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The Statistical Economic Recovery and Double Dip Recession

Economics / Double Dip Recession Dec 12, 2009 - 02:10 AM GMT

By: John_Mauldin

Economics Diamond Rated - Best Financial Markets Analysis ArticleThoughts on the Statistical Recovery
Lies, Damn Lies, and Government Statistics
The Problem of Seasonal Adjustments
The Job Creation Engine
A Double-Dip Recession?
Dad Gets a Lively Lesson

We are clearly starting to get some better data points here and there. But as I pointed out this summer, it is going to be a recovery in the statistics and not in the things that count, such as income and employment. This week we look at the nascent recovery (which could be at 3% this quarter) and try to peer out into the future to see what it means. We look at how recoveries come about, and why I am concerned that we will see a double-dip recession. Plus, I learned some new tricks courtesy of my new granddaughter, to whom Tiffani gave birth this week1 There is a lot to cover, but it should be interesting.


But first, a quick commercial nod to my subscription service, “Conversations with John.” It was one year ago this week we launched the service, and we are pleased that so many of you have subscribed. As a bonus for renewing or subscribing, I am going to be doing a special predictions issue, where I will interview at least six analysts who have been right the past few years and ask for their specific predictions for the coming year.

For new readers, this is where I sit down with some of my friends and hold an in-depth conversation, generally 45 minutes to an hour, and post it on our web site, along with a transcript. We have had some fairly well-known names over the past year, and the reviews from subscribers have been excellent.

As a Holiday Special, we are offering a subscription at the special price of $129. Just click on the link and type in the code JM09 when asked to do so in the subscription process (at the conclusion of the process, not the beginning, but we’re working on that.) This is a big savings over the regular $199 price. Just click on the link to learn more and see what subscribers are saying. http://www.johnmauldin.com/newsletters2.html

Plus, when you subscribe you get access to the Conversation archives. That is worth the price of admission itself. And now, let’s jump into The Statistical Recovery.

Thoughts on the Statistical Recovery

In the ’50s through the early ’80s, recessions were typified by large layoffs at manufacturing businesses, as they had built up too much inventory. Businesses had increased capacity and often borrowed a little too much. Rising prices in the ’70s, along with extremely high interest-rate costs, led to the two severe recessions of the early ’80s, which Paul Volcker had to essentially force into existence, in order to begin the process of wringing inflation out of the economy.

But, and this is important, as the economy improved, inventories were eventually worked through and employees were brought back to work. Things returned to normal. The economy would once again grow at a robust rate. Then, in the last two recessions, in the early ’90s and early ’00s, it took longer for employment to rise. A great part of this was because the manufacturing sector of national employment was becoming an ever smaller part of the economic pie. We were, and still are, turning into an economy driven by services.

I should note that, on an absolute basis, manufacturing in the US has grown (going back to before this recession started.) We just produced more “stuff” with fewer employees. We became more productive. But this means that there are fewer jobs that will be brought “back” to make up for increasing sales than in past recessions. There are estimates out that as many as 2 million of the 8 million jobs lost are permanent job losses.

We know that businesses have made large cuts in numbers of employees in order to address lower sales and to increase their profits. Increasing profits by cutting costs even as the “top-line” sales number is shrinking is not a growth strategy that can be sustained. It also eats into research and development and postpones growth.

How likely are businesses to bring back employees if they have found they can produce more with less? This is a prescription for the mother of all jobless recoveries. A few weeks back, I went into some detail outlining why employment is likely to be uncomfortably high for a number of years, and that assumes we do not go back into recession. The graph below is the most likely scenario. You can see the entire piece, which goes into detail on this and other scenarios (developed with Mike Shedlock).

Quoting from that letter: “In August, I did an interview with CNBC from Leen’s Fishing Lodge in Maine (http://www.cnbc.com/id/15840232?video=1207956774&play=1). The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.” It rather startled some of the hosts – “Where can we get that many jobs?”

Again, quoting from that letter: “That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years.”

As it turns out, Princeton Professor Paul Krugman agrees. He writes in today’s New York Times (http://krugman.blogs.nytimes.com/):

“I don’t think many people grasp just how much job creation we need to climb out of the hole we’re in. You can’t just look at the eight million jobs that America has lost since the recession began, because the nation needs to keep adding jobs – more than 100,000 a month – to keep up with a growing population. And that means that we need really big job gains, month after month, if we want to see America return to anything that feels like full employment. How big? My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 a month. This puts last week’s employment report, which showed job losses of “only” 11,000 in November, in perspective. It was basically a terrible report, which was reported as good news only because we’ve been down so long that it looks like up to the financial press.”

That just goes to show you that I am an optimist. His back-of-the-napkin number is 20% larger. He is probably right, as he has a Nobel Prize and I don’t, and I didn’t actually use a napkin. I did the math in my head on camera while we were getting ready to go fishing.

Krugman uses this to suggest the Fed should double their balance sheet by another $2 trillion (seriously). That would not be very helpful to the dollar, I would think.

(Aside: we are in a balance-sheet recession. We overleveraged our banks and consumers. Now they are having to retrench. We are watching consumer and business loans fall. Putting $2 trillion more into the system is not going to make consumers want to borrow more. I can’t quite see where you deal with the problem of too much leverage by trying to create more leverage somewhere else. But that’s a topic for another day.)

And just to demonstrate that I am not being too pessimistic, you can go to a study the Bureau of Labor Statistics put out yesterday. They estimate that the economy will create 15.3 million more jobs in the next ten years, which is an average of about 1.5 million a year, or 125,000 a month. That is not a robust number, and suggests that the continued high unemployment projected in the graph above may not be far off target, as the employment assumptions are not that dissimilar. If you have no social life, you can read it yourself at http://www.bls.gov/news.release/ecopro.nr0.htm.

Lies, Damn Lies, and Government Statistics

We are going to look at the unemployment numbers of last week, along with the unemployment claims that came out yesterday. But first, I want to quote a section from Dennis Gartman’s letter this morning. It illustrates why we have to be very careful how we use government data. Too often, we think the data is straightforward math and simply draws on the underlying data sources. The reality is that it is anything but. To wit:

“A PROBLEM AT THE VERY HEART OF DATA GATHERING: Recently in Washington a rather large number of economists from academia and from government met to try to hash out a problem with data gathering that has become more and more serious here in the US and has more and more distorted how we value the American economy itself. At heart is how imports into the US are accounted for.

“For example, when a part for perhaps $100 is imported from China and is used in an American automobile … something that happens more and more and more often these days … the stats show that the finished car is American-made because it was assembled here in the US and in the process the US GDP is raised by that same $100 when in fact it should have been deflated by that figure instead. In the process, American workers who might in the past have made the part in question are no longer doing so and are obviously made redundant, hence a job or jobs is lost.

“The unemployment data then ‘finds’ that unemployed worker and accounts for him or her, but the car that is assembled does not, and when it is produced and sold and its value makes its way through the system, it appears that productivity has risen … and rather dramatically so, when in fact it has not. As one of the economists attending that meeting said,

” ‘We don’t have the data collection structure to capture what is happening in a real-time way, or what is being traded and how it is affecting workers. We have no idea how to measure the occupations being ‘offshored’ or what is being ‘inshore.’

“Or as the Assistant Commissioner for International Prices at the US Bureau of Labor Statistics (and how “politburo-like” is a title like that?!!) Mr. William Alterman, said regarding this problem

” ‘What we are measuring as productivity gains may in fact be nothing more than changes in trade instead.’

“This is not an insignificant problem, for as the US has become more and more international in its trading scope the data has become more and more important. Back in the 1975, imports into the US were only 5% of our total economic activity, but in recent years that has swelled to 12%, excluding imports of energy. Thus, many imports into the US are being, and have been, and will continue to be, valued as though they were manufactured here in the US, when indeed they were manufactured abroad and merely assembled here in the US.

“In autos, in computers, in appliances, this is a large and growing problem, but this is a problem too in the areas of services. For example, when an accounting firm out-sources some of its number-crunching to an accounting firm in India, for example, and then bills a client here in the US in US dollar terms, the work is done abroad but billed here and the work is recorded as having been done in the US, adding to US GDP when clearly that is not the case. It happens too, these days, more and more often in medicine, when patient files are sent to India or somewhere else abroad for diagnosis and the patient is billed here in the US as if the ‘work’ had been done here. GDP rises here in the US when it really should have been accounted for in India; productivity goes up; GDP goes up, when in reality neither has happened. ‘ Tis a conundrum.”

The Problem of Seasonal Adjustments

Yesterday we were told that initial unemployment claims were up slightly to 474,000 on a seasonally adjusted basis. That is down 78,000 from the same week last year. The four-week moving average is almost exactly the same. On a four-week-average basis, initial claims are down about 10% from last year.

Let’s look under the hood. The non-seasonally adjusted number (NSA) is 665,000, down almost 95,000 from last year, which is good, but still a very large number. The actual average had been over 550,000 for the last three weeks.

Everywhere the headlines said continuing claims are plunging. And they did. But what really happened is that the drop was not from people getting jobs but from people rolling over to the extended benefits programs. The states by and large pay for the first 26 weeks, and that is where we get the continuing-claim reported number from. (In some parts of the US hosever, you can get unemployment insurance for up to 99 months, paid for by the federal government.

There are 5.16 million on the continuing-claim rolls. But when you add in the extended benefits rolls, it increases to over 10 million. Average length of unemployment is now over 26 weeks, and the median length is over 33 weeks!

It was reported that the unemployment rate dropped to 10% from 10.2%. To get that number, they had to shrink the number of people looking for work by 98,000. Basically, if you have not looked for work in the last four weeks, you are said to be “discouraged” and are taken out of the unemployment statistics. If you add back in the discouraged workers, the rate goes up to 10.5%. And it is worse than that. If you have not looked for a job in 12 months, you are taken off the rolls altogether.

Here is one of the reasons that the unemployment number is going to remain stubbornly high through 2010. Let’s assume a modest recovery of 3%, which is maybe enough to get jobs back into the 150,000 range. As people go back to work, that 0.5% of discouraged workers starts to look for jobs and they are now counted as unemployed. That small number of 0.5% is 750,000 people that will be (should be) added back into the unemployment numbers!

Let’s use Krugman’s 100,000 jobs a month needed to keep up with population growth. (Studies are all over the place on this. 100,000 is the low estimate and 150,000 is the high.) That means we need 1.2 million new jobs next year just to keep the unemployment rate at 10%. And another 750,000 jobs to go to the discouraged workers who will want to start looking. Close to 2 million jobs will be needed to keep the unemployment rate from rising.

And the current business climate says that is not going to happen.

The Job Creation Engine

Small businesses employ 85% (or thereabouts) of American workers. That is always where the employment growth comes from. So when we see the ISM surveys, which are mainly of large businesses, that suggest they may start employing more people in the next few months, we need to see how their smaller brethren are doing. Fortunately, we have a very reliable survey by the National Federation of Independent Businesses, which does a lengthy monthly survey to give us the temperature in the small-business world. You can review it at http://www.nfib.com/Portals/0/PDF/sbet/SBET200912.pdf. (My friend and Maine fishing buddy Bill Dunkelberg puts out the report.)

It is a mixed bag, as some of the scores of questions in the survey indicate that small businesses are feeling better than a year ago. On the whole, though, they are not very upbeat. 72% of small businesses say their earnings are down over the last three months, and that has been the case for over a year. The most important reason for lower earnings is listed as poor sales volume. Sales expectations, however, are much better than earlier this year, with almost half of those surveyed thinking things will get better.

While the number of businesses that are not planning to hire any more employees in the next three months is still slightly negative, it is improving. 54% have job openings. There is not much in the way of wage pressure, as wage levels are dropping; and actual prices of the goods and services they are selling and the materials and services they are buying are falling (on average). Inventory levels have dropped precipitously, and that bodes well for hiring, as inventories at some point are going to have to be built back up

However, as Bill points out, “In November small business owners reported a decline in average employment per firm of 0.58 workers reported during the prior three

months, a big improvement from May’s record loss of 1.26 workers per firm – but still a loss of jobs. Nine percent of the owners increased employment by an average of 2.3 workers per firm, but 21 percent reduced employment an average of 4.2 workers per firm (seasonally adjusted). The “job generating machine” is still in reverse. Sales are not picking up, so survival requires continuous attention to costs – and labor costs loom large. But, job reductions are fading and job creation could cross the “0″ line by the end of the year.

“Owner optimism remains stuck at recession levels. The proximate cause is very weak consumer spending, better than a year ago, but that was pretty bad. Fifteen (15) percent reported gains, while 43 percent reported weakness. With weak consumer spending, there is little need to invest in inventory (and borrow money to support inventory investment). Inventory investment plans are at historically very low levels. Similarly capital spending is on hold, with actual outlays and planned outlays at record low levels along with the demand for loans to finance the outlays. More firms still plan on reducing employment than plan on adding to their payrolls. Inventory reductions are still widespread, eight percent reported accumulation, 33 percent reported reductions. This sets the stage for new orders in future periods, but does not help much now.”

The survey kept highlighting the concerns and uncertainty about government plans for new taxes and regulations. It is hard to make plans to expand when you are not certain what your costs will be for health care, taxes, cap and trade, etc.

This is a survey we need to watch, because when it turns up we can start to feel confident about the recovery (which is still stimulus-driven). We will look back at it in a few months.

A Double-Dip Recession?

Finally, this highlights my concern about a double-dip recession. I think we could see one in 2011, as a result of the massive increases in taxes as the Bush tax cuts expire and the Pelosi-Reid-Obama crowd want to raise taxes on the “rich.” Their assumption is that if we could grow quite well in the Clinton years with higher taxes, then we can do it again.

First, if there are no changes to the proposed tax increases, this will be a massive middle-class tax hike. Make no mistake, the Bush tax cuts resulted in a huge cut in the taxes of the middle class. The data clearly shows the wealthiest 20% are paying significantly more of the total taxes paid.

If you combine a large middle-class tax increase with an even larger new wealth tax (75% of which will affect the very small businesses we just highlighted), it will be a one-two punch to the economic body, when unemployment is already at 10%. You can’t take out well over 2% (and maybe 3%) of GDP from the consumer without it having significant consequences.

Obama mentioned minor tax credits for small businesses in his plan, but then proposes to raise their taxes and health-care costs. It doesn’t work that way. But it is time to hit the send button, so I will close.

Dad Gets a Lively Lesson

A few friends noted that there was no Outside the Box this week. I plead a distraction. I got back from New York Sunday night and left my phone in my home office. I wandered in the next morning and got a call from Melissa (#2 daughter). “Dad, are you going to the hospital now?” Hospital, what hospital?

“Didn’t you get Ryan’s text? Tiffani has gone into labor.” Almost three weeks early. That was not on my radar screen. I shot a text off to Ryan and then we talked. Seems things were progressing slowly. I would have the morning before I needed to go to the hospital.

I settled down and then got a text that Tiffani was starting to push. Oops, that happened faster than we thought. I got to the hospital and went to the waiting room, where some of Tiffani and Ryan’s friends were also waiting.

Did I know what was going on? No, but they did. Seems Tiffani’s best friend is now in Belgium, where she was watching the whole process over the MacBook set up in the delivery room! She was posting (G-rated, I was assured) pictures to Tiffani’s Facebook page, where all their friends were keeping up. And of course, blow-by-blow accounts and pictures on Twitter. As we sat there, one of the young men told me my granddaughter, named Lively Bella-Grace Frederick had been born. Did I want to see a picture? And of course the in-laws, who are missionaries in Cyprus, saw the whole thing relayed by the girlfriend in Belgium.

Mom, Dad, and Lively were here this afternoon, and doing well. But I am seriously going to have to update my communication skills if I am going to keep up with my kids and grandkids. I feel so, well, out of it. Oh well. I am sure Lively will give Papa John a lesson or three over the years.

And finally, I am very excited about my special live webinar next week with Jon Sundt, President and CEO of Altegris Investments. Many of you have already registered, and I look forward to fielding your tough questions. There is still space available for this live event, so please join us! Click here to register

It’s happening next week on Thursday, December 17th, at 9:00 am PST / 12:00 noon EST. If that time doesn’t work in your calendar, simply register and you will be able to listen to the replay at your convenience.

We will be discussing some of the critical macroeconomic forces at work today and how these factors influence your investing decisions. Jon, an expert on alternative investing, will provide his assessment of alternative strategies during these challenging times. Our goal is to support you to better position your portfolio for the year ahead.

Click here for the first step in the registration process: my Accredited Investor website. From there, you’ll be automatically directed to the webinar signup page. Due to regulatory issues, this online event is limited to US investors who qualify as “accredited investors” (generally, net worth of $1.5 million or more). If you have already registered on my Accredited Investor site, please contact your Altegris account executive for a streamlined registration process. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

Have a great week. I know I am going to!

Your going to get this brave new world figured out analyst,

By John Mauldin

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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Comments

Giles Brandrith
12 Dec 09, 21:04
Subscription

John

Why should I subscribe to your service when you have been WRONG on all counts that mattered during 2009 ?

GB.


bash
15 Dec 09, 08:10
depression UK

Borrowing money now to fix the current state of economy (short term goal as everything else in politics will only make further future debts even higher then they should be especially the way the western international banks charge interests, rates never stay low…for long periods unless we become a nation that conforms to the Islamic way of banking where interest are not allowed hence their economies have low interest for life….which I highly doubt the big banks in the our part of the world will ever allow that.

This huge debt burden will be passed down to a future generation who are yet to finish the primarily school. We have to think how is this future generation is going to make all this money up and if the state of the economy at that period will allow or facilitate them to do just that, they will have make very large contribution in tax from their wages, assuming that highly paid private sector jobs will be available to them in this country in huge numbers, which I will explain a later stage.

The new generation that we will be relying on or passing on the debt burden will be fewer in numbers in terms of total working population, as we no the current lifestyle in the UK has been for a while is to have one or two kids some leaving it to their 40s to have kids and when they do they are not having kids like so called baby bloomers who are currently going into the retirement stage….which as you should of guessed by now that their pensions are paid by the present working population through tax and national insurance contribution for the state pension, and private company pension is paid by the present earnings of the present pension fund that is invested in stocks and shares, hence when money is whipped off the stock market where all these company have locked the employees pensions, you create what is a pension black hole!!.

On top of that as the baby bloomers are now expected to live longer which will means the total payout will be much higher then any forecast made by the NHS or any government health agency/ treasury, as they will have to payout for longer time period on the other hand medical treatment cost or NHS costs will sky rocket as older people get they tend to have more medical treatment needs and the fact the current population trend suggest that there will be 3 pensioners per one adult working assuming that in the future all adults will be employed and pay their tax and is enough to pay for public services and the NHS bill. I guess someone somewhere has been working on a balance…between pension costs and medical costs. ie I have no doubts that the smoking band and other such policy is probably worked out with above two ratios in mind. For each one has such I high costs related to it, probably cost levels are as high current debt levels…which very alarming.

the next major factor that can push us further into a depression is our position as a property/ mortgage lead economy and its consequences for the nation. Many have cashed their pensions or transferred most of the saving to property at the height of the property boom, hoping that it will be a nice little nest egg for them to spend from when retired, thinking that the property price will keep going up at a fast rate, however like all things, it is much dependent on the state of economy, prices can co go down to any value they were in the past, depending on the state of the economy a recession like this with such high debt levels going back to levels of the1950 depression debt levels. A house once thought to be security can now be a huge burden on the taker of the mortgage, interest rates will never stay low as they are at some point they will rise and with the rise those that are still employed and paying the mortgage will suddenly find themselves paying much higher mortgage payments which will either leave them with very little of amount of disposable income, intern affecting other parts of the economy such as retail sales etc….or losing their houses all together. This will affect millions. Like the millions already affected in the property market in the so called stabilisation of the property market we have seen in last two years 2008-2009, those that are still hanging or depending on the property market as a livelihood are in for a big surprise and soon add further numbers on unemployment counter.

The other major factor intertwined with the above two factors I already mentioned is in the job creation areas. We need more private sector jobs to be created then public sector jobs and theses jobs need replace many of the jobs that we have lost and may never get those types of jobs again. Public sector jobs is funded by tax collected from the private sectors, many jobs in the past 5 years were created by government or local governments which are not sustainable, and we see the affects of that phiscally in the economy in the next few years as especially after the general election. This massive stimulus package has been great for the economy but only in the short term by keeping jobs for bit longer, but because they were short term solutions based politics, and not addressing the real problems, like the sensational news that we have now without much depth of analysis then it reasonable to believe we have bought year of good statistics for the price of ten years of bad statistics, if only politicians stop to think about themselves and really put the country first. As the stimulus package runs out and the economy will face the same problems it had before the stimulus package, unless new wave of stimulus is available and if we can afford to have them and not because on a whim of politician who wants to keep their seats. More we borrow more we have to pay back, the further in red we go and the only out is to pay it all back starting from now, hence the jobs creation is the only vital thing that will enable us out of this financial meltdown. We need really seriously look into this the creation of jobs and business development especially as we are now in a global world, we cannot afford to think locally, nationally without taking into context that we are competeting globally for business and jobs. Radical rethinking must be applied if we are going to be competitive in a world platform where technology is rapidly increasing reducing the barriers of protectionism and driving competition to extent that those that embrace the technology through people intellect and technology infrastructure and lowering costs maybe win the hearts of big multinationals, conglomerates…(meaning jobs)

Just looking in the past history of UK, from the close down of coal mines and heavy industrial business that once thrived in the UK and employed many people and to its demise which probably lead to increase of a manufacturing sector rising and in the late eighties as we all now to well that came crashing down due international competition from overseas who were producing faster and cheaper, this however lead to rethinking of the UK job market, where UK then found it self becoming a service sector economy where most people were employed in what is now as tertiary and quaternary economy, people working in offices and retail which lead to us becoming a nation of shopper holics and shopping over our means leading as to a position we now as a nation, a mortgage lead/ debt based economy. Where the rise in our property value is actually our so called wealth and not the actual property. The affects of this model we adopted we are now feeling the wrath of it and will always feel it as it as become a business cycle of boom and bust, majority of society will always get busted and lose everything, as they say in gambling, ‘the house always wins’.

full article economistdude.blogspot.com


Nadeem_Walayat
15 Dec 09, 10:53
This generation crisis

>This huge debt burden will be passed down to a future generation who are yet to finish the primarily school.

No

It will be THIS generationt that will pay the price for the debt. As the financial markets will NOT wait for the next generation to grow up and take up the burden


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Free Report - Financial Markets 2014