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

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

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

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

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

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

July employment report details confirm the economy remains on the brink of recession

The market mistakenly interpreted the July employment report as proof that the economy is still in a sustainable and viable recovery. The market was clearly relieved that July seasonally-adjusted nonfarm payrolls rose by 163,000, well above the roughly 100,000 rise that had been widely anticipated. Moreover, the seasonally-adjusted July nonfarm payroll rise seems like a welcome boost in employment after a downward revised 64,000 rise the prior month. But look below the surface and there is reason to doubt that the supposed July nonfarm employment spike actually occurred. Yes,you read that right. First, according to a Barron's report, the July seasonal adjustment added 377,000 to nonfarm payroll jobs, "the largest such adjustment in July for the past 10 years". In addition, the Bureau of Labor Statistics added 52,000 to the July rise to reflect its guess of the number of jobs added by new or small businesses that it does not sample. Together these two adjustments added 429,000 jobs to the nonfarm payroll employment rise. If I did not know better, I might be suspicious that there was a political component to the nonfarm payroll report, that will be corrected some time after the Presidential election, perhaps next year. The Household survey employment report, from which the monthly unemployment rate is derived, provides an alternative view of July employment. The July rise in the unemployment rate to 8.3%, from 8.2% the month before, is less worrisome than the underlying statistics. The Household survey count of jobs fell 195,000 in July and, even worse, the labor force fell by 150,000 as discouraged job applicants gave up looking for work and left the labor force. The U6 employment series, that counts part-time workers who can not find full-time work and discouraged workers, who gave up looking for work, as unemployed, rose to 15.0% from 14.9%. Taking all the evidence together,the dismal July employment performance is just another bit of support for the view that there is so much economic weakness both currently and ahead that a US recession, though not yet certain, is becoming increasingly likely. The highly regarded Economic Cycle Research Institute is holding to its forecast that a US recession is impending. How could it be otherwise with Europe most likely already in recession, and China's economic growth slowing significantly, depressing the growth of other emerging economies and commodity producers? Together that all but guarantees a global recession. Thus far, budget austerity is the only official prescription for the financial crisis gripping troubled European nations and their banks. The financial crisis is a result of the market's recognition that the southern tier of European countries excessive reliance on debt to finance government deficit spending is not sustainable. The consequent austerity and high yields demanded by the marketplace for some sovereign debt will keep Europe in recession. That lowers the demand for goods and services. The US will be affected both by the decline in global demand, the threat of contagion from the financial crisis in Europe,the US fiscal cliff next January (a depressant equal to some 4% of GDP), and a US economy that is already growing at an almost stall speed of only 1.5% or less in real terms. The US stock market was up sharply on Friday and might even rise further. The equity market has not yet declined by the 4.0% or more in a Friday to Friday week to signal a cyclical equity price decline. Thus, for a while longer, the equity market could continue to avoid the inevitable cyclical decline that a recession will bring. The US Treasury market sold off on Friday, with the 30-year yield rising to 2.66%. However, a decline in this yield to at least 2.0% still appears likely. And accompanying this will be a parallel further decline in the yields of high-grade corporate and municipal bonds. The Fed is likely to engage in further stimulus in September. 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

A US and global recession is increasing likely

The risk of a coming US and global recession is mounting. Europe is already entering a recession, perhaps quite severe. China's economy is at least slowing significantly, with a harder landing than widely anticipated possible. That combination,together with weakness in commodity producing countries, promise a global recession from which the US will not be immune. Indeed, continued weakness in US employment, together with other evidence of growing US economic vulnerability, makes that recession risk amply clear. And that recession risk does not even take into account the fiscal cliff of mandated sharp increases in taxes and cuts in spending at the beginning of next year. The fiscal cliff is equal to between a 3.0% to 4.0% depressant in real US GDP. That is clearly a very substantial growth depressant for an economy with real GDP growing between 0.5% and at most 2.0% currently. However, the US equity market and, to a considerable extent, the credit market are still willing to view the US economy as in merely a soft patch, from which it will soon recuperate. But decidedly adverse economic reports and developments ahead will very likely turn the mere recession risk into an all too unpleasnt reality. Some US economic data are already disappointing. The Purchasing Managers index declined to 49.7 in June from 53.5 the month before, possibly already indicating an economic contraction in manufacturing. The small 80,000 seasonally-adjusted June increase in nonfarm payrolls follows equally small revised increases of 77,000 in May and 68,000 in April. While these are increases, not declines-at least not yet, the employment rise does not even compensate for the trend rise in the labor force. That is why the unemployment rate appears stuck at 8.2%. But it is likely to soon be rising. As if this sluggish June employment growth reality were not bad enough,the entire 80,000 rise in June nonfarm payroll employment may actually be fictional. This is because 100,000 was added to total employment estimates to reflect the merely assumed hiring by new companies that are too new or small to be sampled. The recent pace of seasonally-adjusted nonfarm payroll increases, 75,000 on average the past three months, is less than one-third the pace of nonfarm payroll employment gains that should be expected at this point in the expansion, assuming of course that this was a typical cyclical recovery from a typical recesssion. Unfortunately, this is not a typical recovery because the recession that preceded it was far from typical. The recession was due to the bursting of an excessive credit bubble that threatened the US and the global economy with a financial collapse. The deleveraging process from that near miss is still far from complete in the US and especially in Europe. Indeed, the risks of a renewal of financial problems centering on European soverign debts and the capital adequacy of European banks, overburdened with suspect assets, are very much still in the forefront of the European credit crisis. And the contagion risk for US financial institutions should not be minimized. So far, the proposed official solutions to Europe's problems are essentially attempts to merely paper them over. Too many of the European nations in the southern half of the continent have been living beyond their means. They have borrowed excessively to pay for transfer payments that should have been funded by taxes. And too many of the distressed nation's banks have purchased the questioned sovereign debts. The credit market is increasingly unwilling to continue the process of buying the sovereign debts of the troubled countries. There is also a capital flight, especially from the threatened banks. Throwing even more credit support from the more prudent northern Europen nations to backstop the imprudent southern European nations will in time only bring them all into question. There is no unified tax base for the Eurozone, as there is for the US. The US is far from prudent, but that difference in the form of a unified taxing authority makes all the difference. A true confederation of the states of Europe, with a single government and taxing power, would resolve the crisis. Without anything approaching that step the crisis threatens to persist, at least until the problem countries leave the Euro. Coming back to the US, the recent Supreme Court decision upholding the legality of questioned aspects of Obamacare has for the time being removed one major source of uncertainty in the business outlook that had tempered business willingnes to hire and invest. Unfortunately, there are too many other negatives or uncertainties that limit business confidence to expect a stepup in capital spending or employment gains any time soon. The financial implications of this outlook include a decline in commodity prices, a further slowing of inflation(termed disinflation),a further decline in Treasury bond yields and, when the recession is more evident, a decline in the prices of equities whose business prospects are seen as especialy vulnerable to the cyclical downturn. Investor emphasis will be on the so called defensive equities, long term growth stocks and safe dividend payers. The Treasury 30-year bond yield at 2.66%, down from 2.76% the week before, is destined to decline much closer to 2.00%, as investors rush to "safe havens". The maturity yield-spread between the 10-year Treasury, now 1.55% and the 30-year Treasury, will narrow significantly. This maturity yield spread is currently 1.11% (2.66% minus 1.55%). It may well decline towards .50%. That will mostly benefit high-grade bond prices (AA). But, it will also somewhat benefit through to the bottom of investment-grade bond prices (BBB-). Philip Braverman, President Braverman Economic and Financial Consulting One Hewitt Square, #249 East Northport, New York 11731 This and earlier reports can be accessed by going to Internet Explorer and typing in philipbraverman.blogspot.com I can be reached at philipbraverman@Gmail.com.