Month: March 2014

Submitted by Shane Obata of Triggers

An in depth look at the US labor markets

People love to talk about how statistics can be used to prove any point.

I don’t entirely disagree with that claim, but it really depends on both the perspective – or time frame – and the source of the data set.

My research typically involves trying to separate the meaningful data from the nonsense.

In general, people are increasingly absorbed with short term results.

What’s more important is long term trends.

Some of my favourite chartists such as @lanceroberts, @not_jim_cramer, @m_mcdonough, @zerohedge, @greekfire23, @cigolo, and @minefornothing are good examples of economic analysts who don’t try to fool you with the data.

Often time they will present their data over long time frames to make comparisons with other periods possible.

This can help us to identify similar expansionary or contractionary periods or inflection points.

Credible sources are essential but so is doing your own research and making your own conclusions.

But that’s the beauty of economic data – regardless of the author’s opinion, it’s open to interpretation. (Even though most of the time one side is right and the other is wrong – see: santelli and liesman, respectively.)

Back to the matter at hand…

Today we’re going to look at an area of the economy that I’ve been meaning to write about for a while – the US labor markets.

Despite that fact that US GDP is incredibly reliant on consumption – approximately 68% of US GDP is comprised of personal consumption expenditures…

Some could argue that consumption’s actual usefulness to an economy is not as great as it may seem.

For example, if someone buys a stuffed bear every day for a year straight then is that really going to improve the economy in the long run?

When thinking about the quality of an economy or a business venture isn’t sustainable growth what’s important?

In my opinion, wages are what drive an economy.   

Higher real wages allow people to save and then invest without taking on debt.

Unfortunately for the US economy, debt is up and incomes and savings are down.

Moreover, these trends have been in play for a long time.

The personal savings rate, GDP (yoy), and personal income (yoy) peaked in the 1970s.

On the other hand, household credit market debt outstanding is barely off of its peak.

As a result of inflation and lower real median household incomes, individuals are taking on debt in order to maintain the same standard of living.

And that’s why the CPI i?s? ?a? ?j?o?k?e? ?   cannot be considered an accurate gauge of the cost of living – because it no longer measures real inflation.

Let’s get back to the labor markets.

Every month, all the m?e?t?e?o?r?o?l?o?g?i?s?t?s?  economists make projections for the nonfarm payroll number.

Regardless of details and long term trends, what’s important to the market is whether or not it beats analysts’ estimates.

Despite a lot of talk about this number, job growth has not improved in a meaningful way for the past few years.

Furthermore, since the mid-1980s, the rate of increase (yoy) has been in a downtrend.

What’s more is that the number of jobs that the US has gained since the financial crisis has not consistently kept pace with population growth.

In other words, employment is only being created by the incremental demand caused by population growth.

This is reflected in the employment/population ratio – which has not increased since 2010.

But if the employment rate is flat then why is the unemployment rate falling?

To answer that question let’s first define the unemployment rate as: the number of unemployed persons / the labor force.

In order for this rate to fall one of two things needs to happen.

1)    The number of unemployed persons falls

2)    The number of people in the labor force falls

So why is it falling then?

Because of the number of people not in the labor force is increasing.

From 1980 to the present that number has increased from 60 million to 92 million.

What’s more is that people are now leaving the labor force at a faster pace than they were from 1980-2001 and from 2001-2010.

Let’s move on to another important consideration: the quality of the jobs that have been added.

For the most part, everyone is obsessed with the number of jobs.

That said, one could argue that the quality of those jobs is more important.

That’s because high quality and not low quality jobs are going to help the US government to bring in more tax revenues.

In a country where entitlements are growing at an incredible pace, that fact cannot be overlooked.

Unfortunately, the US is not adding enough of what David Stockman referred to as “breadwinner jobs”.

The paper that this chart was taken from can be found here; it’s one of the best analyses of the labor market that you might come across.

So what kind of jobs have been added?

Mostly low quality ones such as retail salespeople, cashiers, food prep workers, etc.

These are kind of jobs that 1) are vulnerable to technological advancement.   

Note: as technology continues to improve it’s likely that many people will lose their jobs to robots.

2) won’t generate enough tax revenues to support growing social benefit payments.

Note: to put to rate of increase in social obligations in perspective, social security now costs 8x what it did in 1980.

And 3) aren’t full time.

Note: during the financial crisis, full time employment as a % of the labor force fell dramatically.

It has recovered since then but it’s still at a depressed level.

On the other hand, part time employment as % of the labor force rose during the financial crisis and is still at a very high level.

Another concerning trend is that weakness in the labor markets is more apparent among the young.

The following graph shows that only the only age group that only those 55 and older have added net jobs since 2007.

Furthermore, since there are fewer quality jobs available overall – those jobs are often held by more experienced persons.

Both of these trends are reflected in lower and higher labor force participation rates for the young and old respectively.

As you can see in the following chart, participation rates for those 16-24 are projected to decrease through to 2020.

In contrast, the labor force participation rates for those 55 and older are projected to increase.

Now that we’ve gone over what’s really happening in the labor markets, let’s examine some of the misconceptions that are commonly held about them:

1) assumption: a falling unemployment rate is indicative of an improving labor market.

Reality: the unemployment rate – especially the U3 rate – is not a good measure of the health of the labor markets for reasons that we alluded to earlier.

On the other hand, the average duration of unemployment seems to be more relevant.

Currently, the average duration of unemployment in the US is 35 weeks.

To put this in perspective, from 1980 until the financial crisis, the highest the number reached was in the low 20s.

What this means is that those who are unemployed are staying unemployed for longer.

2) assumption:  a reduction in initial jobless claims is indicative of an improving labor market.

Reality: initial jobless claims are in a downtrend because – as Lance Roberts reports here – businesses are hoarding their employees

3) assumption: if the US economy keeps adding 200,000 jobs every month then everything will be fine in the labor markets

Reality: at the current pace of growth, “it would take until December of 2018 to return to pre-recession employment levels while also absorbing the people who enter the labor force each month”

In conclusion, the labor markets are not as healthy as some people think they are.

Employment seems as though it may have peaked for this cycle.

And the so-called “recovery” in the labor markets is much weaker than past recoveries were.

These trends are probably reflective of 1) changes in societal labor trends – such as the move away from manufacturing jobs and towards retail jobs.

And 2) a structurally weak US economy whose growth is being held back by debt.

Next time you hear t?h?e? ?w?e?a?t?h?e?r?m?a?n?  Joe Lavorgna talking about how good the labor markets are, consider the long term trends and go over all of the details before you draw a conclusion.

*And don’t forget to support #teamphil.

Shane Obata @sobata416

via Zero Hedge http://ift.tt/1l8YOn7 Tyler Durden

Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

Via ConvergEx's Nick Colas,
 
Note from Nick: For something that policymakers essentially think is a non-issue, we regularly get more questions about inflation than any other economic topic.  The most common observation is that “Real world” prices are rising far faster than the benign CPI readings used by the Federal Reserve to make decisions about interest rate policy.  Moreover, Treasury prices – essentially the market’s take on future inflation – may not be telling the whole story due to continued risk aversion among some investors.  Today Beth takes on the topic head on, looking at how the CPI gets calculated and why so many Americans are losing faith in this index as a measure of inflation. 
 
I can easily go through Costco’s 4-pound “family pack” of bacon in a week; nowadays it goes on and in everything – cupcakes, ice cream, muffins, scallops… and best of all smothered in brown sugar and baked to candied bacon perfection.  But fellow bacon lovers beware.  In the past five years the price of bacon has jumped more than 32%, according to the Consumer Price Index (CPI).  This places it at number seven on our list of items that have appreciated the most from 2008 to 2013.  Unleaded regular gasoline tops the list with a 95.56% price increase, followed by fuel oil (+49.04%) and cigarettes (+48.27%).  Energy prices are a bit deceptive, however, as five years ago they were still in the massive slump induced by the global financial crisis.  
 
On the other hand, the price of television dropped more than any other item, falling 65.45% in the past five years, according to the CPI.  Round out the bottom three are personal computers (38.02%) and photographic equipment (-29.72%).  In fact, a majority of the bottom 10 items are technology-related and this is a result of what the CPI calls a “hedonic quality adjustment” (more on this later).  Toys (-24.13%) and dishes (-21.27%) also make an appearance on the list, which is likely a result of the continuing trend of outsourcing to low-cost manufacturing bases such as China.  See the tables following the text for the complete top 10 and bottom 10 lists.
 
Over the same period of time, headline inflation and core inflation (excluding food and energy prices) increased 10.86% and 8.75%, respectively.  However, there is much more to the story that impacts the true cost of living for many Americans, as the average inflation figures are typically don’t reflect how people actually spend their money.  For example, a middle-aged man who is footing the bill for his family’s healthcare expenses and saving for multiple college tuitions likely sees higher cost of living-driven inflation than indicated by the CPI, as healthcare and education expenses are of relatively little importance in the inflation calculation.  Read on below for our three most important and interesting takeaways from out top/bottom 10 analysis, including more on the variability of what people experience in their actual lives versus what the CPI represents.

First, why is bacon so expensive right now?  More interesting than important in the grand scheme of socioeconomic things, the cost of a pound of retail bacon surged to an all-time high of $5.07 last year; meanwhile, the wholesale price of pork bellies, which are cured into bacon, hit a record higher and exceeded $190 for one hundred pounds in 2013.  So what gives?  A mysterious virus – Porcine Epidemic Diarrhea (PED) – began killing mass numbers of piglets in April when it was first discovered in a U.S. herd.  In just one month, pork futures on the Chicago Mercantile Exchange spiked to more than $100 from $78 in March prior to the outbreak of the virus.  And in CPI data, the price of bacon in the supermarket officially increased 32.55% in the last five years.  On the plus side, reports indicate that the virus is subsiding and 2014 should bring with it lower bacon prices – so go ahead, eat up.

 

Second, the CPI greatly distorts the true cost of anything technological.  For example, if you bought a TV this year, chances are you did not spend 65.45% less than on the TV you bought five years ago.  Yes, the average price of a 32-inch flat-panel television hit an all-time low average of $435 in 2012, down from $546 in 2011; however, from Q1 2012 to Q2 2012, the average price paid for a new TV increased, climbing to $1,190 to $1,124.  As technology improves, consumers opt for the more expensive, fancier TVs as opposed to the cheaper, archaic ones.  To account for this, the CPI employs a hedonic quality adjustment in which statisticians reduce the amount of a price increase due to quality by a certain figure.  So if the price of a computer rose by 10%, the CPI statisticians might claim that two-thirds of the price increase was attributable to quality improvements and report inflation as only 3.3%.  In the case of televisions, technological advances have occurred so rapidly that the CPI math has grossly underreported inflation for TV and other tech products as well.

 

And finally, technology aside, the CPI also distorts the true cost of living for many Americans.  For example, inpatient hospital services (#5) and outpatient hospital services (#9) are both on the top 10 list, with respective 5-year price appreciations of 35.82% and 30.71%.  Both are things that people use selectively – if you’re sick then you’re healthcare costs can be exorbitantly higher than for the average person, yet hospital services as a whole only constitute 2.081% of the entire CPI.  Educational books & supplies – #8 on the top 10 list with a 30.85% price increase tell a similar story.  If you’re got three kids in college, you’re expenditures on education and vastly higher than for a single person who done with his or her education.  Educational books & supplies make up 0.195% of the CPI, while the broader education category is just 3.244% of the index.  Most people in college (or parents of college-age children) likely spend more than 3-something percent of their income in education.

The bottom line is that, while core inflation is a useful estimate for price levels in many instances, Federal Reserve Chairwoman Janet Yellen doesn’t care – at a policy level – about 35% healthcare inflation, 31% education inflation or 96% fuel inflation.  A typical American family of four might care immensely about all three, but in the eyes of the Fed inflation a 5-year core inflation rate of 8.75% is relatively minimal.  This highlights a major issue of using one basket of goods for an entire population – things that people use selectively represent a very small fraction of the CPI, yet are a huge fraction of expenditures for a significant portion of the population.
 
Say you’ve got an aging relative who needs nursing care – an increasingly common challenge for many Americans.  A private room at a nursing home runs about $90,500 per year, so rather than accounting for 0.17% (the CPI weighting for nursing home and adult day care services) of the average household income of $51,016, nursing home services account for 177% of your particular income.  And rather than 10.86% inflation over the past five years – the headline CPI number – your 5-year inflation rate is a whopping 46.0%.  Another example would be a family with two kids enrolled in private colleges, which command an average tuition of $30,094.  College tuition and fees are not 1.81% of you income, as they are in the CPI, but rather 118% of the median household income.  Your resulting 5-year inflation rate is thus 24.3%, or more than twice the headline inflation rate.  Both situations are not at all uncommon and highlight the inefficiencies in applying one uniform inflation gauge to an entire population.
 
There’s an old saying in business circles; ‘What gets measured gets managed”.  The Consumer Price Index may be an efficient way for policymakers to shorthand an answer to the question of inflationary levels.  It is, however, not an accurate method of assessing how consumers feel the effects of higher prices.  This is an important distinction, for inflationary expectations are the true drivers of how both financial markets and consumers alter their behaviors.  Because of the slow-growth global economy of the past five years, both groups have given the Fed a pass on inflation for the moment.  If and when things improve, the psychology behind inflationary expectations may well be different, and more on a hair trigger, than prior recoveries.
 
At least we’ll always have bacon to ease the pain.

via Zero Hedge http://ift.tt/1lDr7NB Tyler Durden

Submitted by Michael Snyder of The Economic Collapse blog,

Is the U.S. economy steamrolling toward another recession?  Will 2014 turn out to be a major "turning point" when we look back on it?  Before we get to the evidence, it is important to note that there are many economists that believe that the United States never actually got out of the last recession.  For example, data compiled by John Williams of shadowstats.com show that the U.S. economy has continually been in recession since 2005. 

So if anyone out there would like to argue that America is experiencing a recession right now, I certainly would not have a problem with that.  In fact, that would fit with the daily reality of tens of millions of Americans that are deeply suffering in this harsh economic environment.  But no matter whether we are in a "recession" at the moment or not, there are an increasing number of indications that we are rapidly plunging into another major economic slowdown.  The following are the top 12 signs that the U.S. economy is heading toward another recession…

#1 We recently learned that the number of new mortgage applications in the United States had fallen to the lowest level that we have seen in nearly 20 years.

#2 Radio Shack has announced that it is going to close more than 1,000 stores.  This is just another sign that we are in the midst of a "retail apocalypse".

#3 The ISM Services index just fell to its lowest level in 4 years, and ISM Services Employment just experienced its largest decline since the collapse of Lehman Brothers.

#4 Obamacare is really starting to hammer the U.S. health care industry…

"The Affordable Care Act is creating significant financial uncertainty to health care organizations," said a survey respondent from the health care and social assistance industry.

 

"With little warning, the negative impact on revenue has been unprecedented."

#5 Trading revenue at the "too big to fail" banks on Wall Street is way down…

Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) are bracing investors for a fourth straight drop in first-quarter trading, a period of the year when the largest investment banks typically earn the most from that business.

 

Citigroup finance chief John Gerspach said yesterday his firm expects trading revenue to drop by a “high mid-teens” percentage, less than a week after JPMorgan Chief Executive Officer Jamie Dimon said revenue from equities and fixed income was down about 15 percent. If trading at the nine largest firms slumps that much, it would extend the slide from 2010’s first quarter to 36 percent.

#6 One of the "too big to fail" banks, JPMorgan, is planning to fire "thousands" more workers.

#7 Moody's has downgraded the credit rating of the city of Chicago again.  Now it is just three notches above junk status.

#8 The U.S. economy actually lost 2.87 million jobs during the month of January according to the unadjusted numbers.  Over the past decade, the only time the U.S. economy has lost more jobs during the month of January was in 2009 at the peak of the last recession.

#9 In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

#10 Only 35 percent of all Americans say that they are better off financially than they were a year ago.

#11 Global retail sales for machinery giant Caterpillar have fallen for 14 months in a row.

#12 The economic data show that virtually all of the largest economies on the planet are slowing down right now.  The following is from a recent Zero Hedge article…

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that 'weather' is not to blame, US strategists, 'economists', and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

For much more on how the rest of the global economy is also slowing down, please see my recent article entitled "20 Signs That The Global Economic Crisis Is Starting To Catch Fire".

Meanwhile, things in Ukraine continue to become even more tense, and the Russian government continues to debate how it will respond if the U.S. does end up deciding to hit Russia with economic sanctions.

According to one Russian news source, the Russian parliament is actually considering the confiscation of the property and assets of U.S. businesses in Russia if the U.S. decides to go ahead with economic sanctions against Russia…

The upper house of Russia’s parliament is mulling measures allowing property and assets of European and US companies to be confiscated in the event of sanctions being adopted against Russia over its threatened military intervention in Ukraine.

We are talking about banks, retail chains, mining operations, etc.

U.S. companies have billions invested in Russia, and all of that could be gone in an instant.

So let us certainly hope that economic war between the United States and Russia is averted.  Our economy is hurting enough as it is.

But no matter how things with this crisis in Ukraine play out, it looks like hard times are ahead for the U.S. economy.

Unfortunately, most Americans never learned the lessons that they should have learned back in 2008.

They just assume that the federal government and the Federal Reserve have fixed our problems and have everything under control, so they are not preparing for the next great crisis.

In the end, tens of millions of Americans will be absolutely devastated when they get absolutely blindsided by what is coming.

via Zero Hedge http://ift.tt/1nkKmtU Tyler Durden

Obama did it by offering hope, change, and class warfare… Abe did it by printing inordinate amounts of money, pumping stocks up, and speaking in increasingly militaristic tones… and now Vladimir Putin has managed to get his approval rating to near-record highs – by invading Ukraine?

Via Pravda,

The approval rating of Russian President Vladimir Putin remains at the highest level during the last two years for two consecutive weeks – 67.8 percent, a survey conducted by the All-Russian Public Opinion Research Center (VTsIOM) said.

 

Sociologists noted that Putin’s rating has been growing against the backdrop of the worsening political situation in Ukraine and the Crimea, successful completion of the Olympic Winter Games in Sochi and preparations to the opening of Paralympic Games.

 

VTsIOM stressed that over the past two years, Russian citizens have expressed approval of the work of the head of state on the level above 60 percent.

 

Previously, the maximum value of this index was reported in May 2012 (68.8 percent), immediately after Putin’s inauguration as president.

Mission Accomplished?

via Zero Hedge http://ift.tt/1nkFpRH Tyler Durden

Submitted by Francisco Toro via the Caracas Chronicles blog,

Say you come into Venezuela with just $1 and an eye for business. Just how much money can you turn that bill into using tried-and-true, being-used-right-now scams? With a bit of gumption the answer to that is…$175K or so. Really. Here’s how.

First, take your crisp new dollar bill to a black market currency dealer and buy yourself Bs.85.

Did you make sure to get travel insurance before you trip?

Good.

Now go to a doctor and buy yourself Bs.85 worth of medical attention. Any pretext will do. Don’t forget to get a receipt, though: your insurance company back home will reimburse your 85 bolivar claim at the official rate, giving you back $1 for every 6 bolivars and 30 cents you spent.

So after one doctor’s visit, your $1 has already turned into $13.50. Not too bad.

But we’re just getting going here. Needless to say your next step is to take your $13.50 right back to the currency tout and buy yourself 1,150 bolivars.

Next, take your 1,150 bolivars to any reputable Caracas jeweller. There, you can get about 5.7 grams of 18-karat gold for that. As it turns out, back stateside those 5.7 grams of gold are worth $182.29.

Your Caracas black market dollar dealer will be expecting your call by now: the $182.29 you netted for the gold buys you 15,495 bolivars.

This is fun, isn’t it?

But maybe you’re getting a bit impatient at this point. Sure, a 18,290% profit with no risk and for doing no real work isn’t too bad, but let’s say you want to make some real money.

For that, you need to go to a market with genuinely grotesque price differential. And in a petrostate like Venezuela, that can only mean one thing: gasoline.

At Venezuela’s ludicrous price of 0.097 bolivars per liter, the 15,495 bolivars currently burning a hole in your pocket can buy 159,742 liters of unleaded gas. That’s 42,200 gallons or so.

The next step is to load your gas into a tanker truck and drive it out to Colombia, where each and every one of your 42,200 gallons will sell for US$4.14.

By the time it’s all said and done, that clean, crisp $1 bill you came into Venezuela with has turned into US$174,905.

That’s a seventeen million percent profit margin for doing basically nothing.

This isn’t just some thought exercise, it’s the central reality of the Venezuelan economy today.

The catch, of course, is that the viability of each of these scams depends first and foremost on having official protection from some regime-connected power broker. You can’t smuggle gasoline out of the country without a National Guard officer (or 10) taking a cut. You can’t load much gold into a northbound plane without paying off an airport guard. Any attempt to buy a substantial number of official rate dollars is going to depend on some regime official – probably wearing olive green -giving his go-ahead.

As the protests mount on the streets, it’s important not to lose sight of this: it’s these rackets those guys are protecting.

And their willingness to use violence to protect them is roughly proportional to the profit margins involved.

via Zero Hedge http://ift.tt/1g45wu6 Tyler Durden

A week after Obama held his first crisis photo op holding a phone while supposedly talking to Putin, he has followed up with another, hour-long conversation. Below is the official White House statement on what was said.

Readout of President Obama’s call with President Putin of Russia

 

President Obama spoke for an hour this afternoon with President Putin of Russia.

 

President Obama emphasized that Russia’s actions are in violation of Ukraine’s sovereignty and territorial integrity, which has led us to take several steps in response, in coordination with our European partners.

 

President Obama indicated that there is a way to resolve the situation diplomatically, which addresses the interests of Russia, the people of Ukraine, and the international community.

 

As a part of that resolution, the governments of Ukraine and Russia would hold direct talks, facilitated by the international community; international monitors could ensure that the rights of all Ukrainians are protected, including ethnic Russians; Russian forces would return to their bases; and the international community would work together to support the Ukrainian people as they prepare for elections in May.

 

President Obama indicated that Secretary Kerry would continue discussions with Foreign Minister Lavrov, the government of Ukraine, and other international partners in the days to come to advance those objectives.

Or even more of the same. We eagerly await the Kremlin’s take of the same phone conversation. In the meantime, while we await for the official visual from this particular photo op, here is the one from last Saturday.

via Zero Hedge http://ift.tt/1lDbXrM Tyler Durden