This measure includes both discouraged workers who have left the labor force because they cannot find work and those who took part-time work out of economic desperation because they could not find full-time jobs. Unfortunately, this already horrendous unemployment level is likely to rise further. The Help wanted add index has declined and there is a mismatch between jobs available and the qualifications of job applicants.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in PhilipBraverman.blogspot.com
Ican be reached at philipbraverman@Gmail.com
In my view, among the reasons for a new recession: The outlook for US exports and the US financial sector will be depressed by the prospect of growing debt problems in Europe, not just Greece, a slowdown in China's growth, a continuing morass in the US housing sector and an inability of Congress to resolve its differences. That points to one or more quarters of negative GDP growth,renewed declines in equity prices, commodity prices, and last, but not least, lower Treasury and high-grade bond yields. The recent back-up in Treasury, and high-grade muni and corporate yields will be reversed. The yield back-up was partly due to a mistaken belief both that Europe's financial problems will be resolved and that the US economy is really stronger than it is. In addition, there were a spate of municipal bond offerings. The maturity yield spread between short- and long-term bond yields will narrow to new cyclical lows. The difference between Treasury ten- and thirty-year yields, for example, will likely decline significantly from the current 1.0% to perhaps 0.5%, as the Fed's operation twist, entailing Fed buying of longer term bonds, persists.
The equity and credit markets greeted September's unchanged 9.1% unemployment rate and 103,000 rise in nonfarm payrolls as if the risk of a US recession had disappeared. True there were upward revisions of August's nonfarm payrolls to a 57,000 rise (after having been originally reported as unchanged), following a scant 42,000 increase in July. But, even if these official reports were not inflated (and they were), they would still leave US employment in a dire situation. Desperation over the lack of jobs is a major component of the motivation for the Wall Street sit-ins, now spreading across the nation.
More than half of the latest month's 103,000 rise in nonfarm payrolls was temporary or fictional, boosted by 45,000 striking Verizon workers returning to work, and 26,000 construction workers who owed much to temporary storm repair work. Also, the nonfarm payroll "estimate", which is what it actually is, was boosted by a Bureau of Labor Statistics mere guess of hiring by unsampled new small business. However, small businesses are not likely to have done much if any new hiring at all, considering that small business optimism has plunged. In order to sustain a cyclical economic recovery, nonfarm payrolls need to be rising well above 200,000 a month, probably 300,000 a month, for an extended period.
There are ominous signs that the pace of employment gains is likely to either remain very sluggish or even decelerate further before actually declining again. Manufacturing payrolls declined 13,000 in September, a reflection of the prospect of faltering exports. A 34,000 September decline in Goverment employment reflects the required efforts of State and local governments to balance their bloated budgets. As these problems worsen with an extended economic malaise both here and in Europe, there will undoubtedly be more such employment cuts. Perhaps most striking, as US corprations are faced with reductions in earnings, further declines in payrolls are inevitable. That will produce a rising unemployment rate, probably back to and above the 10% peak.
Perhaps the most realistic measure of the employment situation is the U-6 unemployment rate, which jumped to 16.5% in September from 16.2% in August. This measure includes both discouraged workers who have left the labor force because they cannot find work and those who took part-time work out of economic desperation because they could not find full-time jobs. Unfortunately, this already horrendous unemployment level is likely to rise further. The Help wanted add index has declined and there is a mismatch between jobs available and the qualifications of job applicants.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in PhilipBraverman.blogspot.com
Ican be reached at philipbraverman@Gmail.com
Saturday, September 3, 2011
US economic growth has stalled at the brink of a new recession
The August employment report triggered a further decline in Treasury and other credit market yields as well as a sell-off in equities.
The yield on the Treasury 10-year note fell to 1.99% on Friday, down from from 2.22% on Wednesday. The yield on the Treasury 30-year bond fell to 3.30% on Friday, down from 3.61% just two day earlier. Not only have these yields been declining, but the yield spread (the difference between the 10-year and 30-year yields) has also been declining. In just the last two days the Treasury yield spread declined to 131 basis points(or 1.31percentage points) from 139 basis points on Wednesday. High-grade corporate and municipal note and bond yields have also been declining. All these various yields and yield spreads are destined to decline further.
Third quarter real GDP growth is shaping up to be essentially zero, even weaker than the revised 1.0% second quarter slight rise and the almost flat 0.4% first quarter increase. As there is additional evidence of the sputtering economy, yields will decline further. The yield spread between 90-day Treasury bills, which already yields barely above zero, and the 10-year, is likely to narrow to 125 to 150 basis points. That suggests a coming 10-year yield low of between 1.25% and 1.50%, down from the current 1.99%. The 30-year Treasury yield could decline to between 2.00% to 2.5% from the current 3.3%. Even a one half percentage point decline in the 30-year yield would produce a 15% rise in the price of the bond. That would of course boost the prices of high grade corporates, such as AA rated GE bonds, and municipals.
The Federal Reserve is likely to reinforce the trend to lower Treasury bond yields by lengthening the maturity of their Treasury security purchases. This would be an operation twist designed to bring down bond yields to help stimulate the economy. Market expectations of this not yet announced possibility were enough to slightly raise 2-year Treasury yields.
August nonfarm payrolls were unchanged, a major disappointment, especially after downward revisions in prior months to payroll increases of only 85,000 in July and 20,000 in June. That is an average monthly increase of merely 35,000 the past three months. That is certainly not reversing the recession decline in employment, let alone creating jobs for new entrants into the labor force, including new graduates and immigrants. To accomplish that, the monthly increases should be well over 200,000. But to make mattters worse, the reported monthly nonfarm payroll increases are grossly overstated because they include a sizable increase attributed to assumed hiring by unsampled new businesses. However, there is good reason to believe that, in reality, new businesses are not significantly hiring.
Other elements of the August employment report were also bleak or even ominous. The official unemployment rate remained unchanged at 9.1%. But the U-6 unemployment rate (which includes discouraged workers and those working part-time because they could not find full-time employment) edged up to 16.2% from 16.1%. Average hourly earnings declined 0.1% and the average workweek also edged down 0.1%, both significant negatives for the US economy.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
The yield on the Treasury 10-year note fell to 1.99% on Friday, down from from 2.22% on Wednesday. The yield on the Treasury 30-year bond fell to 3.30% on Friday, down from 3.61% just two day earlier. Not only have these yields been declining, but the yield spread (the difference between the 10-year and 30-year yields) has also been declining. In just the last two days the Treasury yield spread declined to 131 basis points(or 1.31percentage points) from 139 basis points on Wednesday. High-grade corporate and municipal note and bond yields have also been declining. All these various yields and yield spreads are destined to decline further.
Third quarter real GDP growth is shaping up to be essentially zero, even weaker than the revised 1.0% second quarter slight rise and the almost flat 0.4% first quarter increase. As there is additional evidence of the sputtering economy, yields will decline further. The yield spread between 90-day Treasury bills, which already yields barely above zero, and the 10-year, is likely to narrow to 125 to 150 basis points. That suggests a coming 10-year yield low of between 1.25% and 1.50%, down from the current 1.99%. The 30-year Treasury yield could decline to between 2.00% to 2.5% from the current 3.3%. Even a one half percentage point decline in the 30-year yield would produce a 15% rise in the price of the bond. That would of course boost the prices of high grade corporates, such as AA rated GE bonds, and municipals.
The Federal Reserve is likely to reinforce the trend to lower Treasury bond yields by lengthening the maturity of their Treasury security purchases. This would be an operation twist designed to bring down bond yields to help stimulate the economy. Market expectations of this not yet announced possibility were enough to slightly raise 2-year Treasury yields.
August nonfarm payrolls were unchanged, a major disappointment, especially after downward revisions in prior months to payroll increases of only 85,000 in July and 20,000 in June. That is an average monthly increase of merely 35,000 the past three months. That is certainly not reversing the recession decline in employment, let alone creating jobs for new entrants into the labor force, including new graduates and immigrants. To accomplish that, the monthly increases should be well over 200,000. But to make mattters worse, the reported monthly nonfarm payroll increases are grossly overstated because they include a sizable increase attributed to assumed hiring by unsampled new businesses. However, there is good reason to believe that, in reality, new businesses are not significantly hiring.
Other elements of the August employment report were also bleak or even ominous. The official unemployment rate remained unchanged at 9.1%. But the U-6 unemployment rate (which includes discouraged workers and those working part-time because they could not find full-time employment) edged up to 16.2% from 16.1%. Average hourly earnings declined 0.1% and the average workweek also edged down 0.1%, both significant negatives for the US economy.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
Saturday, August 6, 2011
Recession risks boost prospect of further declines in equity prices and bond yields
The risk of the US and global economy falling back into a recession is mounting. It appears ominous that the IBD US proprietary leading economic indicator has just fallen to a new cyclical low, strikingly even below the prior low level reached in December 2007, which foreshadowed the last recession. Other leading indicator series also point to profound economic weakness ahead. That indicates still lower Treasury note and bond yields ahead, even with the S&P downgrading of US Treasury debt to AA+ from AAA, as well as renewed declines in equity prices.
The credit and equity markets began to take the risk of a return to recession far more seriously after the release of the second quarter real GDP report. The markets were disappointed at the 1.3% second quarter real GDP rise. But, far more distressing was the downward revision of the first quarter real GDP rise to a mere 0.4% annual rate, which is only a 0.1% quarterly increase, essentially economic stall speed. Moreover, revisions to prior GDP data also indicated that the recession was deeper and the recovery even more sluggish than previously reported. This was a major catalyst to a sell-off in equities and rally in Treasury note and bond prices.
Treasury note and bond yields declined sharply the past two weeks. The 10-year Treasury note yield fell to a new low of 2.35% before rebounding to 2.56% on Friday. But,that is still well below the relatively recent high of 3.7%. The announcement that the Bank of New York will start charging depositors fees led to a further decline in short term Treasury yields.
In the week before last the sell-off in equities exceeded 4.0% in all the primary stock indicies. As I have pointed out before, a decline in the Value Line equity index in excess of 4.0% in a single week, Friday to Friday, is typically an indication of a trend decline in broad equity indicies. That warrants a complete sellof of equity portfolios and, for the more speculative minded, establishing equity ETF short positions. That would certainly have proven to be a prudent move given that this past week the Value Line index fell an additional 9.6% and the S&P 500 index was down 7.2%, even with a Friday rebound.
The Friday rebound in equity prices and Treasury note and bond yields was due to a gross misreading of the July employment report, which was modestly better than feared, and an announcement that Italy will intensify its budget austerity and that, as a consequence, the ECB will buy Italian bonds. The July official unemployment rate edged down to 9.1% from 9.2%. But that was only due to continued sharp declines in the labor force as more and more discouraged workers give up looking for work. In July the civilian labor force fell by 193,000. That more than offset a 38,000 decline in household survey employment. Expect the unemployment rate to rise over coming months. That prospect seems all the more likely given the horrendous 60% spurt in July in planned corporate layoffs. The help-wanted add index also declined sharply in July. July nonfarm payrolls rose 117,000 after a mere 18,000 rise the month before. Unfortunately, the rise over the two months would have been a decline without a sheer Bureau Labor Statistics guess of hiring by new unsampled business, despite separate reports that indicate new firms are not hiring.
The global problems are compounding. The austerity required in much of Europe, their persistant credit crisis, the significant decline in US consumer confidence, the huge equity market losses, already approaching two Trillion dollars, business and bank caution as well as the contraints on further US Fiscal and monetary stimulus all point to an extremely sluggish global economy and a more than 50% risk of renewed recession.
Philip Braverman, President
Braverman Economic and Fanancial Consulting
One Hewitt Square #249
East Northport New York 11731
This and prior monthly reports can be accessed by going to Internet Explorer and typing in Philp Braverman.Blogspot.com
I can be reached at philipbaverman@Gmail.com
The credit and equity markets began to take the risk of a return to recession far more seriously after the release of the second quarter real GDP report. The markets were disappointed at the 1.3% second quarter real GDP rise. But, far more distressing was the downward revision of the first quarter real GDP rise to a mere 0.4% annual rate, which is only a 0.1% quarterly increase, essentially economic stall speed. Moreover, revisions to prior GDP data also indicated that the recession was deeper and the recovery even more sluggish than previously reported. This was a major catalyst to a sell-off in equities and rally in Treasury note and bond prices.
Treasury note and bond yields declined sharply the past two weeks. The 10-year Treasury note yield fell to a new low of 2.35% before rebounding to 2.56% on Friday. But,that is still well below the relatively recent high of 3.7%. The announcement that the Bank of New York will start charging depositors fees led to a further decline in short term Treasury yields.
In the week before last the sell-off in equities exceeded 4.0% in all the primary stock indicies. As I have pointed out before, a decline in the Value Line equity index in excess of 4.0% in a single week, Friday to Friday, is typically an indication of a trend decline in broad equity indicies. That warrants a complete sellof of equity portfolios and, for the more speculative minded, establishing equity ETF short positions. That would certainly have proven to be a prudent move given that this past week the Value Line index fell an additional 9.6% and the S&P 500 index was down 7.2%, even with a Friday rebound.
The Friday rebound in equity prices and Treasury note and bond yields was due to a gross misreading of the July employment report, which was modestly better than feared, and an announcement that Italy will intensify its budget austerity and that, as a consequence, the ECB will buy Italian bonds. The July official unemployment rate edged down to 9.1% from 9.2%. But that was only due to continued sharp declines in the labor force as more and more discouraged workers give up looking for work. In July the civilian labor force fell by 193,000. That more than offset a 38,000 decline in household survey employment. Expect the unemployment rate to rise over coming months. That prospect seems all the more likely given the horrendous 60% spurt in July in planned corporate layoffs. The help-wanted add index also declined sharply in July. July nonfarm payrolls rose 117,000 after a mere 18,000 rise the month before. Unfortunately, the rise over the two months would have been a decline without a sheer Bureau Labor Statistics guess of hiring by new unsampled business, despite separate reports that indicate new firms are not hiring.
The global problems are compounding. The austerity required in much of Europe, their persistant credit crisis, the significant decline in US consumer confidence, the huge equity market losses, already approaching two Trillion dollars, business and bank caution as well as the contraints on further US Fiscal and monetary stimulus all point to an extremely sluggish global economy and a more than 50% risk of renewed recession.
Philip Braverman, President
Braverman Economic and Fanancial Consulting
One Hewitt Square #249
East Northport New York 11731
This and prior monthly reports can be accessed by going to Internet Explorer and typing in Philp Braverman.Blogspot.com
I can be reached at philipbaverman@Gmail.com
Saturday, July 9, 2011
US economy will remain weak in the second half
The evidence continues to mount that the US economy is not only currently in a soft patch, but that the much anticipated second half rebound is unlikely to occur. Worse still, there is even a risk that the economy slips back into recession, though Warren Buffet dismisses that dire possibility.
What is the evidence supporting the conclusion that economic growth will at least continue lacklustre for an extended period? The latest employment report alone provides ample evidence of the economy's malaise. The official June unemployment rate edged up to 9.2%, from 9.1%. But, the more realistic U-6 unemployment rate, which includes discouraged workers and those who took part-time work because they could not find full-time work, rose to 16.2% from 15.8%. The household employment survey, from which the unemployment rate is calculated, declined 445,000 seasonally adjusted in June. The more followed nonfarm payroll employment survy was up a mere 18,000 in June after a revised 25,000 rise in the previous month.
The June nonfarm payrolls rise reflected a seasonally adjusted 57,000 increase in private employment and a 39,000 decline in government employment. The decline in government employment is likely to persist as state and local governments continue to scale back their expenditures in order to curtail their excessive budget deficits, as mandated by law in most states. The relatively small seasonally-adjusted increases in private sector employment the past two months may actually have been declines if, as expected, the boost to employment to reflect assumed hiring by unsampled new firms, which was 131,000 in June, did not in reality occur. There were also declines, even if slight, in hours worked and average pay, confirming current and prospective economic weakness.
The widely respected ECRI's propriatary leading US economic index declined 0.7% to the lowest level this year. That points to further economic weakness over the next six to nine months.
Consumer confidence edged lower, suggesting consumer spending restraint.
In addition, there are a number of other very serious negatives for the US economy. The financial sector remains saddled with a large volume of unrecognized losses and nonearning assets that pose a threat to many institutions capital adequacy and willingness to lend. There is still a huge overhang of unsold residential housing that will soon be augmented by a new wave of forclosures. There is an excessive volume of debt owed by business, Federal, state and local governments and consumers that need to be worked off. The debt problems of Europe did not end with the aid to Greece. The problems of Greece have only been postponed. And Portugal, Ireland, Italy and Spain may well experience similar financial strains. That reality,together with efforts by China to slow speculation and high oil prices, will serve to keep global economic growth restrained.
The forgoing is virtually certain to keep Fed policy on hold for a very extended period,probably until after the Presidential election next year. In concert, that has implications for investment choices. Treasury note and bond yields will either stay low or, more likely, decline further. That should lead to a further decline in maturity yield spreads. Continued low borrowing costs are likely to keep firms such as Annaly (nly) and cypress, both listed on the NYSE, highly profitable. Another investment worth considering is a portfolio of Build America Bonds. While the Federal program to encourage state and local governments to offer taxable municipals has ended, and with it new issues, there are still some attractively priced Build America Bonds available in the secondary market.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to internet explorer at philipbraverman.blogspot.com
I can be contacted at Philip Braverman@Gmail.com
What is the evidence supporting the conclusion that economic growth will at least continue lacklustre for an extended period? The latest employment report alone provides ample evidence of the economy's malaise. The official June unemployment rate edged up to 9.2%, from 9.1%. But, the more realistic U-6 unemployment rate, which includes discouraged workers and those who took part-time work because they could not find full-time work, rose to 16.2% from 15.8%. The household employment survey, from which the unemployment rate is calculated, declined 445,000 seasonally adjusted in June. The more followed nonfarm payroll employment survy was up a mere 18,000 in June after a revised 25,000 rise in the previous month.
The June nonfarm payrolls rise reflected a seasonally adjusted 57,000 increase in private employment and a 39,000 decline in government employment. The decline in government employment is likely to persist as state and local governments continue to scale back their expenditures in order to curtail their excessive budget deficits, as mandated by law in most states. The relatively small seasonally-adjusted increases in private sector employment the past two months may actually have been declines if, as expected, the boost to employment to reflect assumed hiring by unsampled new firms, which was 131,000 in June, did not in reality occur. There were also declines, even if slight, in hours worked and average pay, confirming current and prospective economic weakness.
The widely respected ECRI's propriatary leading US economic index declined 0.7% to the lowest level this year. That points to further economic weakness over the next six to nine months.
Consumer confidence edged lower, suggesting consumer spending restraint.
In addition, there are a number of other very serious negatives for the US economy. The financial sector remains saddled with a large volume of unrecognized losses and nonearning assets that pose a threat to many institutions capital adequacy and willingness to lend. There is still a huge overhang of unsold residential housing that will soon be augmented by a new wave of forclosures. There is an excessive volume of debt owed by business, Federal, state and local governments and consumers that need to be worked off. The debt problems of Europe did not end with the aid to Greece. The problems of Greece have only been postponed. And Portugal, Ireland, Italy and Spain may well experience similar financial strains. That reality,together with efforts by China to slow speculation and high oil prices, will serve to keep global economic growth restrained.
The forgoing is virtually certain to keep Fed policy on hold for a very extended period,probably until after the Presidential election next year. In concert, that has implications for investment choices. Treasury note and bond yields will either stay low or, more likely, decline further. That should lead to a further decline in maturity yield spreads. Continued low borrowing costs are likely to keep firms such as Annaly (nly) and cypress, both listed on the NYSE, highly profitable. Another investment worth considering is a portfolio of Build America Bonds. While the Federal program to encourage state and local governments to offer taxable municipals has ended, and with it new issues, there are still some attractively priced Build America Bonds available in the secondary market.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to internet explorer at philipbraverman.blogspot.com
I can be contacted at Philip Braverman@Gmail.com
Saturday, June 4, 2011
Is a new recession foreshadowed by recent slow economic activity?
There should be little doubt that the economy is in the process of slowing further. The recent slate of economic reports are clearly disappointing. That includes a May rise in the unemployment rate to 9.1%,up from 8.8% in March and 9.0% in April, and a mere 54,000 May increase in nonfarm payrolls versus an average 222,000 rise the prior three months. Indeed, there are indications that the greatest private sector employment weakness is among small firms which makes incredible a Bureau of Labor Statistics mere guess that there was a 206,000 May rise in completely unsampled small firm hirings, accounting for one third of the total rise in payrolls before seasonal adjustment. Thus, even the 54,000 seasonally adjusted May rise in nonfarm payrolls may be grossly overstated. As if that were not enough, this week's reports of the Chicago PMI,Purchasing Managers Index,the ISM, Institute of Supply Management, and housing statistics were all also considerably weaker.
But, something even more ominous may well be brewing.
Long-lead economic indicators and other relationships point to the possibility of one or more quarters of negative real GDP growth later this year or next. The Institute for Business Cycle Research sees a new economic downturn looming in their propriatary long lead economic indicators.
The economic model of one Federal Reserve Bank links the recent decline in US Treasury intermediate note and long-term bond yields, and the resultant narrowing in the maturity yield spread, to a decline in real GDP growth in coming quarters.
Housing has proven to be a reliable very long-lead economic indicator. Thus, the renewed decline in various housing measures, from still very depressed levels, points to a relapse in housing that may well portend broader weakness for the overall economy. Indeed, Sam Zell, the legendary real estate Guru, has indicated that he cannot yet buy commercial real estate in the US, at least not until property prices drop significantly to market clearing levels. But, he stressed that can not happen while lending institutions are unwilling to forclose on major delinquent mortgages for fear of the consequent writedown of their capital as they recognize sizable losses. Condominium and coop prices in Manhattan are reportedly an exception to the weakness prevailing in much of the rest of the country, especially in retirement and vacation centers where investor speculation created a massive bubble. And there is also too much office and retail space available, suggesting downward pressure on rentals and prices.
State and local budget deficits are still too large to be closed by a rise in taxes, which is impractical in a distressed economy. Thus, further and significant spending cuts and layoffs will be required.
The efforts of Republicans to curtail Federal spending, so as to limit the balloning Federal budget deficit, will make it virtually impossible to bring major new stimulative Federal spending programs into realty. Thus, there will be little prospect of new Federal spending to offset the economic slowdown or the faze-out of previous Federal stimulus efforts, which incidently seem to have been of little use. There are those who believe that Federal stimulus is ineffective and recent experience certainly appears to support that contention.
It could well be that the battleground of the next Presidential election is being fought and decided currently. No incumbent President since FDR has won reelection with the unemployment rate above 7.0%. And the Republicans, who know this, are waging a battle not only against the Federal budget deficit, but against the economic recovery and, consequently, the President. That could be a dangerous political strategy, even if new economic stimulus would prove ineffective.
A number of other potentially decisive forces are in play that add to the risks of a major economic downturn or even a recession. These include the continuing credit crisis in Europe, extending far beyond Greece. The entire southern tier of Europe has financial problems. This includes Portugal,Spain,Italy and Greece, as well as Ireland. Germany and France cannot continue to bail out the weak economies to preserve the European economic union and the European banks with substantial holdings of distressed southern tier European debts. The prescription of imposed austerity in exchange for the aid packages and bailouts will at the very least significantly undermine and slow European economic growth.
There is also the pronounced efforts of China to slow their overheating economy in order to reign in inflation and curtail speculation, especially in real estate.
Japan is contibuting to a probable slowing in the global economy due to extensive problems stemming from their earthquake and nuclear power plant meltdown.
Uncertainties are proliferating over the consequences of the so called Arab Spring. These various forces can so undermine confidence in the economic outlook that capital investment decisions are prudently postponed, even with advantageous US tax treatment.
While the US equity market has been declining for a number of weeks,the magnitude of the weekly decline has not yet reached the crtical 4.0% plus decline in the value line index and other broad equity market indices in a single week that have in the past proven reliable sell signals. But, given the outlook for the economy, high margin debt and other warning signs, the liklihood is that the 4.0% plus decline in a single week sell signal will soon materialize.
The decline in Treasury yields will likely persist as the economy weakens further and the Fed's QEll, their second quantative easing, comes to an end. This Treasury yield decline, which has already carried the 10-year Treasury yield to 3.00%, from a recent high of 3.60%, will probably eventually carry the yield back to 2.5% or below.And that should benefit the prices of highly rated corporate and municipal bonds as well.
Philip Braverman, President
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can by accesssed by going to Internet Explorer and typing in PhilipBraverman.Blogspot.com
I can be reached at PhilipBraverman@Gmail.com
But, something even more ominous may well be brewing.
Long-lead economic indicators and other relationships point to the possibility of one or more quarters of negative real GDP growth later this year or next. The Institute for Business Cycle Research sees a new economic downturn looming in their propriatary long lead economic indicators.
The economic model of one Federal Reserve Bank links the recent decline in US Treasury intermediate note and long-term bond yields, and the resultant narrowing in the maturity yield spread, to a decline in real GDP growth in coming quarters.
Housing has proven to be a reliable very long-lead economic indicator. Thus, the renewed decline in various housing measures, from still very depressed levels, points to a relapse in housing that may well portend broader weakness for the overall economy. Indeed, Sam Zell, the legendary real estate Guru, has indicated that he cannot yet buy commercial real estate in the US, at least not until property prices drop significantly to market clearing levels. But, he stressed that can not happen while lending institutions are unwilling to forclose on major delinquent mortgages for fear of the consequent writedown of their capital as they recognize sizable losses. Condominium and coop prices in Manhattan are reportedly an exception to the weakness prevailing in much of the rest of the country, especially in retirement and vacation centers where investor speculation created a massive bubble. And there is also too much office and retail space available, suggesting downward pressure on rentals and prices.
State and local budget deficits are still too large to be closed by a rise in taxes, which is impractical in a distressed economy. Thus, further and significant spending cuts and layoffs will be required.
The efforts of Republicans to curtail Federal spending, so as to limit the balloning Federal budget deficit, will make it virtually impossible to bring major new stimulative Federal spending programs into realty. Thus, there will be little prospect of new Federal spending to offset the economic slowdown or the faze-out of previous Federal stimulus efforts, which incidently seem to have been of little use. There are those who believe that Federal stimulus is ineffective and recent experience certainly appears to support that contention.
It could well be that the battleground of the next Presidential election is being fought and decided currently. No incumbent President since FDR has won reelection with the unemployment rate above 7.0%. And the Republicans, who know this, are waging a battle not only against the Federal budget deficit, but against the economic recovery and, consequently, the President. That could be a dangerous political strategy, even if new economic stimulus would prove ineffective.
A number of other potentially decisive forces are in play that add to the risks of a major economic downturn or even a recession. These include the continuing credit crisis in Europe, extending far beyond Greece. The entire southern tier of Europe has financial problems. This includes Portugal,Spain,Italy and Greece, as well as Ireland. Germany and France cannot continue to bail out the weak economies to preserve the European economic union and the European banks with substantial holdings of distressed southern tier European debts. The prescription of imposed austerity in exchange for the aid packages and bailouts will at the very least significantly undermine and slow European economic growth.
There is also the pronounced efforts of China to slow their overheating economy in order to reign in inflation and curtail speculation, especially in real estate.
Japan is contibuting to a probable slowing in the global economy due to extensive problems stemming from their earthquake and nuclear power plant meltdown.
Uncertainties are proliferating over the consequences of the so called Arab Spring. These various forces can so undermine confidence in the economic outlook that capital investment decisions are prudently postponed, even with advantageous US tax treatment.
While the US equity market has been declining for a number of weeks,the magnitude of the weekly decline has not yet reached the crtical 4.0% plus decline in the value line index and other broad equity market indices in a single week that have in the past proven reliable sell signals. But, given the outlook for the economy, high margin debt and other warning signs, the liklihood is that the 4.0% plus decline in a single week sell signal will soon materialize.
The decline in Treasury yields will likely persist as the economy weakens further and the Fed's QEll, their second quantative easing, comes to an end. This Treasury yield decline, which has already carried the 10-year Treasury yield to 3.00%, from a recent high of 3.60%, will probably eventually carry the yield back to 2.5% or below.And that should benefit the prices of highly rated corporate and municipal bonds as well.
Philip Braverman, President
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can by accesssed by going to Internet Explorer and typing in PhilipBraverman.Blogspot.com
I can be reached at PhilipBraverman@Gmail.com
Saturday, May 7, 2011
What is behind the decline in Treasury yields and commodity prices
The recent decline in Treasury yields should not be the surprise that many analysts claim it to be. Moreover, the forces that have created the latest downtrend are likely to extend the decline, especially after next week's slate of Treasury borrowing of 3-year and 10-year notes and 30-year bonds. On Friday, for example, the Treasury ten-year yield edged down to 3.15% from 3.29% the week before. And that decline came despite what some viewed as a stronger than expected 244,000 rise in April nonfarm payrolls. But, an array of economic and financial developments were more than offsetting, supporting a decline in Treasury yields as well as commodity prices.
The increase in nonfarm payrolls was a seemingly respectable 244,000. But, it was more than overshadowed by a rise in the unemployment rate to 9.0% from 8.8%, largely reflecting a sizeable 190,000 decline in April household survey employment. There is disagreement among analysts as to which is the more reliable employment survey, the nonfarm payroll or the houshold survey. However, there is evidence to suggest that at the current stage of the business cycle it is the household survey that is more reliable as an indicator of the state of the economy and, of course, the employment situation. Despite a rise in the nation's population, the civilian labor force declined 1.1 million over the past year, when it should have been rising significantly. The reason for the disparity is that discouraged unemployed workers are leaving the labor force after giving up hope of finding a job. The broader U-6 unemployment rate counts as unemployed not only discouraged workers, but those who were unable to find the full-time employment they seek and out of necessity took part-time work. This U-6 unemployment rate rose to 15.9% in April from 15.7% the month before.
Bill Gross, who heads up Pimco Investments, indicated that the economy is not strong enough to even sustain the emplyment growth we are achieving. That is a very dissappointing assessment considering that employment is not even keeping pace with population growth, let alone remploying the million who lost jobs in the great recession.
The first quarter real GDP rose at a subpar 1.8% annual rate, down from 3.1% in the previous quarter and 3.7% in the first quarter last year. This hardly appears to be a vigorous recovery. And the risk is that the pace will either stay slow or weaken further. The various forms of Federal stimulus is ending. There will be further declines in housing prices as the backlog of unsold homes rises with the coming increase in the foreclosure pace. State and local governments will continue to cut their spending and trim staff, as well as raise taxes, as they try to cut their budget deficits.The global economy will slow as the debt crisis in Europe persists and threatens to widen and China attempts to curtail speculation and inflation.
The announced mid-year end of the Federal Reserve's second round of quantative easing,in which the Fed purchases Treasury securities, will lessen the flow of funds into speculation in commodities. It is the anticipated end of that program and the first efforts to reign in the Federal budget deficit, thereby undermining inflation fears, which are contibuting to the decline in Treasury yields and commodity prices.
With huge excess capacity to produce and lingering high unemployment there can be little sustained inflation pressure, even with the rise in oil, food and other commodity prices. And while there is inflation fear, there is no realistic realty of sustained inflation any time soon. That not only precludes a significant rise in Treasury yields, it should lead to still lower Treasury yields, including a 10-year yield below 3.00%.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in Philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
The increase in nonfarm payrolls was a seemingly respectable 244,000. But, it was more than overshadowed by a rise in the unemployment rate to 9.0% from 8.8%, largely reflecting a sizeable 190,000 decline in April household survey employment. There is disagreement among analysts as to which is the more reliable employment survey, the nonfarm payroll or the houshold survey. However, there is evidence to suggest that at the current stage of the business cycle it is the household survey that is more reliable as an indicator of the state of the economy and, of course, the employment situation. Despite a rise in the nation's population, the civilian labor force declined 1.1 million over the past year, when it should have been rising significantly. The reason for the disparity is that discouraged unemployed workers are leaving the labor force after giving up hope of finding a job. The broader U-6 unemployment rate counts as unemployed not only discouraged workers, but those who were unable to find the full-time employment they seek and out of necessity took part-time work. This U-6 unemployment rate rose to 15.9% in April from 15.7% the month before.
Bill Gross, who heads up Pimco Investments, indicated that the economy is not strong enough to even sustain the emplyment growth we are achieving. That is a very dissappointing assessment considering that employment is not even keeping pace with population growth, let alone remploying the million who lost jobs in the great recession.
The first quarter real GDP rose at a subpar 1.8% annual rate, down from 3.1% in the previous quarter and 3.7% in the first quarter last year. This hardly appears to be a vigorous recovery. And the risk is that the pace will either stay slow or weaken further. The various forms of Federal stimulus is ending. There will be further declines in housing prices as the backlog of unsold homes rises with the coming increase in the foreclosure pace. State and local governments will continue to cut their spending and trim staff, as well as raise taxes, as they try to cut their budget deficits.The global economy will slow as the debt crisis in Europe persists and threatens to widen and China attempts to curtail speculation and inflation.
The announced mid-year end of the Federal Reserve's second round of quantative easing,in which the Fed purchases Treasury securities, will lessen the flow of funds into speculation in commodities. It is the anticipated end of that program and the first efforts to reign in the Federal budget deficit, thereby undermining inflation fears, which are contibuting to the decline in Treasury yields and commodity prices.
With huge excess capacity to produce and lingering high unemployment there can be little sustained inflation pressure, even with the rise in oil, food and other commodity prices. And while there is inflation fear, there is no realistic realty of sustained inflation any time soon. That not only precludes a significant rise in Treasury yields, it should lead to still lower Treasury yields, including a 10-year yield below 3.00%.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in Philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
Saturday, April 2, 2011
Economic growth will remain moderate, only to slow or worse once stimulus ends
It would be a mistake to assume that the economy's recessionary problems are behind it and that the recovery will continue to gain traction indefinitely. The various forms of economic stimulus are clearly having a positive impact on the recovery. But, the tax cuts and other forms of stimulus are likely to end this year. At the same time, economic and financial negatives will continue to prevail, if not intensify. That suggests the economic recovery will at best continue to grow at only a moderate pace that keeps unemployment high for an extended period. But, once the economic stimulus fades from the scene, the economy will either slow or slip back into recession.
There are many depressants still plauging the econom. The deleveraging process is far from complete for individuals, business, financial firms and governments. It will take years more to complete the reversal of the extreme and monumental buildup to overdependence on debt of all these sectors.
The housing sector is still in retreat. There is a huge overhang of unsold homes, vacant homes and homes under water (with outstanding mortgages in excess of market value). There is a coming further wave of foreclosures as financial institutions deal with a backlog of delinquent mortgages and paperwork logjam problems. This all points to a further significant decline in home prices. Even the prices of apartments in urban centers are continuing to decline further. And housing is a long-lead economic leading indicator.
The bad loans that financial institutions still have on their books remain a serious potential threat to their capial adequacy. The revision of Federal Accounting Standards Board rules allows financial institutions to postpone writing off distressed assets as long as they indicate no intention of selling them. That avoids the write down of capital that previous rules would have required. But, it does not make the instutions whole or encourage lending. It plauges them with much the same problems that have beset the beleagured Japanese banks and that have been instrumental in keeping Japan in its economic morass for well over a decade.
The state and local governments have to deal with their huge budget deficits by cutting spending and staff. That is a major negative for the US economy.
China is attempting to curtail its speculative binge. It cannot depend on the US consumer to the same extent to fuel its export dependent economy. The European debt crisis will force austerity on some nations and a slowdown on others. There is a move toward protectionism that will slow global growth. Japan's earthquake related problems will slow its growth and transmit weakness elsewhere due to shortages, despite the eventual rebuilding boost effect. The MiddleEast unrest creates global economic uncertainty and high oil prices that will dampen US and global consumer discretionary spending.
This litany of economic negatives adds up to only a temporary and feeble cyclical economic recovery.
There are certainly some moderate economic positives in the current economic picture. The March increase in nonfarm payrolls was 216,000, in line with expectations. And the official unemployment rate edged down to 8.8% from 8.9% in February. But,that is still a very slow pace of employment growth and an exceptionally high rate of official unemployment this far into a cyclical economic recovery. To make matters worse, the U-6 unemployment rate is still 15.7% seasonally adjusted. This series, which includes discouraged workers who can not find work and those employed part-time because they could not find full-time work, is a better measure of the real extent of the nation's employment distress. Moreover, a disproportionately large share of the employment gains were in low paying jobs. That helps explain why average hourly earnings and average weekly earnings were unchanged. Durable goods orders were weak in the latest report. That is a surpise considering the US effort to boost capital expenditures by allowing substantially increased tax expensing opportunities this year.
Taken together, these views and problems suggest that inflation wil not accelerate on a sustained basis, despite the recent rise in food and energy prices. The Fed will continue its accomodative policy for an extended period, through this year and into next, even if it ends the QE2 purchases of Treasuries at midyear. Treasury bond yields will eventually decline significantly, especially when the commodity price bubble bursts and the US and global economy slows. High-grade bonds will also benefit. But junk bonds will suffer. The stock market will also be declining at that point. But until there is at least a 4.0% decline in the major equity market indices in any given week, it is cautiously prudent to remain invested.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accesssed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
There are many depressants still plauging the econom. The deleveraging process is far from complete for individuals, business, financial firms and governments. It will take years more to complete the reversal of the extreme and monumental buildup to overdependence on debt of all these sectors.
The housing sector is still in retreat. There is a huge overhang of unsold homes, vacant homes and homes under water (with outstanding mortgages in excess of market value). There is a coming further wave of foreclosures as financial institutions deal with a backlog of delinquent mortgages and paperwork logjam problems. This all points to a further significant decline in home prices. Even the prices of apartments in urban centers are continuing to decline further. And housing is a long-lead economic leading indicator.
The bad loans that financial institutions still have on their books remain a serious potential threat to their capial adequacy. The revision of Federal Accounting Standards Board rules allows financial institutions to postpone writing off distressed assets as long as they indicate no intention of selling them. That avoids the write down of capital that previous rules would have required. But, it does not make the instutions whole or encourage lending. It plauges them with much the same problems that have beset the beleagured Japanese banks and that have been instrumental in keeping Japan in its economic morass for well over a decade.
The state and local governments have to deal with their huge budget deficits by cutting spending and staff. That is a major negative for the US economy.
China is attempting to curtail its speculative binge. It cannot depend on the US consumer to the same extent to fuel its export dependent economy. The European debt crisis will force austerity on some nations and a slowdown on others. There is a move toward protectionism that will slow global growth. Japan's earthquake related problems will slow its growth and transmit weakness elsewhere due to shortages, despite the eventual rebuilding boost effect. The MiddleEast unrest creates global economic uncertainty and high oil prices that will dampen US and global consumer discretionary spending.
This litany of economic negatives adds up to only a temporary and feeble cyclical economic recovery.
There are certainly some moderate economic positives in the current economic picture. The March increase in nonfarm payrolls was 216,000, in line with expectations. And the official unemployment rate edged down to 8.8% from 8.9% in February. But,that is still a very slow pace of employment growth and an exceptionally high rate of official unemployment this far into a cyclical economic recovery. To make matters worse, the U-6 unemployment rate is still 15.7% seasonally adjusted. This series, which includes discouraged workers who can not find work and those employed part-time because they could not find full-time work, is a better measure of the real extent of the nation's employment distress. Moreover, a disproportionately large share of the employment gains were in low paying jobs. That helps explain why average hourly earnings and average weekly earnings were unchanged. Durable goods orders were weak in the latest report. That is a surpise considering the US effort to boost capital expenditures by allowing substantially increased tax expensing opportunities this year.
Taken together, these views and problems suggest that inflation wil not accelerate on a sustained basis, despite the recent rise in food and energy prices. The Fed will continue its accomodative policy for an extended period, through this year and into next, even if it ends the QE2 purchases of Treasuries at midyear. Treasury bond yields will eventually decline significantly, especially when the commodity price bubble bursts and the US and global economy slows. High-grade bonds will also benefit. But junk bonds will suffer. The stock market will also be declining at that point. But until there is at least a 4.0% decline in the major equity market indices in any given week, it is cautiously prudent to remain invested.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accesssed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
Sunday, March 6, 2011
The recovery has gained a slight vitality, but it still remains sluggish and vulnerable
The latest set of economic reports suggests the recovery, though still weak and vulnerable, is gaining at least modest vitality. The February employment report is an example of this mixture of positives and negatives. The positives include a 192,000 February rise in seasonally-adjusted nonfarm payrolls,up from a mere 63,000 rise in January. That is a better performance, but at that rate it will take years to just reverse the 8 million jobs lost in the recession, let alone create enough jobs for new entrants to the labor force. Payroll employment is up just 1.3 million over the past year, or an average 106,000 per month. That is too sluggish a pace to restore the economy to pre-recession levels any time soon.
The official unemployment rate edged down marginally to 8.9% in February. However, that still leaves 13.7 million officially unemployed. And that does not include the 8.3 million involuntary part-time workers who have sought but are unable to find full-time employment. In addition, there are still 2.7 million discouraged workers and others considered only marginally attached to the labor force that are not included in the labor force because they did not actively seek employment in the past four weeks. Including these various categories, as does the U-6 series, the unemployment rate jumps to an horrendous 15.9%, though it is down from its 17% cyclical high. Another worrisome aspect of the labor market is the continued downtrend in the civilian labor force population participation rate, now 63.9% down from 66.8% prior to the '07-'09 recession. The continuing dire state of the employment situation has led the unemployed to extreme measures such as forcing early retirement, a reversal of immigration and a return of the unemployed to school. A return to school should not be a surprising consequence of the 10.1% rate of unemployment among professional and business services workers, most of whom already have college degrees.
The markets reaction to Friday's release of the February employment report is instructive. The stock market traded off slightly while the Treasury bond market improved modestly. The likely explanation is that the markets were focused on the prospect that as a result of the employment report there would be an earlier end to Fed stimulus and no renewed Fed purchases of Treasury securities after the current Quantative Easing program's scheduled end at mid-year. That reaction assumes that speculative investment in equities would be reduced and/or corporate profit prospects would be eroded if short-term interest rates were to soon rise. At the same time an earlier end to Fed easing is likely perceived as reducing the prospect of a percipitous rise in inflation. Unfortunately, this potential market analysis is seriously flawed. The Fed is determined to see the economy far stronger than it is currently before it relinquishes its stimulative stance. That virtually assures a continuation of the present low interest policy through this year and probably well into or through next year.
Why, you might ask, am I so pessimistic on the economy that the Fed is expected to continue its low interest rate policy for such an extended period. The reason is the economy is being boosted by various stimulus programs that will end at various points over the course of this year. One of the more important of these programs is the full income tax expensing of corporate capital investment this year. As these stimulus programs end, economic growth will slow to a dissapointing pace. That day of pronounced disappointment may not come until late this year or next year. But it will come. The economy is also facing major problems. The rise in income is insufficient to maintain a rapid growth is retail sales. The US is overstored, there is too much excess office space and there is a continued and possibly an escalating home mortgage foreclosure problem. That points to a continued decline in home prices, office and retail rents, and commercial and retail building prices. Unfortunately, that also implies more losses on and writedowns of related loan assets for financial institutions. That will keep lenders cautious. State and local governments will attempt to close their budget deficits as mandated by law. That will lead to layoffs and spending reductions. The rise in energy, food and other commodity prices are also an economic negative, restraining consumer discretionary spending on products and services other than food and energy. The rise in energy prices stems in part from disruptions in the Middle East. In addition, speculative investment in commodities and the rise in emerging market economies are boosting the demand for and the prices of energy, other commodities and food. The Fed induced low interest rates and available credit in the US are a major source of that global speculation in commodities. Other potential negatives are threats to the pace of global economic growth. China is attempting to slow investment in real estate by a 60% downpayment requirement on second home purchases and despite the efforts to contain the European debt crisis, their problems have by no means been resolved.
Despite increases in oil production by Saudi Arabia and other producers, dislocations, differences in the types of crude produced and market uncertainties can keep energy prices high. Commodity and food prices are also likely to stay high. But, that is unlikely to translate into any significant rise in core consumer price inflation given the still huge excesses in unemployment and unused production capacity. Durable manufacturing capacity utilization at 76.1% is far from the typical inflation threshold near 87% where bottle-neck price pressures would be likely to emerge.
What does all this add up to for investments? The equity market may be somewhat vulnerable, but that does not justify broad scale selling until the major indices are down by at least 4.0% for a full week. In the past that has been a relatively reliable signal not only for liquidating positions, but also for going short. When the decline in equity prices or the slowdown in economic growth arrives, inflation fears will be arrested and Treasury bond prices will rise, as their yields decline. In the meantime, the tax incentive induced spur to capital investment will help boost earnings of durable goods producers. GE, for example, should be a beneficiary. That should be good for both their equity and bond prices.
There may be some few notable municipal problems as beleagured State and local governments deal with budget problems. But, the financial fallout is likely to be nothing like the market and some experts suggest. This could well be an attractive buying opportunity as any real or imagined individual local bankruptcy threat triggers a major resumption of investor liquidation of holdings in tax-exempt mutual funds. In order to meet the withdrawal of investor funds the funds will be forced to sell their holdings. For example, there are already 6% tax-exempt yields available on long-term investment grade bond investments, with relatively assured revenue streams, in New York and Puerto Rico. A new municipal bond selloff would provide increased opportunities on more intermediate-term and still higher rated bonds.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com
Ican be reached at philipbraverman@gmail.com
The official unemployment rate edged down marginally to 8.9% in February. However, that still leaves 13.7 million officially unemployed. And that does not include the 8.3 million involuntary part-time workers who have sought but are unable to find full-time employment. In addition, there are still 2.7 million discouraged workers and others considered only marginally attached to the labor force that are not included in the labor force because they did not actively seek employment in the past four weeks. Including these various categories, as does the U-6 series, the unemployment rate jumps to an horrendous 15.9%, though it is down from its 17% cyclical high. Another worrisome aspect of the labor market is the continued downtrend in the civilian labor force population participation rate, now 63.9% down from 66.8% prior to the '07-'09 recession. The continuing dire state of the employment situation has led the unemployed to extreme measures such as forcing early retirement, a reversal of immigration and a return of the unemployed to school. A return to school should not be a surprising consequence of the 10.1% rate of unemployment among professional and business services workers, most of whom already have college degrees.
The markets reaction to Friday's release of the February employment report is instructive. The stock market traded off slightly while the Treasury bond market improved modestly. The likely explanation is that the markets were focused on the prospect that as a result of the employment report there would be an earlier end to Fed stimulus and no renewed Fed purchases of Treasury securities after the current Quantative Easing program's scheduled end at mid-year. That reaction assumes that speculative investment in equities would be reduced and/or corporate profit prospects would be eroded if short-term interest rates were to soon rise. At the same time an earlier end to Fed easing is likely perceived as reducing the prospect of a percipitous rise in inflation. Unfortunately, this potential market analysis is seriously flawed. The Fed is determined to see the economy far stronger than it is currently before it relinquishes its stimulative stance. That virtually assures a continuation of the present low interest policy through this year and probably well into or through next year.
Why, you might ask, am I so pessimistic on the economy that the Fed is expected to continue its low interest rate policy for such an extended period. The reason is the economy is being boosted by various stimulus programs that will end at various points over the course of this year. One of the more important of these programs is the full income tax expensing of corporate capital investment this year. As these stimulus programs end, economic growth will slow to a dissapointing pace. That day of pronounced disappointment may not come until late this year or next year. But it will come. The economy is also facing major problems. The rise in income is insufficient to maintain a rapid growth is retail sales. The US is overstored, there is too much excess office space and there is a continued and possibly an escalating home mortgage foreclosure problem. That points to a continued decline in home prices, office and retail rents, and commercial and retail building prices. Unfortunately, that also implies more losses on and writedowns of related loan assets for financial institutions. That will keep lenders cautious. State and local governments will attempt to close their budget deficits as mandated by law. That will lead to layoffs and spending reductions. The rise in energy, food and other commodity prices are also an economic negative, restraining consumer discretionary spending on products and services other than food and energy. The rise in energy prices stems in part from disruptions in the Middle East. In addition, speculative investment in commodities and the rise in emerging market economies are boosting the demand for and the prices of energy, other commodities and food. The Fed induced low interest rates and available credit in the US are a major source of that global speculation in commodities. Other potential negatives are threats to the pace of global economic growth. China is attempting to slow investment in real estate by a 60% downpayment requirement on second home purchases and despite the efforts to contain the European debt crisis, their problems have by no means been resolved.
Despite increases in oil production by Saudi Arabia and other producers, dislocations, differences in the types of crude produced and market uncertainties can keep energy prices high. Commodity and food prices are also likely to stay high. But, that is unlikely to translate into any significant rise in core consumer price inflation given the still huge excesses in unemployment and unused production capacity. Durable manufacturing capacity utilization at 76.1% is far from the typical inflation threshold near 87% where bottle-neck price pressures would be likely to emerge.
What does all this add up to for investments? The equity market may be somewhat vulnerable, but that does not justify broad scale selling until the major indices are down by at least 4.0% for a full week. In the past that has been a relatively reliable signal not only for liquidating positions, but also for going short. When the decline in equity prices or the slowdown in economic growth arrives, inflation fears will be arrested and Treasury bond prices will rise, as their yields decline. In the meantime, the tax incentive induced spur to capital investment will help boost earnings of durable goods producers. GE, for example, should be a beneficiary. That should be good for both their equity and bond prices.
There may be some few notable municipal problems as beleagured State and local governments deal with budget problems. But, the financial fallout is likely to be nothing like the market and some experts suggest. This could well be an attractive buying opportunity as any real or imagined individual local bankruptcy threat triggers a major resumption of investor liquidation of holdings in tax-exempt mutual funds. In order to meet the withdrawal of investor funds the funds will be forced to sell their holdings. For example, there are already 6% tax-exempt yields available on long-term investment grade bond investments, with relatively assured revenue streams, in New York and Puerto Rico. A new municipal bond selloff would provide increased opportunities on more intermediate-term and still higher rated bonds.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com
Ican be reached at philipbraverman@gmail.com
Saturday, February 5, 2011
A misreading of profit strength and inflation boost equities and bond yields
While the mix of recent reports suggests the economic recovery is still gaining ground, the evidence also indicates the recovery is sluggish and fragile without any near term risk of excessive or mounting consumer inflation. But the stock and bond markets appear to be only reacting to selected signs of recovery and commodity inflation, not to the economy's slow growth and its pronounced vulnerability. That creates the potential for an eventual reversal of recent gains in equity prices and bond yields. That is because the markets will ultimately recognize that the vitality of the economic recovery is not sufficient to justify current exaggerated expectations of continued vigorous corporate profit growth or rampant inflation, which are the prime catalysts for the rapid rise in equity prices and bond yields. However, there is no clear indication of when that critical realization that the markets have gone too far will occur. Indeed, the trend to higher equity prices and Treasury bond yields is likely be extended further before that market turn-around realization ultimately sets in.
The Friday release of the January employment report is clear example of conflicting set of signals on the economy. The seeming positives include a steep drop in the official unemployment rate to 9.0% from 9.4% in December. While 9.0% is still exraordinarily high, the drop is welcome. The U-6 unemployment rate, which includes part-time workers who are unable to find the full-time employment they seek, declined to 16.1 from 16.7. However, these declines are suspect. The unemployment rate declines were largely due to an outsized and counter-trend 504,000 drop in the labor force. And that decline was due to more discouraged workers leaving the labor force and perhaps a weather-related rise in those who were unable to report that they had looked for work in the preceding 30 days. Also among the positive aspects to the report was a stronger rise in earnings.
The forgoing seemingly economic positives in the employment report were more than offset by a disappointingly small 36,000 rise in January nonfarm payrolls and ominous declines in the average work-week and aggregate hours worked. That suggests more sluggish real GDP growth in the first quarter than the 3.2% in the fourth quarter. But, these were not the aspects of the report on which the markets focused.
Nor did the markets respond favorably to the still modest rates of inflation, 1.5% for the CPI, 0.3% for the GDP deflator. Instead, fear of inflation mounted with persistent Fed easing and the rise in commodity prices. Markets fail to recognize at least two fundamental flaws in its thinking. Regardless of money growth, credit is still not expanding, a prime source of inflation. And commodity price increases are difficult to pass along to final prices amidst still low capacity utilization rates,which were still a very low 76.0% in December. That is far from the 86% capacity utilization level where bottle-neck and production price pressures typically only begin to emerge. Nevertheless, the Treasury 10-year rose to 3.63% on Friday, up from 2.33% as recently as October. There is no reason to believe that yield uptrend will not be extended further before it is reversed. As I have discussed before, when the equity indices decline by at least 4.0% in a single week, past experience suggests the turn around is at hand. Last week they up sharply.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square, # 249
East Northport, New York 11731
This and previous reports can be accessed by going to Internet Explorer
and typing in: philipbraverman.Blogspot.com
I can be reached at: philipbraverman@Gmail.com
The Friday release of the January employment report is clear example of conflicting set of signals on the economy. The seeming positives include a steep drop in the official unemployment rate to 9.0% from 9.4% in December. While 9.0% is still exraordinarily high, the drop is welcome. The U-6 unemployment rate, which includes part-time workers who are unable to find the full-time employment they seek, declined to 16.1 from 16.7. However, these declines are suspect. The unemployment rate declines were largely due to an outsized and counter-trend 504,000 drop in the labor force. And that decline was due to more discouraged workers leaving the labor force and perhaps a weather-related rise in those who were unable to report that they had looked for work in the preceding 30 days. Also among the positive aspects to the report was a stronger rise in earnings.
The forgoing seemingly economic positives in the employment report were more than offset by a disappointingly small 36,000 rise in January nonfarm payrolls and ominous declines in the average work-week and aggregate hours worked. That suggests more sluggish real GDP growth in the first quarter than the 3.2% in the fourth quarter. But, these were not the aspects of the report on which the markets focused.
Nor did the markets respond favorably to the still modest rates of inflation, 1.5% for the CPI, 0.3% for the GDP deflator. Instead, fear of inflation mounted with persistent Fed easing and the rise in commodity prices. Markets fail to recognize at least two fundamental flaws in its thinking. Regardless of money growth, credit is still not expanding, a prime source of inflation. And commodity price increases are difficult to pass along to final prices amidst still low capacity utilization rates,which were still a very low 76.0% in December. That is far from the 86% capacity utilization level where bottle-neck and production price pressures typically only begin to emerge. Nevertheless, the Treasury 10-year rose to 3.63% on Friday, up from 2.33% as recently as October. There is no reason to believe that yield uptrend will not be extended further before it is reversed. As I have discussed before, when the equity indices decline by at least 4.0% in a single week, past experience suggests the turn around is at hand. Last week they up sharply.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square, # 249
East Northport, New York 11731
This and previous reports can be accessed by going to Internet Explorer
and typing in: philipbraverman.Blogspot.com
I can be reached at: philipbraverman@Gmail.com
Saturday, January 8, 2011
The recovery's strength will fade further
The economic recovery remains intact, but it is far from vigorous. That was obvious from Friday's disappointing report of a relatively weak 103,000 seasonally-adjusted increase in December nonfarm payrolls, even though larger than a revised 71,000 November rise. This is hardly a significant reversal of the steep recession decline in employment. Indeed, this two-month rate of increase, an annual rate of 1.0 million, would not even match the normal long-term trend growth in the labor force, which will materialize if there were renewed confidence that there were enough jobs to attract them. That is evident from the growth of the population and the percent employed.
There was some initial enthusiasm over the decline in the unemployment rate to 9.4% in December, from 9.8% in November. But, the decline appeared far less impressive after it was realized that the improvement was appreciably due to an aberrant decline in the labor force, as some 260,000 discouraged unemployed workers gave up looking for work, while there was a suspect 297,000 increase in household survey employment, perhaps due to a questionable seasonal adjustment. There is likely to be a reversal of this unemployment rate decline over the months ahead as employment continues sluggish and the labor force reasserts some trend growth. Indeed, a rise in the unemployment rate to or above 10.0% remains a distinct possibility.
Other components of the December employment report continue to cast doubt over the strength of the economic recovery. The average workweek remained unchanged at a low 34.4 hours. This not only implies a less vigorous fourth-quarter real GDP rise than widely expected, but hints at a sluggish employment rise ahead since a rising workweek tends to foreshadow a rise in hiring. Also, average hourly earnings edged up a mere 0.1% in December after being unchanged in November. This points to a less than vibrant consumer sector over coming months, including weakening personal income. Moreover, though social security taxes are reduced, this boost to discretionary income will be more than offset by the rise in energy prices and food. Indeed, these price components are likely to boost consumer prices when they are released next Friday, perhaps by 0.4%. That will work to slow consumer discretionary spending on domestic products and help keep real GDP growing slowly.
The rise in inflation is by no means a positive indication of economic strength. Much of the rise in commodity prices stems from speculation, fueled by the increased liquidity sloshing through the global economy. Since a significant portion of the commodities affected are imported, it is not a boost to the US economy, but a cost that is difficult for business to pass on to the final purchaser. That will serve to squeeze US corporate profit margins, a disincentive to new hiring. Moreover, the consequent economic slowdown will tend to reverse the speculative commodity price rise and, with it, much of the recent rise in interest rates. This is, of course, far from the ebullient consensus forecast.
Other forces are also at work to keep the recovery disappointingly only inching along. The widespread requirement that State and local governments must cut their balooning budget deficits will probably produce significant employment layoffs and reductions in other spending. The new Congress may also make Federal spending reductions a priority. In addition, there is likely to be a new wave of residential real estate foreclosures that will further appreciably depress home prices. That will keep the real estate construction industry depressed. Shopping center vacancies are likely to rise further, leading to mortgage defaults and foreclsures in this sector. These various economic forces retarding the recovery will, at a minimum, curtail the positive impact of the stimulus programs.
There are also a number of other uncertainties and potential negatives ahead for the economy. The effort of bond holders to saddle banks with the losses on real estate backed securities is helping to intensify lending caution. And it could well lead to employment cuts in this sector. There is a risk of a decline in the grossly inflated real estate prices in the major cities in China. That could cause added problems for Chinese banks already saddled with sizable nonearning loan assets. The result could be more of a slowdown in Chinese economic growth than the authorities plan. The debt crisis in Europe is far from over. That will slow Europe's growth.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philibraverman@Gmail.com
This and prior reports can be accessed by going to Internet Explorer and typing the following:philipbraverman.blogspot.com
There was some initial enthusiasm over the decline in the unemployment rate to 9.4% in December, from 9.8% in November. But, the decline appeared far less impressive after it was realized that the improvement was appreciably due to an aberrant decline in the labor force, as some 260,000 discouraged unemployed workers gave up looking for work, while there was a suspect 297,000 increase in household survey employment, perhaps due to a questionable seasonal adjustment. There is likely to be a reversal of this unemployment rate decline over the months ahead as employment continues sluggish and the labor force reasserts some trend growth. Indeed, a rise in the unemployment rate to or above 10.0% remains a distinct possibility.
Other components of the December employment report continue to cast doubt over the strength of the economic recovery. The average workweek remained unchanged at a low 34.4 hours. This not only implies a less vigorous fourth-quarter real GDP rise than widely expected, but hints at a sluggish employment rise ahead since a rising workweek tends to foreshadow a rise in hiring. Also, average hourly earnings edged up a mere 0.1% in December after being unchanged in November. This points to a less than vibrant consumer sector over coming months, including weakening personal income. Moreover, though social security taxes are reduced, this boost to discretionary income will be more than offset by the rise in energy prices and food. Indeed, these price components are likely to boost consumer prices when they are released next Friday, perhaps by 0.4%. That will work to slow consumer discretionary spending on domestic products and help keep real GDP growing slowly.
The rise in inflation is by no means a positive indication of economic strength. Much of the rise in commodity prices stems from speculation, fueled by the increased liquidity sloshing through the global economy. Since a significant portion of the commodities affected are imported, it is not a boost to the US economy, but a cost that is difficult for business to pass on to the final purchaser. That will serve to squeeze US corporate profit margins, a disincentive to new hiring. Moreover, the consequent economic slowdown will tend to reverse the speculative commodity price rise and, with it, much of the recent rise in interest rates. This is, of course, far from the ebullient consensus forecast.
Other forces are also at work to keep the recovery disappointingly only inching along. The widespread requirement that State and local governments must cut their balooning budget deficits will probably produce significant employment layoffs and reductions in other spending. The new Congress may also make Federal spending reductions a priority. In addition, there is likely to be a new wave of residential real estate foreclosures that will further appreciably depress home prices. That will keep the real estate construction industry depressed. Shopping center vacancies are likely to rise further, leading to mortgage defaults and foreclsures in this sector. These various economic forces retarding the recovery will, at a minimum, curtail the positive impact of the stimulus programs.
There are also a number of other uncertainties and potential negatives ahead for the economy. The effort of bond holders to saddle banks with the losses on real estate backed securities is helping to intensify lending caution. And it could well lead to employment cuts in this sector. There is a risk of a decline in the grossly inflated real estate prices in the major cities in China. That could cause added problems for Chinese banks already saddled with sizable nonearning loan assets. The result could be more of a slowdown in Chinese economic growth than the authorities plan. The debt crisis in Europe is far from over. That will slow Europe's growth.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philibraverman@Gmail.com
This and prior reports can be accessed by going to Internet Explorer and typing the following:philipbraverman.blogspot.com
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