January Unemployment Report Just Weird

This morning the Bureau of Labor Statistics released one of the weirdest unemployment reports you’ll ever see.  As reported by the BLS, non-farm payrolls fell by 20,000 jobs.  Yet, unemployment fell dramatically, from 10.0 to 9.7%.  With the labor force growing by nearly 150,000 per month, a loss of 20,000 jobs should have driven the unemployment rate up by 0.1%.

And that’s not even the weird part.  What’s weird is that, while the non-farm payrolls fell by 20,000, total employment grew by 541,000.  That means that farm employment exploded.  In January?!?!?  Hardly seems plausible.  Making it even more unlikely is that weekly jobless claims continued to run at a high level throughout Janaury, a rate that should have unemployment rising by 0.5% for the month.  Then, if that wasn’t weird enough, they cut non-farm payrolls by approximately one million going back to March of 2009.  Did they discover that the Bush administration had been padding the figures?  Or are they setting the stage to make any rebound in jobs look that much bigger? 

The reason that the unemployment figure came in so much lower than everyone expected, I believe, is because the data is seasonally adjusted.  January is typically a month when retailers lay off a lot of seasonal employees.  So if, in a month when payrolls typically decline by 500,000, they only decline by 250,000 (because they never hired as many seasonal workers in the first place), then seasonally adjusted that’s a gain in employment of 250,000.  I can’t prove it, because the BLS doesn’t make the unadjusted data available. 

No one, including the Obama administration, really believes this month’s report.  Obama’s proposed budget for next year, based on optimistic projections for the economy, only projected unemployment falling to 9.8% by the end of the year.  Now it’s already at 9.7%?  Not likely.

The following is my calculation of unemployment which, since it uses the same government data (what else can I use?), also shows similar declines in unemployment. 

Unemployment Calculation

And here’s the same data in graphical format:

Unemployment Chart

We’ll get a better read on the employment situation next month when the seasonal factors aren’t such an issue.

Is the U.S. a Piglet?

There’s been lots of concern about sovereign debt in Europe this week, centered on four nations now dubbed the “PIGS”:  Portugal, Ireland, Greece and Spain.  I suppose the “PIGS” acronym is a metaphor for their appetite for debt. 

I thought it might be interesting to take a look at a few key economic indicators for these countries and see how the U.S. stacks up against them.  The following spreadsheet compares their balance of trade per capita, their national debt per capita and their national debt as a percentage of GDP.  (National debt includes both public debt – that held by its citizens – and external debt – held by foreign investors.)  I’ve included the national debt per capita because, although economists are fond of expressing national debt as a percentage of GDP, it must be remembered that it’s not the GDP that will ultimately have to repay the debt; it’s the people.

PIGS

As you can see, Ireland is a bit of an anomaly.  Although it has an enormous trade surplus, the highest in the world, it also has the worst national debt problem by far, at 1400% of GDP, or almost $595,000 per person in Ireland.  I can’t explain Ireland’s predicament, but it makes me wonder whether Ireland’s staggering trade surplus has been an orchestrated plan by the rest of the world to provide Ireland a way out of their fiscal problems.

That leaves Portugal, Greece and Spain.  All three have very large trade deficits per capita.  The U.S. isn’t far behind. 

All three have national debts that are near or above 300% of GDP.  By that measure, the U.S. has a ways to go.  But in per capita terms, the U.S. is on a par with Portugal.

So is the U.S. a “piglet?”  Though not at the same level of concern about the potential for default by the “PIGS,” concern about America’s debt is higher than ever.  Ratings agencies are threatening to beginning cutting our credit rating if the debt problem isn’t addressed soon.  Perhaps the only thing that makes U.S. debt a “safe haven” is that everyone knows that, unlike the “PIGS,” the U.S. can simply print money to pay its obligations if all else fails.  But that strategy would not be without serious risk to the U.S. economy. 

Let’s hope the trough runs empty before we can baloon to “PIG” status.

Weekly Jobless Claims “Unexpectedly”(?) Rise Again

http://www.reuters.com/article/idUSN1416882220100204

Weekly first-time jobless claims rose yet again last week, and the 4-week moving average has now risen for three straight weeks.  This was “unexpected” for analysts, but not unexpected for anyone who understands that the root cause of our economic problems has yet to be addressed. 

The number of workers filing new applications for jobless benefits unexpectedly rose last week, according to a government report on Thursday that pointed to a labor market still under stress even as the economy grows.Initial claims for state unemployment benefits increased 8,000 to a seasonally adjusted 480,000 in the week ended January 30, the Labor Department said.

Analysts polled by Reuters had forecast claims falling to 460,000 from a previously reported 470,000.

The much-ballyhooed recovery (the rise in GDP being the only evidence) is an illusion and the economy is quickly sinking back into recession.  (Although, if economists were honest, they’d admit that it never ended.)

Enforcing Flawed Trade Deals

http://www.reuters.com/article/idUSTRE6131YM20100204

No sooner do I announce plans to scale back on posting articles when along comes something I can’t resist.  The above-linked Reuters article reports on an announcement by Commerce Secretary Gary Locke of plans to boost enforcement of trade deals in an effort to achieve Obama’s promised doubling of exports in five years.   There are a couple of key points that need to be made here. 

First of all, I have spent virtually my whole adult life listening to presidents, Commerce secretaries and U.S. Trade Representatives vowing to get tough on trade deal enforcement.  This effort will turn out no differently.  If anything, exporting nations are relieved to have the focus drawn away from the import side of the equation.

Secondly, the following passage from the article can’t pass without comment:

“While the U.S. is a major exporter, we are underperforming,” Locke said in the excerpts given to reporters. “U.S. exports as a percentage of GDP are still well below nearly all of our major economic competitors.”

The competitors Locke speaks of are primarily China, Japan and Germany.  Back in early November, Obama challenged his economic team with the question, “If Germany can build an economy on exports, why can’t we?”  (See Obama on Trade: “If Germany can do it, why can’t we?”.)  America is not “underperforming.”  It’s not about “competing.”  The problem is that the field of economics doesn’t yet recognize or understand the role of population density disparities in driving global trade imbalances.  Boosting our exports means that nations like China, Japan and Germany have to boost their imports – their domestic consumption.  If they were capable of such domestic consumption, they wouldn’t have the need to export so much in the first place, nor would they have the excess production capacity to do so. 

I don’t doubt the president’s sincerity.  Every president for the past 30 years has understood the need to restore a balance of trade.  But Obama is the first post-global economic collapse president and, as such, the first to have an added sense of urgency brought on by a realization of the ultimate consequences of sustained trade imbalances.  Unfortunately, he’s fallen back on the same worn out approach of enforcing trade deals when it’s the deals themselves, lacking population density-leveling mechanicsms,  that are the problem. 

But this time, time is not on his side.  The era of sweeping trade imbalances and their consequences under the rug has ended.  The U.S. is economically boxed in on all sides by high unemployment, global demands to rein in our budget deficit and a Federal Reserve with an empty tool box.  So the only question is how soon the president will run out of patience with the export-focused approach and turn his attention to imports.

Announcement

After some soul-searching and research, I’ve decided that the time has come to take my game to the next level.  My strategy thus far has been an attempt to drive a bottom-up understanding of a new economic theory that might eventually drag economists along, kicking and screaming.  It’s impossible to say whether I’m having any effect but, if I am, it may take a thousand years to achieve the desired results.  What’s really needed is an intravenous injection of this theory into the body of economics. 

I’ve begun working on a white paper which I plan to submit for pulication in one of the many academic economics journals.  The vast majority of articles published in such journals are written by Phd economists, but I’ve been encouraged to submit such a paper and, upon examining some of these journals on-line (the ones that allow the user to view a free sample), I’ve concluded that it’s worth a shot at finding one that will consider a submission from “an independent researcher.” 

It’s going to take a bit of work – not a simple “copy and paste” of a condensed version of the book.  It needs to be presented in a much more scholarly format.  I’m letting you know this, faithful readers, because it means that I won’t be able to post or reply to comments on this blog at the same rate as in the past, for a little while at least.  I’ll still post commentary on major economic developments, perhaps once a week or so, and will still read all of the comments, but may not have enough time to reply as much as I’d like. 

I’ll keep you posted on my progress.  My understanding is that many of these journals do not accept simultaneous submissions, which means that instead of “shot-gunning” copies to all of them at once, hoping to score a hit with one of them, I may have to submit to them one at a time, awaiting acceptance or rejection before moving on to the next. 

Even if this effort is ultimately a failure and no one agrees to publish, it may not be in vain, since someone at each journal must read the paper in order to pass judgment.  Like planting seeds behind a fence, just because you can’t see what happens next doesn’t mean that it hasn’t borne fruit. 

Beyond this white paper effort, I’m also contemplating a 2nd edition of Five Short Blasts or, perhaps, a new book altogether.  I’d like to keep this theory out there, available in a book that’s fresh and relevant with up-to-date data. 

Again, I’ll keep you posted.  Wish me luck.

Domestic Vehicle Sales Plunge in January

Lost in all the stories yesterday about gas-pedal problems at Toyota, the impact on their sales in January (which fell almost 50% from December), and sales gains by GM and Ford was the fact that overall domestic vehicle sales (including the big 3 and foreign transplants) plunged to an annual rate of 7.9 million vehicles in January, much worse than analyst expectations of a small decline from 8.5 million in December to 8.4 million.  After rising for three consecutive months, domestic vehicle sales fell in January to their lowest level since October.

Aside from the happy 4th quarter GDP report, evidence is mounting that the economy has stalled again and may already be back-sliding into recession – the “double dip” that many economists have predicted.  Jobless claims have begun rising again; job losses have resumed and now vehicle sales have slipped badly.  The government’s efforts to gloss over the realities of the post-globalization economy and the root causes of the collapse are failing.  The Federal Reserve is out of ammo and will halt its balance sheet expansion (currently in the form of purchases of mortgage-backed assets from the banks) in March.  And patience with exploding deficits is growing thin.  Things are going to get very interesting this year.

Plan to Double Exports Just More Trade Policy Blundering

http://www.cnbc.com/id/35143495

It seems I wasn’t the only one who found Obama’s pledge in the State-of-the-Union Address to double exports in five years to be unbelievable.  Check out the above-linked CNBC article. 

Since the Obama administration has not yet clearly articulated a trade policy or even sent several completed trade agreements to Congress, his pledge to double exports in five years was greeted with incredulity, even among Democratic trade policy experts.

Never mind health care, the stimulus plan, Afghanistan, or all of the other issues that have distracted his attention so far.  Obama’s failure to articulate a trade policy or come up with a plan to address the trade deficit is, by far, his biggest failure.  Contrary to his campaign promises, he’s done nothing to correct the imbalance with Mexico that arose from the North American Free Trade Agreement.  Worse, he’s done nothing in response to tariffs that Mexico slapped on American goods the first time he tried to raise the issue.  Nor has he done anything in response to persistent dumping by the Japanese.  Nor has he done anything about China’s refusal to unpeg their currency from the dollar. 

His stimulus plan has failed to revive the economy.  Unemployment isn’t dropping.  With credit rating agencies on the warpath about sovereign debt, another big stimulus isn’t an option.  Reinflating the housing bubble isn’t an option.  He seems to understand that revitalizing manufacturing is the only way to get the economy back on its feet. 

So he’s faced with a choice:  rein in imports so that manufacturing can focus on meeting the needs of domestic consumption, or manufacture products to be consumed by other nations.  The first option is completely within his power and success would be guaranteed, but at the price of angering other exporting nations.  The second option is something over which he has absolutely no control and there is virtually no chance of success, but at least China wouldn’t be P.O.’d at us. 

So what does he choose?  True to form, he’s opted for the appearance of doing something that angers no one, as opposed to real action that requires real leadership.  By setting a goal of doubling exports in five years, he can fall back on the excuse that “we still have two years to go” when the next presidential election rolls around. 

Boosting exports has been our trade policy ever since the signing of the Global Agreement on Tariffs and Trade in 1947.  The idea is to open new markets.  But it’s precisely this plan to open new markets and boost exports that has saddled us with an enormous trade deficit.  How?  Because trade negotiations always involve the U.S., in a gesture of good faith, offering to open up our market first.  So in comes a fresh tide of imports. 

Then, when the exports don’t materialize, we ask, “why aren’t you buying any of our cars?”  The answer:  “because our nation is too crowded for everyone to drive cars.”  “Our commuters rely on mass transit.”  Then we wonder why they don’t buy American-made lawn mowers until we realize that – oh, yeah, we forgot - they’re so crowded that they don’t have lawns.  Then we wonder why they don’t buy American-made applicances until we realize that – oh, yeah, we forgot again - their homes are so tiny there’s barely room for a bed and a toilet. 

Too late.  The trade deal is done and now we’re stuck with an even bigger trade deficit.  The solution?  Move on to the next country, perhaps with an even bigger population, and hope that things turn out differently.  We keep applying the same failed trade model while always expecting different results. 

Since Obama so loudly and publicly proclaimed such a commitment, I’ll hold his feet to the fire.  I’m going to chart our monthly progress on export growth, along with imports and the overall trade deficit, using January 2010 trade results as the starting point (which won’t be released until March).  To meet this goal, exports must rise at a rate of 1.2% per month for the next five years, while any growth in imports must be held to about half that value in order to achieve a balance of trade.  Oh, by the way, I’ll be tracking this in constant dollar terms, not letting him inflate his way toward meeting this goal. 

Anyone care to place a bet on Obama meeting this goal?  I wonder if the president himself would make that bet. 

So stay tuned.  It’ll be fun to watch how this unfolds.

4th Quarter Real Per Capita GDP Jumps 4.6% (Sort of)

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

On Friday the Bureau of Economic Analysis (BEA) announced that real (adjusted for inflation) U.S. GDP (gross domestic product) grew in the fourth quarter by 1.425%, which yields an annualized rate of growth of 5.7%.  Allowing for an annualized population growth rate of 1.0%, that means the real per capita GDP grew at an annualized rate of 4.6%, rising to $42,638 from $42,153 in the 3rd quarter. 

If we factor stimulus spending out of the equation to determine what’s happening with the real, underlying economy, the growth rate is even higher – an annualized rate of 8.6% – thanks to the fact that stimulus spending actually fell in the 4th quarter to $83.8 billion from $113.2 billion in the 3rd quarter. 

Wow!  The economy’s really on a roll, right?  Well, maybe not.  When you examine the details, things don’t look quite so rosy.  I’ve provided a link above to the BEA report.  Here’s what accounted for the lion’s share of the growth:

The change in real private inventories added 3.39 percentage points to the fourth-quarter change
in real GDP after adding 0.69 percentage point to the third-quarter change.  Private businesses decreased
inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter
and $160.2 billion in the second.

In other words, in the bizzaro world of government macroeconomy accounting, when inventories decline less than they did in the previous quarter, this actually counts as economic growth!  So of the 5.7% gain in GDP, 3.39% or 59% of the gain is purely an accounting gimmick – smoke and mirrors. 

And it doesn’t stop there.  Since trade data for the month of December hasn’t even come in yet, this first-pass estimate of 4th quarter GDP is based upon assumptions about exports and imports. 

Real exports of goods and services increased 18.1 percent in the fourth quarter, compared with
an increase of 17.8 percent in the third.  Real imports of goods and services increased 10.5 percent,
compared with an increase of 21.3 percent.

I don’t know where they’re getting these figures, but the trade data published by the BEA (see http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf) simply doesn’t bear these out.  So far, in the 4th quarter, exports have risen only about 5% from the 3rd quarter and remain below the level of exports in the 4th quarter of 2008.  The story for imports is exactly the same – a rise of about 5% vs. the 3rd quarter.  So the claim of a big rise in exports and a much smaller rise in imports simply doesn’t hold water.  Assumptions about trade made in the 1st-pass estimate of 3rd quarter GDP were also inflated, resulting in the final reading of 3rd quarter GDP being cut to 2.2% from the initial 3.8% estimate. 

The following graph depicts real per capita GDP, with and without stimulus spending, since the first quarter of 2000:

Per Capita GDP

The sharp V-turn in the last quarter, especially with stimulus spending removed, just doesn’t look very plausible, does it?  I’ll update this data when the next estimate of 4th quarter GDP comes out next month.   The revisions never generate nearly the interest as the first-pass estimate, so it won’t surprise me if we learn that this estimate was goosed with some false assumptions to prop up consumer and investor confidence. 

By the way, I’m not the only one who sees a red herring in this report.  Check out some of the quotes from this article below:

http://www.reuters.com/article/idUSTRE60S3AZ20100129

NIGEL GAULT, CHIEF U.S. ECONOMIST, IHS GLOBAL INSIGHT, LEXINGTON, MASSACHUSETTS:

“We got to be very cautious about what it implies for the future because it (came) from the inventory cycle… if you take out net exports as well, the actual final spending by U.S. consumers, businesses and government actually grew more slowing in the fourth quarter than the third quarter.

“I’m a bit doubtful that net exports can continue to be a plus because I think we’re going to see a rebound in imports. Also, there’s not a lot more, in terms of the growth effect, to come from inventories.

CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:

“A big inventory build added about 3.4 percent and then a swing in net exports added another half of a percent. When you look at domestic demand, final sales to domestic purchasers, it was only 1.7.

TOM PORCELLI, SENIOR ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:

“When you strip out inventories, you see real final sales were 2.2 percent. This is not a fantastic number. If you compare this to the ‘75 and ‘82 recessions, real final sales in the first two quarters after, we averaged 5 percent after ‘82 recession, and about 4 percent after the ‘75. By comparison, we obviously are looking pretty weak.

Obama Transitions to Caretaker President

 

As evidenced by the State of the Union address last night, Obama has chosen to respond to falling poll numbers and rising anger among the electorate by taking the safe route and morphing into yet another caretaker president.  Aside from waxing eloquent in his opening and closing remarks about the historic challenges we face, he sounded exactly like George Bush and every president preceding him for the past two generations, offering a littany of tax cuts and credits to get the economy moving in the right direction, while closing with vows to reduce the budget deficit. 

“Change we can believe in” is dead.  There were still echoes of the campaign trail when he spoke of eliminating tax breaks for companies who outsource jobs, enforcing trade deals, health care reform, green jobs and an energy policy, but there was no conviction in his voice and everyone watching knew that it was merely nostalgic rhetoric.  The efficacy of the speech was best summed up in one moment when, after speaking at length about fiscal restraint and reining in the budget deficit, he concluded with “but that will have to wait till next year,” deservedly drawing loud guffaws from the Republican side of the room. 

Most disappointing of all was his comments on trade.  Contrary to his campaign promise to stand firm against any more free trade deals that have devastated our manufacturing sector, he now supports conclusion of the Doha round of World Trade Organization talks, with its agenda of opening another artery in America’s economy upon which more parasitic economies will feed.  And his vow to double exports by opening new markets is nothing more than a retreat into the same dumb trade policy that has amassed a trade deficit of ten trillion dollars while simultaneously dismantling our manufacturing sector over the past three decades.  We’ll “open new markets.”  Right.  That means opening our market first,  in return for  markets so badly stunted by low per capita consumption that an even bigger trade deficit is the only possible outcome.  This part of the speech was a slap in the face to every voter, like me, who put faith in Obama’s promises to reduce the trade deficit and bring manufacturing jobs home.

The practitioners of old-school, 18th century economics have won the day again.  A few more tax breaks here.  Sprinkle in some token cost cuts there.  Pump up the economy with immigration and population growth.  Drill, baby, drill.  “Spin, baby, spin.”  (The unspoken platitude to the green crowd.)  Boost exports.  Pay no mind to those nuisance imports.  Crank up the printing press at the mint.  Don’t rock the boat.  Everything will be fine.  This is our future.  We now have another caretaker to see to it.

Just one problem.  This isn’t the middle of the 20th century.  Those approaches have culminated in economic ruin.  Continue on this path and you can take one of two outcomes to the bank:  far worse unemployment or a $20 trillion national debt in ten years that collapses our economy, perhaps forever.  Obama has chosen the well-worn path and crossed his fingers in the hope that it doesn’t happen on his watch.

Balancing the Budget: Simple, but It Takes Guts

In advance of tonight’s state-of-the-union address by President Obama, there’s a lot of talk about the urgent need to rein in the budget deficit, along with speculation about what the president may propose.  Already leaked is a plan to freeze discretionary spending for three years, saving $250 billion over a ten year period, during which the budget deficit is projected to be $6 trillion – nothing more than a token gesture.

Lost in all the proposals is the one measure that would do far more than anything else toward balancing the budget – a return to sensible trade policy that relies on tariffs to restore a balance of trade.  Consider this:  in 2008 we imported $2.1 trillion worth of goods.  If these imports had been subjected to an average tariff of 38.5%, the prevailing rate established by the Fordney-McCumber Tariff Act of 1922, we would have collected an additional $809 billion in federal revenue.  That would eliminate 58% of this year’s budget defiict of $1.4 trillion.  Compare that to Obama’s plan to freeze discretionary spending, a move that would reduce the deficit by only 1.8%.

Of course, imports would certainly fall as a result of the tariffs, reducing the revenue take.  But they’d be offset by a boost in domestic manufacturing, increasing federal revenue from the domestic economy.  And growth in the manufacturing sector would have synergistic effects on the rest of the economy, boosting revenues even further. 

This would entail extricating ourselves from the World Trade Organization or, at the very least, predicating our continued involvement in the WTO on its acceptance of the role of population density in driving global trade imbalances, allowing us to raise tariffs on overpopulated nations without the threat of retaliation. 

That’d take a lot of guts on Obama’s part, a quality that, if it exists, has yet to be revealed.  No doubt, China, Japan and Germany would threaten to dump their vast holdings of U.S. treasuries.  But it’s a hollow threat.  First of all, such a move toward a sensible trade policy would send the dollar soaring, making other nations eager to snap up those bonds and, secondly, with our budget deficit reduced so drastically, the volume of bond auctions would fall precipitously, tipping the supply/demand balance in favor of the U.S. 

It’s no mere coincidence that virtually all of the rise in our national debt over the past three decades closely matches our cumulative trade deficit in that same period of time.  The relationship between the two is more than coincidental, since deficit spending by the federal government has been relied upon heavily to offset the negative consequences of the decline in GDP wrought by our trade imbalance.  You can’t fix the former without addressing the latter.  The economic smoke and mirrors employed by both the left and right for the past three decades to obscure that fact has painted our economy into a corner. 

Is Obama willing to walk over that paint and take us in a new direction?  I doubt it.  More likely, he’ll grab ahold of a sconce on the wall, support himself on one tippy-toe, and lay down some more paint.