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

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Ican be reached at philipbraverman@Gmail.com