Wednesday, December 16, 2009

More on Jobs...and of course the ISM reports.

The start of the new year always presents opportunities to reflect on the past year and to look toward the future of what can come about and to explore that "undiscovered country." Beyond our personal challenges, the question on many investors minds now is what information do we have now to help predict the future events in the markets. The nice bounce on Monday of about 1.5% gain on the Dow Jones Industrial Average had me thinking back to the old adage of "as goes January, so goes the year" and starting off with a bang could not hurt to at least portend positive results for January. But Mark Hulbert says "First trading day of year may mean little." He also expands the reasoning in "January's questionable predictive powers."

Mark does provide a good case to not make investment decisions based on just the tiniest of blips in the data and poorly correlated events. I will take his word on the significance levels although details might help make his case more fully. The question I would pose him is whether his expanded sample {1896-2009} is relevant. At some time whether it was a slow process or rapidly changed with advancements in technology the structure of the markets has to be taken into account. I am pretty certain that there are differences in the equity markets between a bunch of men under a tree and the electronic markets we have now that nearly everyone {with money} can make bids or offers at any time of the day or night.

That being said what news has driven the markets?
David Brown in the latest ‘What the Market Wants’ entitled What the Market Wants: Market Opens New Year with a Bang stated the following:
The news fueling the market, while not sensational, has been steadily positive. My favorite was the ISM last week, a full point above consensus at 55.9 and 2.5 points above its previous reading. Consumer confidence, while just meeting expectations at 52.9 last week, was well above the previous reading of 49.5. Best of all, I suppose, was last week’s initial jobless claims of 432,000, which was the lowest level in some time and well below the expected 460,000 and the previous reading of 452,000. PMI was also positive while construction spending and retail sales were just okay. No real disappointments here.

Like noted above, the December 2009 Manufacturing ISM Report On Business® was positive and was continuing with its streak of increasing output in manufacturing for the 5th consecutive month and 8th consecutive for the overall economy. The positive thing to note on the first table of the ISM report is all the "faster" rates of change which has 10 out of the 13 indicators. Which is positive except for two exceptions. The first is the price index rising to 61.5 up from 55 in November. I am not sure at what point do we need to worry about this translating into inflation but it should be noted that there is a lot more industries that are experiencing higher prices and the net for the index was 23 seeing higher prices. Still the Fed is saying that slow recovery still most likely scenario. But more importantly than the headline is the part from the article stating:
There was a sharp divide among officials about the forecast for inflation longer-term. The argument was so intense that the discussion about the price outlook continued long after the formal vote on policy, which usually signals the end of the closed-door gatherings.

They are obviously seeing some signs of inflation as the ISM report may suggest. The second rate of change that should be of interest is that while export index is still positive at 54.5 which indicated the rate of change is slowing, the imports index rate of change is rated as faster for jumping from 51.5 to 55. But since both are expanding then it may not be enough to worry about.

While the employment index went up to 52 up from 50.8 and the rate of change is faster, I still see that the gainers are battling with the losers. The industries that are gaining is 7 and the losers are 8. And the net percentage is -1. This signifies that the ones with employment increases are increasing at a faster rate than the industries in declining employment. Will this group still be able to keep up with expansion? In a way this is sort of expected as some industries expand and some contract but there is a lot in the middle ground that could be expanding employment also if we are to see job recovery this year. But I must say that the surprise was new orders jumped more than 5 points to 65.5 and ongoing production at 61.8 up from November's 59.9.

But what about the Service Sectors of the Economy?
The Non-Manufacturing ISM Report was not so upbeat but still positive with an index of 50.1 which is below the forecast of 51 that MarketWatch Economic Calendar shows but within the general range that Econoday Reports on the ISM Non-Mfg Index January 6, 2010. They state the consensus range as 48.3 to 51.0 and the consensus as 50.4. This most definitely showed the contrast with the Econoday Report: ISM Mfg Index when the final number was above the consensus range of 52.0 to 55.5 at 55.9.

Continuing on the non-manufacturing data, the sample respondents were not too positive. Business activity {production} was up and a positive sign but employment while up is still well below the 50 mark at 44 which marks its 23rd contraction for the last 24 months. The price index also rose to 58.7 which as noted in the manufacturing index that the Fed and others might need to start being concerned about inflation. Export and import index switched sides on positive and negative 50 point range. Export index decreased to 46 from 54.5 and import index rose from 46 to 52.5.

How about some more positive thinking?
I am not sure if we need some more prayer this year but the Wall Street Journal maybe hinting at such. Under the front page article entitled "World's Factories Rebound" they have a picture with the caption:
Miracle Workers: Japanese businessmen pray for good business at Tokyo's Kanda shrine on Monday. Tokyo stocks rose on the year's first trading day, with Japanese exporters helped by a stronger U.S. dollar.

On to more substantial material, Larry Kudlow points out at Kudlow's Money Politic$: {that} The Yield Curve Is Signaling Bigger Growth. And if that does not make you an optimist Alan S. Blinder presents The Case for Optimism on the Economy. Remember he also provided some econometric data to support that 25% of all jobs could be outsourced.

Another article of positive news about the US equity markets is at "5 quiet signs of a rebound". Looking toward corporate suites might not tell us great detail about how the economy is headed but it could provide clues as to where growth might occur.

Samuel Fromartz provides us with 5 bullet points that point to a potential rebound in the economy. The first is rising cash and it clearly is the most important for sustained economic growth in that resources need to be diverted towards productive enterprises. The question is whether there are enough projects out there that will increase profits when outlook for business does not look rosy. The second is mergers increasing in frequency but as economist this would be more like transfer payments and have little direct effect on the economic growth of a country. While in the long run mergers will reallocate resources to more productive sectors and businesses, it does not have an immediate effect on the economy. The third is considered both dividends and buybacks of company common stocks, which again is merely transfer payments from one individual to another and has little economic effect on the economy. The fourth is the upswing in IPO offerings, which is a positive sign looking forward. Not only it signifies as stated that investors are more willing to take on more risky investments but also that the companies offering the IPOs also see that investors would appreciate their business opportunities as well as the company seeing broader investment potentials in their businesses moving forward.

The fifth and last sign is insider buying. Naturally this is great time to point out that:
Sabrient uses data on insider buying and analyst upgrades to create an "insider sentiment index" of the top 100 companies where these trends are strongest.

An exchange-traded fund, the Claymore/Sabrient Insider ETF (NFO), tracks the index. Since the market low in March the ETF has risen 117%.

While this is great, the 100 stocks might not be a representative sample to signify the results of the direction of the whole economy. But Scott Martindale does state in the article that:
"Buyers are outrunning sellers at the moment and that's definitely a net positive sentiment,"

Martindale also posted on the Sabrient Blog some more information about how Sabrient created the index as well the reasoning for building it at: Net Insider Trading loses direction.

What does this all mean?
Basically the manufacturing sector seems to be taking off but non-manufacturing still has some problems especially in the aspect of increasing employment which will continue to be a drag on the economy as noted in other blog posts. We should continue to look for green shoots of recovery but be cautious to the downside risks.

Disclaimer: The writer does have a small stake in the ETF NFO and does not have any plans on selling the shares.

5 quiet signs of a rebound

Calculated Risk: Construction Spending Declines in November

That 1937 Feeling

Answering the wrong questions | The Economist

Calculated Risk: PIMCO's McCulley: Three Major Issues for 2010

Manufacturing index rises to nearly 4-year high ISM index rises to 55.9% in December

Econbrowser: The Prospects for Global Imbalances: A View from the IMF

In the Aftermath of the Great Recession By Robert Samuelson

Bernanke's Speech to the AEA, Arnold Kling | EconLog | Library of Economics and Liberty

Calculated Risk: What Bernanke Didn't Say

Why Import Workers Now? by Patrick J. Buchanan 12/08/2009

Aughts were a lost decade for U.S. economy, workers -


The Capital Spectator: WILL A NEW YEAR BRING NEW JOBS?

What is 'woman's work' really worth? Calculating the value of care-giving isn't child's play
Possibly principle/agent problems?

Health care and Iraq

Kudlow's Money Politic$: The Yield Curve Is Signaling Bigger Growth

Happy Keynesian New Year « Organizations and Markets

Sticking to the Official Narrative - William L. Anderson - Mises Institute

macroblog: Better news on the jobs front: Layoffs down, temp hiring up

The Capital Spectator: DID THE STIMULUS WORK?

The Capital Spectator: IS THE STIMULUS STYMIED?

Tough times for Chicago | The Economist

The end of the revolution is nigh | The Economist

Red hot China | The Economist

The truth about all those excess reserves | The Economist

Pending home sales index plunges 16% Expiration of federal subsidy drives sales lower, NAR says

Positively Giddy:
Alan S. Blinder: The Case for Optimism on the Economy -

An Optimist’s Prediction for 2010 - Maggie's Farm

Daniel Henninger: A Rodney Dangerfield America? -

12 Dr. Dooms shred 2010 investing optimism Paul B. Farrell - MarketWatch

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Friday, December 04, 2009

Labour Markets??? & of Course Paul Krugman!

I have been talking a lot about sectors of the economy and where the growth might be next in my blog posts. But even if the economy is starting to turn around we are facing a major threat of high unemployment rates overhanging economic growth in the long run. The article entitled Initial jobless claims rise 17,000 to 474,000 Total jobless claims, including extended benefits, top 10 million sums up this overhang:
Over the past several months, the claims data have flashed two somewhat contradictory messages: Fewer people are losing their jobs than were six months ago, but once a job is lost, it's very hard to find another one.

This most definitely indicates a need for a WH Jobs Summit. Although not much usually happens at such summits it strikes me as a bad decision to exclude from invitation both the United States Chamber of Commerce and the National Federation of Independent Business where the event featured 133 guests. A couple of names should be familiar including world famous economists like Joseph Stiglitz, Jeffrey Sachs and lastly but not least Paul Krugman. Well sure enough Dr. Krugman provided a glimpse of what he may have been thinking of when going to the summit at The Jobs Imperative. His opening remarks on the op-ed:
If you’re looking for a job right now, your prospects are terrible. There are six times as many Americans seeking work as there are job openings, and the average duration of unemployment — the time the average job-seeker has spent looking for work — is more than six months, the highest level since the 1930s.

Although I do not have a specific academic paper to refer to, I am sure he is right about financial crises cause "not just by severe recessions but by anemic recoveries". This obviously makes sense from purely a financial standpoint in that financial crises cause not just a normal business cycle but changes the way participants handle and evaluate risks. If financial institutions are not secure then evaluating returns on investment projects becomes harder as uncertainty rises. To quote an infamous person: "they become more interested in return of investment than return on investment".
And the damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills, and even when the economy recovers they tend to have difficulty finding a job, because they’re regarded as poor risks by potential employers. Meanwhile, students who graduate into a poor labor market start their careers at a huge disadvantage — and pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.

So it’s time for an emergency jobs program.

It is most certainly true about the microeconomics effects on individuals but I fail to see how an "emergency jobs program" can overcome these negative effects on individuals. The most obvious problem to this solution is that the people losing jobs are highly diverse and across a wide variety of skill sets. I have yet to see a jobs program be other than manual labor that the skill level is at the lowest common denominator and thus it will not improve anyone's skill sets. Plus being hired into a make works program sounds like that also would carry with it a negative stigmatization in the job market.

He is correct that "general tax cuts" is not the right remedy right now as this would probably lead to just higher deficits without much overall change in the economy as well as and most importantly employment. His suggestion for more funding of states and local governments seems to create a massive moral hazard. Fairness has also been raised on this issue since when is it fair for a citizen of one state that manages its budget to be taxed more and provided to states that can not manage their budgets. Examples given were taxing Texans to pay for the complete fiscal crisis in California.

His suggestion of giving incentives that increases employment is a very good idea as long as monitoring it turns out to be easy enough to do and costs to administer such a scheme is not overly burdensome. Thus it could in fact be a good "stimulus" as in being "timely {enacted shortly through Democractic control of both houses and White House}, targeted {jobs}, and temporary {incentives have sunset provisions}". These seem to contrast sharply with Krugman's statement, "That strategy might have worked if the stimulus had been big enough — but it wasn’t." The problem is that the Stimulus Bill was Neither Timely Nor Targeted and thus lost its ability to fully perform a stimulus on the economy.

One suggestion that I have not seen Krugman offer is to lower the work force participation. What I mean by that is to provide alternative avenues of livelihood besides "work" in the private sector. I can think of three which are increased military forces {like WWII}, increasing number of students in furthering education, or just provide incentives for raising families. I dislike and reject the first one. The other two are acceptable in theory, but this again creates a greater burden on those productive in society and as taxes are raised to pay for any of Krugman or my suggestions then incentives to work become less over time.

Even education is not the absolute solution for workers losing skill sets and becoming less attractive to potential employers. As Alan S. Blinder, Professor of Economics and Public Affairs at Princeton University, academic paper shows that many present jobs are susceptible to offshoring in the paper entitled On the measurability of offshorability. He states the following:
Fear of offshoring may force its way back onto policy agendas soon. This column uses a survey of individual workers to measure the offshorability of particular jobs and says that about 25% of US jobs are offshorable. Surprisingly, routine tasks are not more offshorable but those held by more educated workers are.

Blinder also provides some suggestions for our education system. Theoretically nearly all jobs are offshorable/replaceable especially if you think science fiction as in the movie Sleep Dealer.

What does this all mean?
Since Krugman has shown some influence and his ideas gather traction because of his prestige and influence then these seeds of thoughts may one day become reality. I just hope the better ones become reality and the bad ones are cast aside.

It is expected that high rates of unemployment will continue for some time and that is a cost to society in general and to individuals as Krugman rightly points out. While unemployment compensation is a counter-cyclical economic stabilizer, it is still a cost to society and as we see unemployment insurance rates rising across the country this is going to cut into people's paychecks and lessen the incentives to work. One bit of advice that hardly needs mentioning is workers need to constantly improve their job skills and adapt to the changing economic structures.

The growing case for a jobless recovery
October 21, 2009 The growing case for a jobless recovery
Twenty-five percent of US jobs are offshorable | vox - Research-based policy analysis and commentary from leading economists
Alison van Diggelen: Paul Krugman's Advice for Obama Job Summit

Links Misc:
Paul Krugman's Advice for Obama Job Summit
Wages and recovery
The Krugman Recipe for Depression Massive government spending is no solution to unemployment.

Angry Bear: Industrial Production
Angry Bear: The Mythology of the Future Job Market
Angry Bear: Vague Thoughts on The Theory of the Firm, the Business Cycle and Kurt Vonnegut
Could Advancing Job Automation Technology Cause Structural Unemployment?

Unemployment and inflation

Mankiw: Outsourcing Redux
Increased U.S. Productivity from the Outsourcing of Services

Global Stuff:
Stephan Schulmeister Reform the international Monetary System!

South-South Trade Tensions

Guest Contribution: East Asian Production Networks, Global Imbalances, and Exchange Rate Coordination By Willem Thorbecke

EU Girds for China Fight Over RMB

What RMB appreciation?

Two Views: Blame It on Beijing Redux, or Joint Determination

Economist's View:The World Needs a New Financial Architecture
Soros: China will emerge as winner from current economic turmoil

UK National Debt

FRB: Mortgage Debt Outstanding, September, 2009

The paradox of the paradox of thrift Posted by:

Consumer confidence ticks higher in November Conference Board: Conditions seen in pessimistic light with bias to be frugal

ISM Report On Business®
Past Manufacturing and Non-Manufacturing ISM Reports On Business®

About the Construction sector

Series: TCU, Capacity Utilization: Total Industry
Series: CUMFN, Capacity Utilization: Manufacturing (NAICS)
Series: MCUMFN, Capacity Utilization: Manufacturing (NAICS)
ipg1.gif (GIF Image, 585x815 pixels)
Capacity Utilization Percent of capacity, seasonally adjusted

Here's Why the Economy's Growing

The Good, the Bad, and the Dollar

OCC's Quarterly Report on Bank Derivatives Activities

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Thursday, December 03, 2009

Employment of One Man and the ISM Reports...

Just before bed last night, I was checking my emails for any alerts and found the following short note at Sen. Sanders to place hold on Bernanke nomination. It does not seem likely that Sanders will or can block Bernanke's nomination as the President already showed support for his nomination and Sanders can only delay the process some. And the markets reacted more when the Stocks pull back after ISM services index falls. From Sanders own newsroom comes:
‘He’s part of the problem’
A Senate panel this week will hold a hearing on Federal Reserve Chairman Ben Bernanke’s nomination to a second term in charge of the nation’s central bank. The appointment is subject to Senate confirmation. Senator Bernie Sanders said he will vote no. “The middle class of America is collapsing; we have seen incredible greed, recklessness and illegal behavior on Wall Street. This guy…missed the boat on the most significant economic crisis since the Great Depression,” Sanders said Monday on “Morning Meeting” on MSNBC. “We need a whole new direction in the Fed and in our economic policies. A direction that stands up for a change, not for the rich, not for the top 1 percent, not for the giant financial institutions, but for the working class and the middle class of this country. Nobody thinks that Ben Bernanke is that person.”

That is, other than the President and most of the Senate. One of his complaints that does seem to hold some water was Bernanke's handling of the TARP process but so many others were involved in that that it hardly can be blamed solely on the Fed Chairman. Some of his other complaints were the Fed did not "stop the casino-type activities of large financial companies", demanding bailed-out banks lower interest rates on credit cards, unemployment nearly doubled, and 120 banks failed.

ISM Reports
But let me put aside the problems on one person's employment or unemployment status and discuss the market as noted with the release of the ISM numbers for manufacturing released on Dec. 1st and non-manufacturing on the 3rd. {Links: ISM - Media Release: November 2009 Manufacturing ISM Report On Business®, ISM - Media Release: November 2009 Non-Manufacturing ISM Report On Business®} The manufacturing sector while still positive and growing for the 4th consecutive month was below consensus of 55 being 53.6 and below last months number of 55.7 indicating a slowing growth trend. Non-manufacturing overall index was disappointing as noted earlier by being below consensus expectations of 52 which would have been above the index level for last month of 50.6. Thus economists had expected a growing at a faster rate than the net result of 48.7 indicating a contraction of that segment.

New orders were maintaining its strong growth trend in manufacturing and in non-manufacturing sectors with the trend being growth for 5 and 3 months respectively with the current index at 60.3 and 55.1 respectively. This may be one reason for the continuing optimism for the consensus numbers we looked at earlier. Since we are talking about forward indicators of the economy, I think it might be worth looking briefly at the Architecture Billings Index (ABI) which provides a forward indicator to construction activity/spending. The index is like the ISM in that over 50 indicates expansion. The ABI was 46.1 up sharply from 43.1 in September and the good news was that the project inquiries index was 58.5 indicating strong interest for new project but follow through may be the issue until we see more "green shoots" of recovery.

Hat tip to Calculated Risk for the graphic at AIA: Architecture Billings Index Shows Contraction.

I know that the job market for architects has been dismal as it is reflected here in the West having the lowest regional averages with the South being the highest but still well below 50 meaning contraction. As I stated in earlier posts, I just do not see the construction sector providing the engine for growth going forward for some time especially to absorb the high levels of unemployment.

While the forward looking indicators looked positive for the ISM indexes, employment has not yet gotten traction. Although the manufacturing index was positive with an indicator of 50.8 it is down from the 53.1 in October. It must be noted that even though there are 6 industries reporting growth and 6 reporting decreases in employment the percentage of firms reporting increases is 17% while decreases is 18%. This does not bode well for continuing growth in employment but it is even worse in the non-manufacturing sector with the index of 41.6 which is above last month but is the 19 month trend of reducing employment and the 22nd time out of 23 times in negative territory.

Pass through costs and export segments.
The comments sections of both reports also show much caution looking forward including this noteworthy comment: "No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern." (Public Administration) Even the manufacturing sectors did not respond positively to the reduced value of the dollar and were most concerned about increasing costs of imports. Prices paid for both sectors were in positive territory but non-manufacturing was clearly and significantly trending up with the latest being 57.8 while manufacturing price index dropped 10 points to 55. The last point is important to indicate inflation {and inflation expectations} remains subdued.

I have been suggesting in some of my blog posts that exports are a needed factor in our economic growth and a factor in unwinding the "global imbalances" so let us look at the numbers for imports and exports according to the reports. Net export orders are positive and trending up with the index 56 in manufacturing and 54.5 in non-manufacturing. Imports in the manufacturing sector is positive but lower index than the exports and non-manufacturing is below the 50 mark with 46. Both import indexes seem to be holding steady.

Since this post has thrown a lot of numbers around, I reproduced the graph from the ISM below:

David Brown has also noted that the markets have been sitting up and noticing the exchange rate as he noted in WTMW starting on November 16th at: Market in Strange Dance with the Dollar and Anticipating Black Friday.
Over the past several weeks, the market has seemed inversely tied to the value of the dollar. The dollar goes down, the market goes up; the dollar goes up, the market goes down. Generally speaking, the dollar has gone down, and the market has gone up.

In fact, today as I write, we have reached a new high for the year for the S&P500, the Nasdaq, the Dow, and just about anything you want to name. And sure enough, the dollar is down once again today.

Frankly, this inverse relationship between the dollar and the market is not that surprising since a weak dollar means more exports and fewer imports for the U.S. and higher material prices. That also explains the strength of large-caps over small-caps, since as general rule large-cap stocks have much more revenues from exports than small-caps. Clearly, most major natural resource companies are also large caps. At the November 7th G-20 meeting, the leaders had pledged to continue to support the recovery until it is assured, and that has led to a weaker dollar.

Looking forward.
There are some positive signs going forward but without some signs of employment improving then not likely that the equity markets can continue to be positive in its outlook. I still hope for a gradual decline in the value of the dollar accompanied by increases in exports/decreases in imports.
PS: More thoughts on Ben's nomination at WILL HE STAY OR WILL HE GO?

Links Misc:
AIA: Architecture Billings Index Shows Contraction

Angry Bear: Industrial Production
Angry Bear: The Mythology of the Future Job Market
Angry Bear: Vague Thoughts on The Theory of the Firm, the Business Cycle and Kurt Vonnegut
Could Advancing Job Automation Technology Cause Structural Unemployment?

Delinquencies, foreclosures break record MBA: 14.41% of mortgages delinquent or in foreclosure in third quarter

U.S. Mortgage Market and Seriously Delinquent Loans by Type

Recent Developments in Mortgage Finance

California Controller: Overview of the Commercial Property Markets

Dominating the Narrative Arnold Kling

Yes, the federal government has a structural deficit. But let's keep it in perspective, shall we?

Bernie Sanders articles used:
Bernie Sanders Moves To Block Ben Bernanke's Confirmation

US Sen Sanders Attempts To Hold Up Bernanke Renomination

Sen. Bernie Sanders puts hold on Bernanke's 2nd term - Yahoo! Finance