The raw data showed that 919,000 payrolls were somehow created in October, which therefore would have made this the second strongest October in the last 11 years — in October 2009, the tally in the raw nonfarm payroll data was 646,000 even though the economy then was accelerating at a 5% annual rate. The data bear no resemblance to the reality of an economy barely growing at all in real per capita terms.
I share David’s view that the numbers do not add up given the broader macro picture. So I was left scratching my head. I still am, but I would like to add something to the discussion and pose a question. Two recent emails:
A new address for me. I woke up 6 weeks ago and said fuck it. Put my stuff in storage and moved to Houston. I got a place to stay and a job. So I am starting over, again.
Ian
BK: Ian is a plumber who worked for a big construction company south of Tampa Fl. Steady work as Fl. boomed. Then he got laid off and maxed out unemployment waiting for a recovery that did not happen. He scrambled for cash work to stay alive. When the benefits ran out the only option was to move to where there was work.
Simon got a job after nearly two years. For years he helped people to get a mortgage. Now he is working for a company that has customers who can’t pay their mortgage. He doesn’t make as much as he used to but at least he has benefits.
Aunt Edna
Do these comments mean anything? Not really. Two stories in the wind of 130mm. These two people were motivated to change what they were doing when the crunch came. The crunch was the end to EU benefits.
Over the next few months close to 5 million people will be looking at the end of their checks. There will be a range of outcomes as this happens. Some will not find work and their status will be tenuous. Others will figure out how to get by with less and find work off the books. Still others will take jobs that are available even if they have paychecks well less than they did two years ago. This has the potential to create some tremendous “noise” in the economy. It also might create some head fakes in the markets.
Consider a scenario where the end of EU pushed a good number of people back into the workforce over the next few months. Yes, they would be taking jobs at the Wal-Mart and Duncan Donuts, but they show up as newly employed. On NFP Friday the only thing that counts is the top line number. I pose the question: What happens if we get hot numbers that average 250k for the next three months as the EU issue sorts itself out?
My first thought is that this could be an explosive combination with Mr. Bernanke’s QE. If just 20% of the 5mm find something to do for a paycheck over the next six months while our boy Ben is pouring gas on the fire the economy will flare up for a bit. An improvement in the jobs picture will be very noticeable in the bond market. It could be the basis of a hiccup in all manner of commodities prices. The most significant would be in the cost of energy, food and gold. Should things work out like this it would shine a terrible light on QE. The policy would be indefensible given the backdrop of an improved labor picture and a sharp ramp up of consumer prices. Bernanke would be forced by the markets and the public to back off and moderate the QE program. He has said they would fine tune QE as information on the economy becomes available. Most people read that to mean that QE-3 was a sure thing. It could also mean that he would back off if there is demonstrable evidence that QE was not really necessary.
But here is the real world scenario. Forget about some noise we may get from a few months of distorted employment numbers. What is really happening is that a very significant number of the 5mm will be hitting the skids in slow motion. Their consumption will fall substantially and we will probably see an increase in food stamps at the same time payrolls are rising. Those that do get a job will have after-tax income not too far from the unemployment checks they were getting. Net-net disposable income will be in decline. In this outcome the best that one could hope for is a few years of growth a point or so above zero.
There are many possible paths in the future. Something along these lines is just one. Should something like this happen we would find ourselves sometime this spring or summer with a busted and disgraced QE effort. ZIRP might still exist but the Fed’s ability to push the economy further using monetary policy will be exhausted. I can’t imagine that QE will end quietly. It will go out with a bang. When it is gone it will not return for a long while.
Bernanke got head faked a few months ago when Greenspan said that the economy had, “Hit an invisible wall”. He over reacted and teed up QE as a result. Once it was out there it was impossible for him to back off, even though the economic evidence suggested caution. As a result, we get a half assed QE compromise that will accomplish little but to stoke some commodities fires.
QE-1 was an emergency measure that achieved the objective of stabilizing the economy during the “emergency” of two years ago. We may very well find ourselves in another emergency later in 2011. The economy may need a shot in the arm. But the botched introduction of QE-2 will make it impossible for Bernanke to roll out a sequel.
Bernanke is an academic. He has no experience in markets and therefore has no sense of market timing. He completely blew the timing on this one. QE-2 will go down in history as a failed policy effort that backfired. When/if we need QE in the future it will not be available as a policy tool. Bernanke’s botch job has tied the Fed’s hands for at least a decade.
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Hi Bruce,
ReplyDeleteI personally think they are just boosting the numbers artificially in hopes that something, anything catches before all the true data comes out. If this extend and pretend works, I'm sure there will be a great expose written in 10 to 15 years talking about a massive secret project organized by government insiders to keep America out of the abyss. If not, there will be a very public historical record of the failure.
Anyway, that was really just an aside. The real point in writing is that I've been unemployed for nearly a year now, you have time to think when this happens. I used to make about 90k a year, and my unemployment is about 22k/year (it’s a sliding scale and I’m at the top), needless to say I live hand to mouth.
I’m facing down the next expiration of benefits at the end of the month, and you’re right, you start to get desperate in what you’ll consider. One little fact that you’re off on is to say that a job at walmart or some other place similar would be on par with UE. Benefits pay about $10/hr and a position at Walmart pays more like $8/hr. My point is that if you quickly move all 5mm into those positions it will be much more crippling than you suggest. Besides the fact that if I was forced to take a spot at $8/hr I would definitely default on some of my debt, this is something else to consider – my credit score before unemployment was 750, today it’s 630 due to an accumulation of revolving debt (to buy basics) and no job, so I don’t have much more to lose.
Interesting thesis but the core to keep in mind is the net difference between wages and benefits.
ReplyDeleteHew hires surrender benefits to gain wages, when the wages equal unemployment benefits there is little or no net change in funds attributable to labor. If there was - if wages were marginally higher than bennies - people would be taking the Walmart and Dunkin' Donut jobs now rather than waiting until the bennies run out.
More than likely the jobs available are at the lowest rung of the 'labor arb' ladder; harvest workers, oil spill and toxic waste cleanup, landscape work, etc. where the competition is from undocumented workers.
Also, the labor figures' seasonality cuts both ways. There will be a seasonal surge in employment which will 'un- surge' after Xmas.
Finally, the figures released seem to be 'contaminated' by a questionable birth- death business formation model that gives positive numbers that are revised downward months later.
Anon,
ReplyDeleteThanks for the insight and the clarification on wages/EU. I wish you well. You have to start over too. Not easy, but doable. I did it three times.
bk
I live in Canada, where many people who have lost jobs have made their way to Fort McMurray Alberta, the gateway to the oil sands, to find relatively high valued and high paid work. If I were unemployed in the US, I would probably find my way to North Dakota or Montana, since both states are benefiting from a massive oil boom due to the presence of the Bakken oil fields beneath their soil. Bakken oil is sweet and light, the most highly prized oil in the world because it is easy to refine. The geologists say there is 100 years of oil laying within the shales of the Bakken. Only in the past few years have the engineers found ways to tap the oil economically from the shale. So it may well be the boom is only beginning.
ReplyDeleteNext point is about QE2. Paul Kasriel, the prize winning economist of Northern Trust today released a report comparing the late 1933 QE with Bernanke's QE2, suggesting that this version will be as successful as the 1933 version of QE, when gold was revalued upward. Here's the salient points he makes:
"There is much skepticism as to whether the Fed’s second round of quantitative easing, QE2, will be effective in stimulating the nominal demand for goods and services in the U.S. economy. It was explained in our November 4, 2010 US Economic and Interest Rate Outlook why the Fed’s first round of quantitative easing, which ran from the end of November 2008 through the end of March 2010, was rather unsuccessful in stimulating nominal aggregate demand and why we believe that the Fed’s just-announced second round will be more successful. Keying off Mark Twain’s aphorism that although history may not repeat, it often rhymes, perhaps we can get some guidance as to whether QE2 will be successful from the results of the quantitative easing that was initiated in the second half of 1933.
It was not the Federal Reserve that initiated quantitative easing in the second half of 1933, but the U.S. Treasury. In May 1933, Congress granted permission to the President of the United States to increase the U.S. dollar price of gold, which at that time was $20.67 per ounce. By January 1934, President Roosevelt had raised the dollar price of gold to $35.00 an ounce. By the stroke of a pen, the Treasury’s hoard of gold increased in value by 69%. This, in effect, increased the Treasury’s spendable funds by the increase in the value of its gold holdings. The Treasury could use these funds created figuratively “out of thin air” to pay some of its bills without having to raise taxes or issue new securities. Thus, the Treasury could increase its spending without any other entity in the economy having to cut back on its current spending. The upward revaluation of the Treasury’s gold holdings starting in the second half of 1933 was similar to today’s Federal Reserve purchases of securities. The upward revaluation of the Treasury’s gold holdings starting in the second half of 1933 increased the supply of money in the economy just as would have occurred if the Fed and the commercial banking system had increased their credit creation."
Kasriel provides various charts and data to show what followed beyond 1933, when GDP exploded higher in the order of 10% a year.
Sounds pretty compelling to me but I'm not trained in finance. I've been pretty pesimistic til recently but the massive stock market rally, commodities rallies, and dollar drop have made me think that Bernanke may be onto something here. Refute Kasriel if you can.