Friday's release of the March employment report triggered new doubts over the vitality of the economic recovery and especially the sustainable strength of employment gains. That led to a Friday partial reversal of the recent back-up in Treasury note and bond yields. And in the equity market, which was closed for the Good Friday holiday, a retreat in the futures market indicates a decline in Monday's stock market prices.
The sharp jolt to market confidence came from a modest 120,000 increase in March nonfarm payrolls, versus expectations of a 200,000 rise, and other signs of employment report disappointment. Even though the March unemployment report edged down to 8.2% from 8.3%, the decline was primarily due to a perverse 164,000 drop in the labor force, which countered a 31,000 drop in employment. Thus,both elements of the labor force calculation point to employment weakness, not strength.
The March employment report of aggregate hours worked also edged down, indicating a slower than anticipated first quarter real GDP rise, probably 2.0% or less, versus the 3.0% fourth quarter increase. That would also confirm that special and unsustainable one-time forces that were at work to boost the economy in last year's fourth quarter and employment in recent months. These included the need to boost inventories to make up for supply disruptions due to the Japanese earthquake and tsunami, as well the Thai floods. In addition, as Fed Chairman Bernanke theorized, Corporations may have reduced employment too severely and were merely reinstating some of that excessive cutback. Moreover, the unusually warm winter significantly, but artificially, boosted seasonally-adjusted employment reports in prior months. Like March, subsequent monthly employment reports are thus likely to be paybacks for the abberrant winter weather. However, there are still signs that the economic recovery, though sluggish, is still intact. For example, weekly Initial Claims for Unemployment Benefits, at 357,000 in the latest week, are well under the 400,000 claims level that is viewed as the threshold level indicating economic recovery. But that would not be inconsistent with a sluggish pace of economic growth.
A likely sluggish pace of economic growth and employment gains would cause the Fed to no only persist in its accomodative policy through next year and into 2014, but could even lead them to reinstate quantitative easing, which recent Fed minutes appeared to rule out. That prospect will help boost purchases of safe-haven US Treasuries.
The recession brewing in Europe and the slowdown in China'a economic growth, with even a hard landing possible, create an increased vunerabliity for the US economy. A return to recession for the US, though unlikey, can not be ruled out. But, just slow US economic growth will likely cause increasing doubts over the strength of corporate profits, which will probaby top out in the first quarter. The massive bailout of Greece,Portugal and Spain does guarantee success or rule out a return to major credit strains. That certainly seems the message of the extreme widening to 400basis points in the yield spread between the soverign credits of Spain and Germany. Though China has cut its real GDP growth target to 7.5% from 9%, their actual growth could fall below that target as export sales to Europe falter and a shift to production to meet domestic demand disappoints.
As a result, look for weaker demand and prices for commodities,and restrained inflation of 2.0% or less. Expect vulnerability of equity prices, especially with the approach of May, when the old dictum suggests investors liquidate so as to buy back in October. The other equity rule to follow is to sell when the equity market indices decline in excess of 4.0% for a single Friday to Friday week. And for Treasury notes and bonds, the outlook still calls for significantly lower yields, with even new lows possible in the second half of the year, if not before.
Philip Braverman, President
Braverman Economic and Fionancial Consulting
One Hewlety Square #249
East Northport, New York 11731
This 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 7, 2012
Sunday, February 12, 2012
US is vulnerable to a European recession and asian slowdown
Though there have been further indications that the US recovery is gaining traction, there are realistic doubts that this progress will be extended. Moreover, there are special reasons for this mere appearance of a strengthening economy. And, even more significant, the economy will soon run into difficult headwinds that will cause it to at least slow and quite possibly slip back into recession.
The fourth quarter real GDP was up 2.8%, after a 1.8% rise in the third quarter. But, much of the fourth quarter rise was merely due to a temporary 1.9% rise in inventories. That may largely be due to the realization that the "just in time" inventory control system can no longer be depended on in view of the string major supply disruptions due to the Japanese earthquake and Sunnami and the Thialand floods. Without that inventory rise, fourth quarter final sales were up a minicule 0.8%. But, even that slim rise was inordinately boosted by the ending in the fourth quarter of the 100% write off of business investment. Automotive purchases alone accounted for 0.3% of the 0.8% fourth quarter final sales.
The unemployment rate declined to 8.3% in January from 8.5% the prior month. Nonfarmpayrolls also appeared stronger with a 243,000 rise. But, the realty is that the January seasonally-adjusted rise is entirely due to the seasonal ajustment that turned a 2.7 million nonfarm payroll decline into a 243,000 seasonally adjusted increase. While the January decline before seasonal adjustment was smaller than in recent January's, that reflects the smaller seasonal end-of-year pre-holiday hiring and the warmer than normal January weather that permitted a contraseasonal rise in construction employment.
The credit and equity markets have reacted to the appearance of somewhat stronger US economic reports as convincing evidence that the risk of a US economic retreat has significantly receded. But, that view does not take into consideration either a renewed sluggishness or worse in the US as recent strength disapates or the adverse impact of the contagion effect from the outright recession that is bound to occur in Europe, if it has not already commenced, and the slowdown in China and much of the rest of asia. The major shift to austerity, the required prescription for reversing the excessively indebted southern tier of European countries, including Portugal, Spain, Italy and Greece, will plunge the entire continent into an almost inevitable recession. The economy in China is slowing. This is due to a deliberate effort on the part of the government to reign in the excessive speculation in real estate and slowing sales to Europe and much of the rest of Asia. Japan's economy, for example, already appears to be contracting. The leadership in China is scheduled to change this year. That precludes any new stimulus any time soon even if a hard landing is feared. While the official China manufacturing purchasing managers index, which measures large firms,is still positive, the HSBC purchasing managers index, measuring small manufacutring firm activity, indicates a contraction in this sector in China.
Based on this analysis, the recent rise in US Treasury bond yields will be reversed and then some. I am still looking for new lows in Treasury bond yields. As it becomes clear that the global economy is slowing,the demand for commodities in general will also slow. That is also likely to erode confidence in equities.
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
This and prior reports can be accessed at internet explorer by typing in philipbraverman.blogspot.com
The fourth quarter real GDP was up 2.8%, after a 1.8% rise in the third quarter. But, much of the fourth quarter rise was merely due to a temporary 1.9% rise in inventories. That may largely be due to the realization that the "just in time" inventory control system can no longer be depended on in view of the string major supply disruptions due to the Japanese earthquake and Sunnami and the Thialand floods. Without that inventory rise, fourth quarter final sales were up a minicule 0.8%. But, even that slim rise was inordinately boosted by the ending in the fourth quarter of the 100% write off of business investment. Automotive purchases alone accounted for 0.3% of the 0.8% fourth quarter final sales.
The unemployment rate declined to 8.3% in January from 8.5% the prior month. Nonfarmpayrolls also appeared stronger with a 243,000 rise. But, the realty is that the January seasonally-adjusted rise is entirely due to the seasonal ajustment that turned a 2.7 million nonfarm payroll decline into a 243,000 seasonally adjusted increase. While the January decline before seasonal adjustment was smaller than in recent January's, that reflects the smaller seasonal end-of-year pre-holiday hiring and the warmer than normal January weather that permitted a contraseasonal rise in construction employment.
The credit and equity markets have reacted to the appearance of somewhat stronger US economic reports as convincing evidence that the risk of a US economic retreat has significantly receded. But, that view does not take into consideration either a renewed sluggishness or worse in the US as recent strength disapates or the adverse impact of the contagion effect from the outright recession that is bound to occur in Europe, if it has not already commenced, and the slowdown in China and much of the rest of asia. The major shift to austerity, the required prescription for reversing the excessively indebted southern tier of European countries, including Portugal, Spain, Italy and Greece, will plunge the entire continent into an almost inevitable recession. The economy in China is slowing. This is due to a deliberate effort on the part of the government to reign in the excessive speculation in real estate and slowing sales to Europe and much of the rest of Asia. Japan's economy, for example, already appears to be contracting. The leadership in China is scheduled to change this year. That precludes any new stimulus any time soon even if a hard landing is feared. While the official China manufacturing purchasing managers index, which measures large firms,is still positive, the HSBC purchasing managers index, measuring small manufacutring firm activity, indicates a contraction in this sector in China.
Based on this analysis, the recent rise in US Treasury bond yields will be reversed and then some. I am still looking for new lows in Treasury bond yields. As it becomes clear that the global economy is slowing,the demand for commodities in general will also slow. That is also likely to erode confidence in equities.
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
This and prior reports can be accessed at internet explorer by typing in philipbraverman.blogspot.com
Saturday, January 7, 2012
A US recession and decline in Treasury yields remain likely
The decline to 8.5% in the official unemployment rate in December, from 8.7% the month before, and 200,000 December rise in nonfarm payrolls cap a series of reports that imply the economy is modestly strengthening. But, that strengthening is far more apparent than real and, moreover, is likely to soon be reversed.
This is certainly not a consensus view of the economic outlook. Most economists base their conclusions on where they believe the economy is currently in the typical domestic business cycle. Unfortunately, this is not a typical domestic business cycle. The US economic recovery from the deepest recession since the Depression of the 1930's is still so feeble as to remain near stall speed. And there are new problems ahead, including an end or reversal of some of last year's stimulus and a further wave of foreclosures. Even worse, the US economy is vulnerable to the soon to be developing recession in Europe and the economic slowdown in China and much of the rest of Asia. All this does not even encompass the economic problems that would follow a spike in oil prices if,as threatened, Iran attempts to close the straits of Hormuz, through which much of worlds oil moves.
The December improvement in the employment data was grossly exaggerated by special factors. The December decline in unemployment rate was parly due to an abberational 50,000 drop in the labor force as discouraged workers gave up looking for work. The 200,000 increase in nonfarm payrolls was boosted by some 42,000 increase in delivery jobs undoubtedly connected to holiday sales, especially from the internet, and the warmer than normal weather that lifted seasonally-adjusted construction jobs by 17,000. Both these sources of December employment strength are likely to be reversed in coming months. As a consequence of these and other economic negatives, the unemployment rate will rise again, while nonfarm payroll gains will slow.
While the major risk of a US recession that I percieve is not a consensus view, I am not alone in what may seem my pessimism, or more appropriately, my realism. The Federal Reserve Bank of San Francisco's forecasting model places the probability of renewed recession this year at more than 50%. I agree. While a US return to recession is not certain, it appears likely. Similarly, even after Friday's employment report, Pimco's El Erain still puts the probability of recession at 30% to 40%.
The European sovereign debt crisis has not been resolved, despite the efforts of the European Central Bank to provide sizable liquidity to the most troubled European Government credit markets. A default by Greece remains likely as early as March. That could create a contagion effect for other weak European Government credit markets including Italy, Portugal and Spain. There is also a continuing risk of a downgrading of the credit rating of France and other beleagured European countries. That also implies contagion risk. Italy's borrowing costs have spiked, depressing the Euro to 16-month lows. Expect these problems to not only persist but to worsen, producing proliferating European economic austerity.
The Treasury 30-year bond yield, which has moved just above 3.0%, is likely to decline toward 2.0%. The Treasury 10-year yield, currently 1.96%, is likely to decline to between 1.25% and 1.5%. As you will note, the forecast implies a further decline in the 10-year to 30-year maturity yield spread from the current more than 100 basis points (more than 1.0 full percentage point)toward 50 basis points. That will also further drive down the yields, and drive up the prices, of high-grade corporates and municipal bonds. That would also be consistent with a decline in inflation fears, general commodity prices (though not gold prices) and inevitably equity prices.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed from internet explorer by typing in philipbraverman.blogspt.com
I can be reached at philipbraverman@gmail.com
This is certainly not a consensus view of the economic outlook. Most economists base their conclusions on where they believe the economy is currently in the typical domestic business cycle. Unfortunately, this is not a typical domestic business cycle. The US economic recovery from the deepest recession since the Depression of the 1930's is still so feeble as to remain near stall speed. And there are new problems ahead, including an end or reversal of some of last year's stimulus and a further wave of foreclosures. Even worse, the US economy is vulnerable to the soon to be developing recession in Europe and the economic slowdown in China and much of the rest of Asia. All this does not even encompass the economic problems that would follow a spike in oil prices if,as threatened, Iran attempts to close the straits of Hormuz, through which much of worlds oil moves.
The December improvement in the employment data was grossly exaggerated by special factors. The December decline in unemployment rate was parly due to an abberational 50,000 drop in the labor force as discouraged workers gave up looking for work. The 200,000 increase in nonfarm payrolls was boosted by some 42,000 increase in delivery jobs undoubtedly connected to holiday sales, especially from the internet, and the warmer than normal weather that lifted seasonally-adjusted construction jobs by 17,000. Both these sources of December employment strength are likely to be reversed in coming months. As a consequence of these and other economic negatives, the unemployment rate will rise again, while nonfarm payroll gains will slow.
While the major risk of a US recession that I percieve is not a consensus view, I am not alone in what may seem my pessimism, or more appropriately, my realism. The Federal Reserve Bank of San Francisco's forecasting model places the probability of renewed recession this year at more than 50%. I agree. While a US return to recession is not certain, it appears likely. Similarly, even after Friday's employment report, Pimco's El Erain still puts the probability of recession at 30% to 40%.
The European sovereign debt crisis has not been resolved, despite the efforts of the European Central Bank to provide sizable liquidity to the most troubled European Government credit markets. A default by Greece remains likely as early as March. That could create a contagion effect for other weak European Government credit markets including Italy, Portugal and Spain. There is also a continuing risk of a downgrading of the credit rating of France and other beleagured European countries. That also implies contagion risk. Italy's borrowing costs have spiked, depressing the Euro to 16-month lows. Expect these problems to not only persist but to worsen, producing proliferating European economic austerity.
The Treasury 30-year bond yield, which has moved just above 3.0%, is likely to decline toward 2.0%. The Treasury 10-year yield, currently 1.96%, is likely to decline to between 1.25% and 1.5%. As you will note, the forecast implies a further decline in the 10-year to 30-year maturity yield spread from the current more than 100 basis points (more than 1.0 full percentage point)toward 50 basis points. That will also further drive down the yields, and drive up the prices, of high-grade corporates and municipal bonds. That would also be consistent with a decline in inflation fears, general commodity prices (though not gold prices) and inevitably equity prices.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed from internet explorer by typing in philipbraverman.blogspt.com
I can be reached at philipbraverman@gmail.com
Saturday, December 3, 2011
A US recession in 2012 remains likely
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
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
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
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