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Today's Market WrapUp 05.06.2008 Mon Tue Wed Thu Fri Barbera Archive Mad Cow &
Economics Mumbo-Jumbo Media Babble Last Friday’s economic headlines were suitably upbeat on the surface, validating the stock market rally of the last few weeks. Implied in the headlines was the message that everyone can relax about the recession, the recession is not so bad; in general, “chill out” folks. Of course, the penetrating analysis that goes into what passes for news media reporting took the BLS bait hook, line and sinker, barraging the masses with a blitz of calming headlines. At Investors Business Daily, the headline read, “Job Losses Less Than Expected,” “April US Job Loss Softer Than Feared; Unemployment Falls.” At CNN Money, the headline read, “Wall Street extends advance after April employment report adds to hopes that the economy is stabilizing” and never to be out done, at perennially bullish CNBC the lead headline was: “Jobs Report Fuels Hopes Economy Has Hit Bottom” followed by:“Fewer U.S. jobs were lost in April than economists feared and the unemployment rate unexpectedly improved, raising hopes an economic downturn was not gathering steam as the second quarter opened. The Labor Department said on Friday that 20,000 jobs were shed last month, far fewer than the 80,000 that economists had anticipated. The national unemployment rate fell to 5 percent from 5.1 percent in March. "The economy is just barely treading water," said Richard Yamarone, chief economist for Argus Research in New York, after the jobs figures were issued. "It's not imploding but it's not desirable either." At the Associated Press, the official release stated, “Nonfarm payroll employment was little changed in April (-20,000), following job losses that totaled 240,000 in the first 3 months of the year, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate, at 5.0 percent, also was little changed in April. Employment continued to decline in construction, manufacturing, and retail trade, while jobs were added in health care and in professional and technical services.” All of this sounds very mild, nothing to be concerned about, but unfortunately, all of this is just a statistical mirage. In the official release from AP, the total job losses of 240K were obtained by adding up the prior reported figures for March –81K, Feb –83K, and Jan –76K. However, what the media are not reporting, and what is not getting sufficient attention is the BLS Birth-Death Model. Yes, we have written about this in the past, and perhaps it is asking too much of reporters to actually look for the ‘numbers behind the numbers,’ but the end run effect is disingenuous at best, and an outright lie at worst. In the case of the BLS Birth-Death Model, this is a complex ARIMA Model that seeks to extrapolate prior cycle job gains and losses for the current cycle on the premise that prior history can be used to impute/refine today’s data. Unfortunately, this is not the case as the American economy has undergone traumatic fundamental changes in the last two decades, with the rise of Corporate Capitalism and the exportation of the US Manufacturing base. Call it the 'Return to the Guilded Age,' or more euphemistically, a ‘Transnational Restructuring of the American Economy,’ or simply, ‘The Rise of Globalism;’ any way you slice the baloney, today’s US economy does not resemble anything seen in the 40’s, 50’s, 60’s, 70’s or 80’s. (Well, OK. I’d have to concede that we do have a revival of the late 1970’s stagflation, except, before we are done, this is likely to prove an even stronger brand, but that’s a story for another day). Take the so called recovery of 2003 to 2006, which was an economic recovery cycle singly devoid of job growth, with the worst cumulative gains in Industrial Production in the last 50 years, and where the overall Labor Force contracted for most of the supposed recovery, something that has never happened in any prior cycle. To many, huge bells and whistles rang an ever present tune over the course of the last five years for anyone with historical knowledge of prior US economic cycles not to shriek in horror at what Barry Rhitholtz very aptly dubbed the “Backwards Economy.” In the case of 2003-2006, it was the ‘backwards economy” as normally rising capital investment yields greater Industrial Production, creating more jobs with solid wage growth leading to higher asset prices, including Housing. In the case of 2003-2006, it was all backwards. Ultra low interest rates and easy Al, with his easy money, led to a speculative bubble of rising asset prices cast against an economic backdrop devoid of real job creation, and morbidly lacking in either capital formation or industrial production. Thus, one has to wonder how the good folks at BLS feel justified in perpetuating the validity of an ARIMA Model which blindly assumes ‘past as prologue’ but which ignores the huge fundamental structural changes in today’s economy. Nevertheless, they do (use it), and they have (ignored the past), and for now we are stuck with a monthly dose of BLS Birth-Death Model Phantom Jobs, contaminating the employment data. So
guess what? If you look at the phantom job additions
for February and March, courtesy of the Birth-Death Model, we see a
gain of 142K jobs for March and a gain of 135K jobs for February. That means that instead of a reported loss
of 164K jobs, the real job losses were -223 for March and -218 for
February. We would love to go back and include January, but every
January is when the BLS reconciles the model to account for the
supposed job losses that it did not pick up on in the prior year, and
thus, every January is a giant negative number. In the table below, we
show the average monthly additions/subtractions (Jan) for the model
since they began
Notice that every April, we get a huge surge in phantom job creation from the model, and that last Friday the model created out of thin air 267,000 new jobs. Thus, since this data is included WITHIN the overall reported total, and the reported job loss total was –20,000, this means that the real job loss reported was –287,000 jobs in April. Thus, recapping, we find that ‘EX’ the Birth-Death Model, total job losses over the last three months are now 728K, and have averaged –242K per month over the last three months. Now, for some perspective on that latter number. In a healthy environment, job growth should be taking place at a rate in excess of the growth in the Labor Force, which at present is growing by approximately 150,000K per month. Thus, a growth rate of +200,000 per month would be reasonable, with a growth rate in excess of 250,000 more robust. At –242,000 per month, we are talking about the domain of ONLY very deep recessions. These numbers simply are never seen at any other time except when the US Economy is in the grip of a strong recession.
Now far be it from us to point a finger without offering some tangible proof, in the chart below, shown in the top clip is the 3 month moving average of the Non-Farm Payroll data going back to 1960. The three horizontal lines are drawn in at +300K (very healthy growth), zero (no growth) and –200K (strongly negative growth). Notice that every time the 3 month moving average plunged below –200K, the lower horizontal line, the US was in a recession, 1974, the double dip of stagflation, 1980-1981, the Gulf War 1991, and the Dot.Com bust 2002. Next, we note that as reported, the current 3 month moving average is nowhere close to –200K and instead resides at –63K, well above the ‘full recession’ level of –200K.
Above: the under-reported Official Job data which show a slow down but not a –200K recession type signal (soft peddling the bad news) and lower clip, the real numbers ex-the Birth-Death Model which are at full blown recession levels… imagine that. Now, here’s the fun part. If we go in and ‘back out’ the bullish distortion of the Birth-Death Model, and deal with ‘real jobs only’ as opposed to ‘real + imagined” job growth, we see that the prior series, left on its own devices, would be as noted above, at a negative rate of –242,000 jobs per month. Simply put, there is NOTHING “less then expected,” “softer than feared,” or “hopeful” or showing “signs of stabilizing” in any aspect of last Friday’s jobs report. Did the media miss the real story 100%? In our view, you bet they did, and that is a huge disservice to the American public which deserves accurate economic reporting. Even more mangled and obscured is the Unemployment Rate, which would really take the full time dedication of someone like John Williams, Shadow Government Statistics, to unknot and unravel. For my account, I simply watch two more obscure, but nevertheless reliable gauges. The first is the overall level of Continued Claims, which represents people out of work, who cannot find work. As can be seen in the chart below, Continued Claims have been surging on a weekly basis, and are now fast approaching levels that would indicate a recession. Keep in mind that data of this ilk tend to be somewhat rear-view oriented in that people first have to exhaust their initial claims before they even begin to move toward a continued claim. Yet, the trend is quite clear, and at today’s pace even this lagging indicator is on track for a clear-cut recession signal. The second gauge is the trend for hiring of Temporary workers, which at the present is submerging in straight line fashion. Not only that, but this gauge is also deeply in the red, trending well below zero. All of the positive media spin in the world cannot change what is truly happening in the real world, and while we can always hope for the best, it is best when making important investment decisions to at least understand the fundamental climate within which one is operating, and right now that climate is distinctly negative.
Markets ended mostly higher today with the DJIA moving higher by 51.29 index points to close at 13020.83, while the S&P 500 ended up 10.77 index points to close at 1418.26. On the NASDAQ, prices gained 19.19 index points to finish at 2483.31. The bond market rallied today, with the yield on the 10-year US Treasury rising to 3.893%. Gold also gained, up 2.65 to close at 876.85. That’s all for now, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
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