The Oser View

Unemployment Continues to Increase

The Bureau of Labor Statistics reported this morning that the unemployment rate rose to 10.2% and the “true” unemployment rate, which includes discouraged workers and those who want full-time work but can only find part-time jobs, rose to 17.5%.  The number of unemployed persons now stands at 15.7 million, more than double the recent low of 7.67 million in April 2008.  Total non-farm payrolls fell by 195,000 in October.  

The details of the employment reports offer little comfort.  Manufacturing employment fell by 61,000.  The sector has lost jobs for 23 months in a row and in 38 out of the last 39 months.   Fully one-third of the 17.3 million manufacturing jobs that existed in the US at the beginning of this decade are now gone.  The situation in construction is as bad, if not worse.  In October, there were less than six million construction jobs, down from a peak of 7.7 million in January 2007.  There are almost 800,000 fewer today than at the turn of the century

Yesterday, the Labor Department announced that US labor productivity rose an astonishing 9.5% percent in the third quarter.  It was the biggest productivity jump since 2003, but it came on the back on workers, whose hours of work fell by 5% from the second quarter.  In fact, the year-over-year decline in hours worked of 7.5% was the largest since record-keeping began in 1948.  As in all recent recessions,  business has been forced to find ways to do more at less cost.  

There are, however, two bits of good news in the data.  First, job losses in September and August were revised downward by 91,000.  Second, the pace of losses is clearly slowing.  The three-month average of monthly job losses is down to 188,000 from 428,000 in the second quarter and 691,000 in the first quarter.  It’s likely that most businesses are now working with as limited staffing as they can.  But, the question of when we will finally see employment increase remains to be answered.

Sales of existing homes increased to an annualized rate of 5.57 million units in September, the highest level since July 2007.  The bottom was an annualized rate of 4.94 million units in January.  Much of the recent increase is attributed to a rush to take advantage of the $8,000 first-time-homebuyer tax credit.  Low 30-year mortgage rates, which have averaged 5.0% the last couple of months, also spurred sales.  

The median value of the homes sold in September was $175,000, which is about the average for the year. The table below shows the average median value for the last few years:

 

Year	Price
2002	$163,900
2003	$177,100
2004	$193,200
2005	$218,200
2006	$222,000
2007	$216,600
2008	$197,200

The supply of homes for sale—that is, the inventory of unsold product—also improved.  From highs in the range of 4.5 million units, the number of unsold homes dropped to 3.6 million.   A normal level is about 2.5 million units.  

The bottom line is that home sales and values have reached a level of stability, roughly equivalent to 2002.  We believe that it will be some time before they can move substantially higher given the November 30 expiration of the homebuyer credit, the  recent rise in the 10-year UST Treasury yield (against which mortgage rates are set), and the continuing high level of unemployment.   

The Middle Way

The markets were jittery all morning, waiting for the announcement following the close of a two-day meeting of the Federal Open Market Committee (FOMC), the Fed’s policy arm.  Usually such anxiety is stirred by the prospect of a change in the fed funds rate, but this time everyone knew the target would stay at 0.00% to 0.25%.  Instead, the focus was on how the Fed would react to an economy no longer in free fall. 

The first paragraph of the FOMC statement, when it finally came, was a balanced capsule summary of present conditions.  The “pace of economic contraction is slowing,” consumer spending is “stabilizing,” and businesses are aligning inventories with sales.  Weighing against these gains are “ongoing job losses,” “tight credit,” and cutbacks in business spending on fixed assets.  In short, the economy remains very fragile and downside risks abound, but a bottom has been reached.  The FOMC’s conclusion is that under these conditions “inflation will remain subdued for some time.”  Fed officials are no longer worried about deflation, even though the Consumer Price Index has fallen 1.3% in the last year.  But they remain convinced that further monetary stimulus is necessary and that their policies “will contribute to a gradual resumption of sustained economic growth.” That’s why the fed funds target will stay near zero, and the Fed will continue its program of buying $1.25 trillion of Treasury and Agency securities.

The markets have not reacted well to the FOMC announcement because no one got quite what they wanted.  Inflation hawks wanted some indication of when fed funds rates would rise.  Those worried about the recession continuing were hoping the Fed would commit even more than $1.25 trillion of liquidity.  In the end, the Fed went down the middle and both stocks and bonds fell.

The May Employment Situation

The Bureau of Labor Statistics announced today that the unemployment rate rose to 9.4% in May and job losses totaled 345,000.  This was about half the loss rate of recent months and well below expectations.  A number of commentators hailed it as a sign that the recession is abating.  The pace of economic deterioration is certainly slowing, but we are not out of the woods.  This month’s unemployment report is no cause for celebration.

The total number of unemployed hit an all-time high of 14.5 million people, an increase of 3.4 million just since the end of last year.  And nearly half have been out of work for 15 weeks or more.  The employment participation ratio—that is, the number of employed people as a percentage of the civilian workforce—dropped to 59.7%, the lowest percentage since 1984.  Manufacturing lost another 156,000 jobs, and this is before the Chrysler and GM plant shutdowns.  Since the recession began, almost 1.8 million manufacturing jobs have been lost, and the unemployment rate in this sector is 12.6%.  Construction employment has been falling since February 2007.  Over 1.4 million construction jobs have been lost, and the construction unemployment rate is a Depression-like 19.2%.  Maybe one reason that job losses were less than expected is simply that there aren’t that many more jobs to lose. 

The Employment Situation Remains Bleak

Certain areas of the economy, particularly housing and retail sales, have shown modest signs recently of bottoming or even turning up.  The employment situation, on the other hand, continues to get worse.  This morning, the Bureau of Labor Statistics announced that non-farm payrolls fell by 663,000 jobs, bringing total job losses since the recession began in December 2007 to 5.1 million.  The unemployment rate rose to 8.5% from the mid-4% range it had been in for most of 2006 and 2007.  The real unemployment rate, which includes the long-term unemployed and those who want to work full-time but can only get part-time jobs is 16.2% or nearly 25 million Americans.  At the end of January, the latest date such information is available, there were only three million job openings.

Nearly all sectors are shedding jobs, but some are faring much worse than others.  Manufacturing has been in the doldrums for decades.  There are fewer manufacturing jobs today than at any time since 1945 and fewer assembly line jobs than at any tine since 1938.  The total number of manufacturing jobs peaked in 1979 at 19.5 million or 18.7% of the workforce.  Today, there are just 12.3 manufacturing jobs or 8% of the workforce.  Assembly line jobs?  A mere 8.6 million.  Construction employment has fallen all the way back to 1999 levels.  This industry, which accounts for just 4.2% of the workforce, has lost almost 1.3 million jobs since peaking early in 2007. 

How hard is it to find a job these days?  Looking ahead, the Society for Human Resources Management reports that virtually no manufacturing or service firms are having difficulty filling open positions.  Only 17% of manufacturing firms and 22% of service sector firms expect to increase staff this month, while 31% and 27% plan to decrease staff.  A year ago, even though the recession had begun, 52% of manufacturers and 47% of service companies still planned to increase staff.  

Unemployment always continues to grow even after recessions end.  In fact, employment in the US historically reverts to pre-recession levels considerably faster than in other industrialized countries.  A decline in unemployment insurance claims, however, would be a key leading indicator of economic improvement.  Sadly, last week’s filing of 669,000 initial claims was the most since 1982.  During the first quarter of 2009, nearly nine million people filed unemployment claims, almost exactly twice as many as in the first three months of 2008.  And, as of last week, a record 5,728,000 were collecting unemployment, compared to 2,923,000 at the end of March 2008.  Spring has begun, but it has not brought much joy with it yet. 

The Seasons

  Most of the economic data produced by government statisticians is reported on an “SAAR” basis, which stands for Seasonally Adjusted Annual Rate.  There are good reasons for SAAR adjustments: the data is made much more comparable over long periods, and one-offs do not require endless explanations.  But, we need to remember that SAAR is not a description of what literally has happened. 

Today the Commerce Department reported that construction began on 583,000 housing units in February.  This was a 22% increase over January and the biggest month-to-month jump in almost 20 years.  None of the estimates of the 71 economists polled by Bloomberg News was even close.  Multi-family starts—townhouses, condos, and rental apartments—soared an amazing 82%, from 124,000 units in January to 226,000 units last month. 

All these numbers, however, are SAAR.  Let’s look underneath and see how much actual residential construction began in February.  Actual construction is, after all, creates actual employment and actual commerce.  Construction actually began on 40,400 units of new privately owned housing units in February, of which 24,600 were single-family and 15,700 were multi-family.  There is some good news here.  February housing starts marked a significant increase over 37,700 starts in December and just 31,100 in January.  But January was an all-time low going back to 1946; in fact, before last November, there had been less than 50,000 monthly housing starts exactly once before, in January 1982, when the US was mired in a deep recession and mortgage rates were in the mid-teens. 

Any way we look at year-over-year comparisons between this February and last, the comparison is bleak.  In all phases of construction, from the issuance of permits to the completion of construction, we see very large double-digit declines.  In total, on an unadjusted basis, the number of housing starts was 48.5% lower than a year ago.  Permit issuance is 48.8% lower, and there are 25.8% fewer units under construction.  Neither is any region immune, although the situation in the West is truly horrific.  Both housing starts and building permits there ware down 60% from February 2008.

The February data provides a bit of hope that housing may, just may, have begun to turn up.  But the hole is very, very deep.

New Home Sales--The Collapse Continues

The Commerce Department reported this morning that sales of new homes in December fell to the lowest level since national recordkeeping began in 1963, when the population of the United States was 61% smaller.  Like most housing data, new home sales are reported on an annualized basis.  In December, sales were reported at an annualized pace of 331,000.  The actual number sold was 23,000, a mere 6.4% of the total 359,000 new homes available for sale.  Of these 23,000 homes, only half were sold before they were completed.  If a new home is completed before it can be sold, the median time it will stand vacant is now more than nine months.  Prices are falling too.  The median sale price of a new home in December was $206,500.  That’s a 9.3% decline from a year earlier and a 21% drop from the peak in March 2007.  Less than 1,000 homes in the entire country were sold for more than $750,000.    

In other news, the number of Americans collecting unemployment insurance surged to 4,776,000.  As with so many negative statistics these days, this is the largest number since recordkeeping began in 1967.  With many large companies—Caterpillar, Starbucks, Jabil Circuit, just to name a few recent ones—announcing layoffs, the ranks of the unemployed are certain to swell in the weeks ahead.

The Fed Pulls out the Stops

The expression “pull out all the stops” literally means to open all the pipes of a pipe organ to make it as loud as possible. The statement issued today by the Federal Open Market Committee (FOMC), the Fed’s policy arm, is a figurative example of pulling out the stops. The FOMC is saying, loud and clear, that the economy is in big trouble. The statement is a promise that the Fed will do everything it can to “promote the resumption of sustainable economic growth and to preserve price stability.” The Fed acknowledges that key economic indicators of business and consumer activity and of employment “have continued to decline steeply.” The FOMC does not use the word “deflation,” instead employing an elaborate circumlocution. “The Committee sees some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” Alan Greenspan, the master of obfuscation, could note have enunciated it more eloquently. Since the fed funds rate is already at rock bottom, the “all available tools” the FOMC vows to use essentially means that the Fed will pipe liquidity into the financial system by expanding its already substantial purchases of Treasury securities and other high-grade bonds. The goals are to stimulate mortgage lending and the housing market and to unfreeze non-government credit markets. Under most circumstances, the promise of virtually unlimited government liquidity would be a wildly inflationary monetary policy. Under present circumstances, it may be just sufficient to achieve the Fed’s aims.

An Inglorious End to an Inglorious Era

The George W “Herbert Hoover” Bush presidency comes to a fitting and dismal close with the most job losses since 1945.  All told, the economy shed 2,589,000 jobs last year, of which 1,531,000 came in the fourth quarter.  The unemployment rate jumped from 5.0% in December 2007 to 7.2% last month.  In December 2000, Bill Clinton’s last full month as President, it was 3.9%.  The number of unemployed persons, including those actively seeking work and so-called “discouraged workers” who have despaired of finding suitable employment, has risen 40%, from 19.4 million In December 2007 to 27.3 million.   Employment in the manufacturing sector dropped to 13 million, a mere 9.6% of the labor force.  Fewer workers are engaged in manufacturing than at time since 1949, when the total labor force was less than a third of what it is now. 

I could go on, but it’s too depressing.  The employment situation is bad, and—as President-elect Obama said yesterday, “It’s going to get worse before it gets better.” 

White Christmas, Blue Economy

Bad news abounds this morning with more depressing reports on housing, retail sales, and the automobile industry.

 

Item:  The Commerce Department reported that new home sales in November fell to an annualized rate of 407,000 units, the lowest since January 1991 and a decline of 35% from a year earlier.  The median sale price of $220,000 marked an 11.5% drop from November 2007.

 

Item: The National Association of Realtors reported that sales of existing homes dropped to an annualized rate of 4.49 million units in November, by far the lowest since national records began being kept in 1999.  The median price of $181,300 is 13% lower than a year ago.  The supply of available single-family homes jumped to 11.2 months.  The supply of available condo units soared to 16.7 months. 

 

Bottom Line:  Home sales have been weak all year, but November's data shows them taking a new leg lower.  The best hope is falling mortgage rates, which were down to an average 5.18% last week, the lowest in 5 1/2 years, but the benefits will be muted by rising unemployment and tougher credit standards.

 

Item: The International Council of Shopping Centers reported that sales at stores open at least a year declined by 0.6% in the week ending December 20 from a year ago.  The group predicted that holiday-season sales may fall as much as 2%, making 2008 the worst Christmas season since 1969, when comprehensive record-keeping began. 

 

Bottom Line: Look for more retail bankruptcies in January.

 

Item: Despite a promise of $9.4 billion in government loans in the next few weeks, General Motors' stock price has dropped 30% in the last five trading days and is now below $3/share.  The auto giant's market capitalization is a mere $1.8 billion.  The cost of insuring a $10 million five-year GM bond against default rose to $8.15 million up front plus $500,000 a year thereafter. 

 

Bottom Line: Bailout or not, most investors do not expect General Motors to survive.