Daily Insight

U.S. stocks side-stepped the latest foreclosures report that showed 349,000 filings for December – a 14% jump from November’s 305,000 filings – to advance for a second-straight session. A good report on business inventories and high hopes for Intel’s earnings release – which came after the bell and did easily surpass expectations – offered the market some juice.

The market’s what’s bad is good mentality doesn’t jibe with stocks moving higher on the positive inventory report. In fact, the market traded lower shortly after the release of that report, but comments from New York Federal Reserve Bank President Dudley, stating that short-term interest rates may remain low for at least six months and possibly up to two years, came to the rescue to help traders’ sentiment regarding the expected shelf-life of ZIRP. Not sure I can say the same for the Fed’s sentiment; comments like this don’t portray ebullience about economic prospects.

The 10 major industry groups were split with half up and half down. Health-care, tech and financials led the way again. Telecom, basic material and utility shares led the losers.

Intel reported that fourth-quarter profit surged three-fold and offered great guidance for both the top and bottom lines. The fabulous results were driven by a three-fold story: massive cost cutting, largely via payrolls; improved business demand as firms move to managing business spending to maintenance levels from the largest collapse in equipment purchases in the postwar era; easy comps as profit was down 90% in the year-ago period. Still, Intel would have posted a nice number even without easy comps as this was a record profit quarter for the tech giant. (They better be careful or some in Congress may view these results as “windfall” profits.)

Thing are likely to get much tougher for the firm over the next four quarters as their gross margin, which super-spiked to 65%, has only one direction to go from here. Further, when you post such a large increase so quickly (again hugely helped by the payroll reductions) it makes it tough to keep the ball rolling. I like Intel, particularly the dividend they now pay -- and they were given room to boost that payout thanks to this number, but like the rest of the universe I’m not sure the profit story has much staying power past two-three quarters.

Market Activity for January 14, 2010
Jobless Claims

The Labor Department reported that initial jobless claims rose 11,000 to 444,000 (7K above expectations) in the week ended January 9 – initial claims up but it remains under 450K so no real harm done. The four-week moving average fell 9,000 to 440,750, the lowest level since early September 2008 – just prior to the Lehman collapse.

Continuing claims offered the first positive news that possibly long-term unemployment is beginning to decline a bit. As you may recall, we’ve spent a lot of time talking about this story. As of the latest monthly jobs report, those out of work for at least 27 weeks (the longest duration of joblessness that labor measures) continues to make new highs. But both standard and EUC claims fell for the first time in a while. The standard continuing claims figure fell 211,000 in the latest week. This has been the trend. The problem has been claims for Emergency Unemployment Compensation (EUC) continued to rise – this is what long-term unemployed persons rotate to when their traditional 26 week of benefits run out. This latest data, however, showed EUC claims fell meaningfully for the first time since the beginning of the year.

As we touched on last week, we’ve watching for the EUC to halt its march higher as evidence that employers just may be starting to hire a bit. This helps to back up our belief that mild payroll increases will begin by February/March. The caveat here is that the standard continuing claims data has a one-week lag to the initial claims number and a two-week lag for EUC. That means we’re talking about the week’s ended January 2 and December 26, so there may be some holiday distortion in the declines. We’ll ultimately have to wait two weeks (get fully past the holiday distortions) for EUC data to confirm this easing.

Retail Sales

The Commerce Department showed that retail sales for December came in well-below expectations, falling 0.3% (+0.5% was expected). The November reading was revised substantially higher to +1.8% from the initially reported +1.3%. Based on the unrevised November figure, December sales would have been up 0.2%, so the estimate wasn’t off by quite so much based on what the consensus was working off of.

Put the past three months together and consumer activity was up a super-strong 11.3% at an annual rate, fostered by a price-driven 35% annualized increase in gasoline. The reading that gets plugged into the personal consumption component of GDP, which excludes gasoline BTW, is up a solid 3.1% for the quarter. This is being distorted by government transfer payments that currently make up a record percentage of total income. Those out of work would have had to reduce expenditures to a greater extent if not for these cash transfers – a trajectory of government spending that is not sustainable and among other things will result in an economic payback.

Excluding autos, retail sales fell 0.2% (+0.2% was expected). Excluding gasoline, sales fell 0.4%. The gasoline station component was one of the few positive readings for the month, up 1% -- the price of gasoline rose about 6%, which more than offset lower volumes. Health-care (up 0.8%), sporting goods (up 1.6%), furniture (up 0.3%) and non-store retailers (up 1.4%) were the other components that showed an increase.

Among the components that declined: electronics sales fell 2.4% -- completely erasing the November gain; building materials declined 0.4%; food and beverage fell 0.8%; clothing sales were down 0.6% -- and erased the mild gains of the previous five months; auto sale fell 0.8% -- but this is after two big months of increase.

This data has bad weather written all over it. Even the eating, drinking component fell – a figure that is dominated by 20-somethings who are resistant to economic weakness. The rise in non-store retailers (online sales) pretty much confirms the weakness was driven by the snowstorms that hit most of the country.

I noticed that there were a few commentators stating the unexpected December decline in retail sales is a sign the economic recovery will be slower than many believe. Not exactly. This data doesn’t illustrate the likelihood of a much less durable expansion, but many other things do as I’ve laid out over the past few months. This data simply shows an easing off of the pretty strong readings of the previous three months, along with some weather-related obstacles.

Again, though one should not expect the consumer to play quite the role they have over the past few years – personal consumption made up 71% of GDP for several years, and still does. That number is going to decline back to the historic average of 65-66%; there’s no way around it as household debt burdens are way too high (a reality that was manageable at 5% unemployment but not at 10%, or even 8%). The government can pump these numbers up for a time, but eventually the economy must stand on its own two feet. Unfortunately, the way we’ve chosen to attack this situation is very likely to hinder private-sector activity for an extended period. Those are the things the financial press should be focused upon, not one month’s spending data.

Import Prices

The import price index came in flat for December, right in line with expectations. This follows a trend that has shown substantially higher prices over the previous eight months. Take out petroleum prices though, which fell 2.0% in December after jumping over the previous few months (up 78.4% year-on-year), and import price rose 0.5% in December.

The ex-fuels price reading was boosted by food and industrial-supply prices. Agricultural imports rose 2.0% in December (up 9.6% y/o/y) and industrial supplies rose 1.8% for the month (up 7.4% y/o/y).

In total, import prices are up 8.6% over the past year – a combination of easy year-ago comparisons and a dollar that lost about 5% of its value as measured against a basket of other currencies.

Business Inventories

Here come the inventories! The Commerce Department reported that business inventories rose 0.4% in November (+0.3% was expected), following the same increase for October – the first back-to-back increases in over a year as they follow 13-straight months of decline. Importantly, the sales data jumped 2.0% for the month following a 1.4% increase in October.

The inventory data is made up of three components: manufacturing, wholesale and retail stockpiles. Manufacturing inventories rose 0.2% and wholesaler increased 1.5%. Retail inventories was the only segment down, off by 0.2% -- would have been even lower if not for auto rebuilding. Ex-auto, retail inventories fell 0.4%. This jibes with what Beige Book showed on Wednesday.

Business sales have rallied 6.2% from the nearly five-year low hit in May and have nearly climbed back to November 2008 levels. That means sales are still down 14% from the cycle peak, but moving in the right direction.

The inventory-to-sales ratio has returned to low levels and this speaks well for additional inventory rebuilding in the coming months. The sales data will have to keep rolling along for this to come to fruition.

The fourth-quarter has gotten off to a great start in this regard. Even if the inventory day shows a pullback when the December figure is released, this component is going to add nicely to GDP – another topic we’ve spent much time on; it is the inventory dynamic. We should get a 4.0%-4.5% GDP reading for the fourth quarter.

Looking out beyond 1H 2010, we’ll need final demand to keep the ball rolling as inventory rebuilding is a very short-term catalyst without healthy business and consumer consumption.

Have a great weekend!

Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks shook off early-session weakness to close smartly higher on Wednesday. Analyst upgrades and earnings optimism overcame the latest energy report that showed fuel demand remains weak. The Fed’s Beige Book report (economic conditions within the Federal Reserve’s 12 bank districts) probably had little overall effect on market activity. The report showed some economic broadening as more districts reported improvement relative to the previous release, but it wasn’t terribly confirming.

Nine of the 10 major industry groups closed higher on the day, telecoms being the only loser. Health-care, financials and tech were the top performers.

The broad market currently resides at its highest level since October 1, 2008, surging 72% from the March 2009 abyss – capturing just more than half of the losses from the October 9, 2007 peak. We’ll now watch to see if the S&P 500 can make it back to its pre-Lehman collapse level of roughly 1240, just 8.3% higher and we’ll hit it.

The bulls remain in charge as the direction of stocks is more a function of earnings and interest rates than employment and GDP. Net bullishness (the difference between bullish and bearish sentiment) as measured by the American Association of Individual Investors has hit its highest level since February 2007.

Interest rates are certainly extremely low; the profit story has yet to play out -- expectations are very optimistic. The market cares little about the unemployment rate or GDP right now simply because the longer these figures remain weak (actually depressed in terms of employment and lackluster in terms of GDP thus far) the longer traders expect interest rates to remain very low. But the market should be giving a little more consideration to the jobs picture. Employers will likely wait quite a long time before they aggressively begin to hire again – they’ll want to book several quarters of good profit growth first. Besides, resource utilization rates are very low and that means they can squeeze more work out of existing employees; therefore, they will delay boosting payrolls in a meaningful manner – not to mention the delaying effects due to uncertainty about tax rates and health-care costs per worker; policymakers can remove this uncertainty in one fell swoop if they cared to do so.

While the slashing of payrolls is good for profits in the short-term, it doesn’t help final demand rebound – tough for this to occur at peak post war unemployment rates – and leads me to question the durability of earnings growth.

In addition, high joblessness doesn’t help mortgage-default rates or overall credit quality to improve. As default rates remain high, this puts additional pressure on bank capital ratios – banks will be hesitant to lend as they fear an erosion in capital adequacy ratios. This spells trouble for credit expansion.

Market Activity for January 13, 2010

Dollar, Fed Speak and a Little Oil

The U.S. dollar got a lift in early trading on hawkish comments from Fed officials. Federal Reserve Bank Presidents Plosser and Fisher (Plosser from the Philly Fed Bank and Fisher from Dallas) commented on how the FOMC should not be deterred from tightening policy by a sluggish job market or other unfortunate realities.

Plosser focused on the need to hike rates in a timely manner. He stated that: “economic slack is neither a necessary or sufficient condition to ensure low inflation.” (That kind of anti-Keynesian talk won’t get him invited to any Federal Reserve dinner parties.)

Fisher focused more on allowing the economy to adjust on its own at this point. He commented on the perils of holding interest rates artificially low, which has certainly been the case as the Fed’s $1.25 trillion in MBS has pushed mortgage rates lower -- and Treasury yields too as investors sell MBS to the Fed and buy Treasuries with the proceeds. He also engaged in a bit of digression, moving onto fiscal policy (which is obviously out of his jurisdiction), as he brilliantly stated: “While it appears urgent, if not agreeable, to use massive public spending to stimulate an economy under duress, an economy cannot sustain long-term growth under the weight of significant fiscal burdens. At some point, what is considered a temporary economic prosthesis becomes a hindrance to the workings of the private sector.”

Neither of these two are current FOMC members, so they don’t have a vote on policy.

The market apparently didn’t view these comments as siren songs as the dollar rebound was extremely short-lived and headed back down to close the session lower.
Even though we have Fed officials out there talking up the exit story on occasion, the voting members continue to infer that monetary policy will remain floored for some time still. You listen to the latter for policy guidance. Personally, I find myself in the Plosser/Fisher camp.

Moving on, the dollar weakness didn’t stop crude from falling as the February contract fell back below $80 (closed at $79.67/barrel) after the weekly Energy Department report showed stockpiles rose twice as much as expected. Total fuel demand was down 1% from the same week last year. There is really no improvement in transportation demand and that is a key indicator to watch for economic progress.

And speaking of transportation, ASI/Transmatch’s latest data on weekly freight carloads showed extreme weakness continues. The chart below is on a four-week rolling average basis.





Mortgage Applications

The Mortgage Bankers Association reported that its mortgage applications index jumped 14.3% for the week ended January 8. This followed a 0.5% rise in the prior week.

The increase was all on the refinancing side as the segment bounced 21.8% and accounted for 71.5% of all applications during the week. This bounce follows three weeks in which refinancing activity fell 38.4%. Purchases were up just 0.8%; the separate purchases index remains floored. After a rebound in home purchases during the first 10 months of 2009, the index has slid back to levels that were first hit in 1997.

The rate on the fixed 30-year mortgage averaged 5.13% for the week, down from 5.18% in the previous week.

Beige Book

The Federal Reserve’s latest analysis of economic conditions showed that activity improved in 10 of their 12 districts (up from eight in the previous report), but remained at a low level. The assessment was for the period November 21-Janaury 4. Labor markets did remain weak across the board and real estate markets are causing a serious drag on things – but of course these are widely known. Richmond and Philadelphia were the two districts that reported activity was not much changed from the last Beige Book.

Most districts reported that consumer spending was slightly greater during the holiday season relative to year ago, but well off 2007 levels – districts noted that since sales were so weak in 2008 compared to 2007 that the 2009 gains did not represent a meaningful shift in trend. Retail inventory levels remain very lean in nearly all districts. Auto sales held steady or increased slightly from the previous report. Reports on tourism were mostly flat or weak. Overall, consumers were described as cautious, prices sensitive and necessity-driven.

Manufacturing activity increased or held steady. Among districts reporting near-term expectations, the factory outlook was optimistic, but spending plans remain cautious. Most activity was reportedly driven by auto assemblies and exports to Asia.

Home sales increased in most districts, but mainly for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, according to the Fed. Residential construction remained at low levels in most districts. The report mentioned that the tax credit boosted sales in November and led to an unusual slowdown in December. Commercial real estate was still weak in all districts with rising vacancy rates and falling rents.

Since the last report loan demand continued to decline or remained weak in most districts – and would have been worse if not for refinancing activity and auto loans. Credit quality continued to deteriorate.
Price pressures remained subdued, though metals prices increased and some districts reported higher agricultural prices.

Have a great day!

Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks, at least in terms of the broad market, rallied in final hour of trading after losing all of its opening session gains and spending most of the day in negative territory. The Dow Industrial Average only spent a brief time under the cut line as it was propelled by shares of Caterpillar and United Technologies – the two stocks accounted for nearly 90% of the index’s gain.

Tech stocks were the worst-performing sector, weighing on the NASDAQ Composite as the index shed all of its morning-session gains just 30 minutes into trading and was unable to make it back to the plus side. Mid and small-cap stocks also closed to the downside, but just fractionally.

The latest trade data out of China showed exports were up strong and imports surged 56% from December 2008 – that’s got massive Chinese stimulus written all over it even if the figures are relative to extremely depressed levels of a year ago – and was responsible for most of the day’s gains. Industrials jumped 1.17% and that’s a China story.

Utility shares also performed well, up 1.10% for the session. Although, the group accounts for a much smaller percentage of the S&P 500 than industrials do so it didn’t have much impact on the index. Comments from St. Louis Fed Bank President Bullard stated the Fed is likely to keep policy floored for longer than most expect and that’s a green light for higher-dividend paying shares.

Bullard also mentioned that the Fed’s quantitative easing (QE)campaign may be extended and increased, referring to the central bank’s mortgage-backed security purchases and possibly Treasury securities too. It seems the Fed is floating messages out there to see how the market reacts. The chances of Bernanke & Co. increasing QE is heightened in my view. That’s unfortunate. At some point they are going to have to make the economy to stand on its own, or at the least force it to use just one crutch. If they choose otherwise, it will create additional problems down the road – and they’re choosing otherwise.

Market Activity for January 11, 2010 Crude, Delinquencies, Printing and the Consumer

The price of oil for February delivery hit a new 15-month high yesterday as Chinese exports recorded the first year-over-year increase in 14 months, colder than usual temperatures continue to grip the U.S. and many other parts of the world, pipeline attacks returned to the Nigerian Delta (it was a brief respite), and a declining U.S. dollar that has now erased a three-week bounce. (Crude has pulled back a bit this morning after Alcoa’s disappointing earnings report but remains solidly above $80/barrel.)

The weather will turn warmer and an extraordinary level of Chinese government stimulus will dissipate, but what will remain in the near future is a Fed that holds monetary policy at emergency levels – the only thing that will outlast this is oil infrastructure attacks within troubled parts of the world. As a result, the dollar will remain under pressure -- barring some nasty event that causes a full-fledged run for safety – and this will add more fuel to possibly propel the price of oil higher.

It is obviously impossible to predict where oil is going. I could actually see all commodity prices pulling back for a spell as supplies have probably become a bit bloated as higher prices have encouraged production and an intensification of banking-sector troubles cause traders to worry about already weak demand to get hit again.

It is only prudent to expect mortgage-delinquency rates to increase in the coming months simply because of persistently high unemployment, a shadow supply of homes that can’t be held from the market forever, and high loan-to-value ratios (additional price declines will increase the percentage of underwater mortgages). Now we have Washington looking at adding fees to the banks as a way of raising government revenue. Bad timing boys and girls, but when is Washington’s timing ever on target. Populism is running wild and I’m not sure investors are properly assessing the risks involved with such behavior. That’s the problem with pedal-to-the-metal monetary policy though; it causes a gratuitous level of complacency.

The overall point is that the likelihood of higher delinquency rates along with other financial-sector issues may just cause another run for safety and that means transitory dollar support and probably a correction in commodity prices – unless, and this is a big caveat, the Fed immediately meets this trouble by announcing they will increase their mortgage-backed security purchases. In that event, such money-printing behavior may just keep the commodity train rolling and escape what would otherwise be a normal pull-back before trending higher again.

For now, crude is showing substantial momentum and if the Fed expands QE that momentum will increase, creating some issues for an already burdened consumer. The only thing that is likely to ultimately hammer the price of oil, not a transitory pullback but a prolonged hit, is when the Fed signals they’ll begin to unwind current policy and raise interest rates. When that occurs, Katy bar the door on the oil trade; but then again, it may just mean a run for the exits with regard to all kinds of assets. This seems to be quite a way off though as Bernanke & Co. understands very well the challenges we face. While I believe they should mildly remove some accommodation and rid the economy and the market of this state of dependency, the Fed sees things quite differently.

As I’ve stated many times now, the Fed is in a box. If they begin to move now, the housing market will show its underlying foundational cracks and that will obviously have an effect on consumer activity. Yet, if they continue to keep policy floored, commodity prices (namely energy for this discussion) are very likely to trend higher, also hitting the consumers’ pocketbook – draining real incomes.

(On the consumer, what I would watch for is those first-time home-buyers tax credits to begin to take hold in the spring. These checks, which will total up to $8,000 for new home-borrowers, will boost spending or at least help consumers manage around higher crude prices or another round of economic trouble. But the ameliorative effects of this housing subsidy will prove short-lived as it provides one-and done spending. What we’ll be left with is labor market trouble that is unlikely to meaningfully ease anytime real soon. We’re in store for more extend and pretend.)

This Time They Mean It

Fourth-quarter earnings season kicked off yesterday evening with Alcoa’s earnings release. Alcoa marks the traditional beginning of quarterly earnings results, but things don’t get going in earnest until a couple of weeks later when the bulk of releases begin to stream in The market will be watching for some degree of top-line improvement – sales growth. While S&P 500 profits (bottom-line results) have sucked wind over the past nine quarters (remaining very depressed even as of the third quarter as total profits fell 15.6% and ex-financial results declined 24.1%), they have been better-than-expected as massive cost-cutting via payroll slashing has assisted the bottom line.

Prior to third-quarter earnings season, analysts were stating they would have to see some sales growth in order for the market to rise. Well, we didn’t get it as sales fell 9.6% from year-ago results. Stocks, nevertheless, continued to climb, up another 10% since the previous earnings season effectively came to an end. This time they say they mean it. We shall see.

Have a great day!


Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks shook off a worse-than-expected jobs report and the largest decline in consumer credit on record to push higher as both releases boosted the longevity of ZIRP – the Fed’s zero interest-rate policy.

Industrial, commodity-related basic material and energy, along with technology shares led the way. Financials, consumer, telecom and utility shares were down on the session.

While the jobs data was not bad in terms of the degree to which payrolls declined -- a drop of 85,000 is a statistically insignificant number, the long-term unemployment numbers are more than disturbing. But when the market is going on what I believe is a very short-term mindset, easy-money delight, what is bad remains good. Because of this I wouldn’t have been surprised to see quite a substantial sell off if the data had shown a 100k increase in payrolls.

I saw a Bloomberg News reporter state that the market is excited about what this jobs data means for profit growth. For sure, the lack of hiring will help earnings advance – recall that we have talked about how there could be a couple of big-bang quarterly earnings results over the next year. Heck, slash 7.5 million payrolls and firms are going to show some level of profit growth even if sales remain weak. While there’s a good shot growth may be pretty strong for a couple of quarters, if the profits are mostly due to massive cost-cutting via payrolls this will obviously keep final demand lackluster, which means the growth is short-lived. Add in the consumer credit situation and the chance that final demand sticks is low.

So, I look each and everyday for positives to give me more confidence that a durable recovery will emerge, but the more I look the more problems I find. The bulls seem to be awfully short-sighted these days, and what we’re seeing is not a move higher based on fundamentals but a continued move to riskier assets based upon the Fed holding interest rates artificially low, in my opinion.

Volume was weak again, I really thought trading activity would rebound back to normal levels with the holidays behind us, as just 950 million shares traded on the NYSE Composite – 18% lower than even the pathetic average of the last six months. We should be seeing at least 1.4 billion trade per day.

For the week, the broad market gained 2.6%. This marks the seventh weekly gain out of the last 10 and puts the S&P 500 up 72% from the March 9 intra-day low. I should be really excited about this, but the move above 900-950 on the index just doesn’t feel right to me based on the headwinds – a number of challenges I laid out in the year’s first letter a week ago.

I think one has to build a market valuation analysis around $65 in S&P 500 earnings (earnings peaked at roughly $85 in 2007 and the cycle trough just recently came in at $45) and that means a value of 950 puts the S&P 500 at 15 times – a multiple that is right in line with the long-term average. It is tough to justify a multiple that’s above the average in light of the challenges we face.

Market Activity for January 8, 2010
December Jobs Report

The Labor Department reported a jobs report that was worse-than-expected as payrolls declined 85,000 in December (the consensus expectation was for no change, with +85K at the high-end of the range and -100K at the low end). The November payroll figure was revised higher to show a 4K increase, previously reported as an 11K decline – marks the first positive reading since December 2007. Still, all of these numbers are statistically insignificant as anything within +/- 100K is.

One thing that people were focused on was the revisions for the previous couple of months, expecting more positive changes – this is important because the revisions generally portend the future trend. While the November reading saw a positive revision, the October data was revised a bit lower, so no effective change.

In terms of industry, goods-producing industries shed 81,000 jobs -- a decent deterioration from November’s -58K; in line with the three-month average of -83K. The construction segment cut 53,000 – double the decline of November and worse also compared to the three-month average of -45K. (Keep in mind though that we had some nasty weather in December and this surely damaged the monthly figures for the segment.) The manufacturing segment shed 27,000 – better than the -35K in November and an improvement relative to the three-month average of -37K. (It seems the better employment figures within the regional factory reports were correct in signaling some improvement.)

The service-producing industries cut payrolls by 4,000. This is nothing, completely insignificant, but is a large deterioration from the 62,000 increase registered in November. The three-month average is +13K. The trade and transportation segment cut 37,000 – more than the -32K in November but better than the three-month average of -43K. Retail payrolls declined 10,000 – an improvement from the
-14K in November and also the three-month average of -21K. Business services payrolls increased 50,000, boosted by another nice pick up in temporary hiring. Temp. help increased 47,000, following +89K in November – the three-month average is +49K. Temporary hiring is a key component to watch as historically it has proved to be a nice signal that at least mild overall job growth will soon follow.

Ex-post office, the federal government added jobs but state and local gov’ts cut jobs -- states are in a world of hurt and are going to present a problem for quite some time; the Medicaid expansion will put the states on a path of financial ruin if it is ultimately passed In total, government jobs declined 21,000, but this figure is going to pick up in the months ahead. Hiring for the 2010 census will begin in earnest over the next couple of months. This is going to distort the jobs figures as (if memory serves) 800,000 workers will be needed, and those additions will be spread out over a multi-month timeline. However, it won’t be long again before the census workers are hunting for employment as this is a six-eight week gig.

The unemployment rate held at 10%, but this number is going meaningfully higher. Why? Because the civilian labor force plunged 661,000 during December. These are people who removed themselves from the labor market because they didn’t look for work during the previous four weeks – termed the “discouraged worker.” When the labor force increases, workers returning to look for work as they feel better about the chances of finding a job, the jobless rate will rise. This why the unemployment rate is a lagging indicator, continues to increase even as the economy has moved to expansion mode. That said, I think the degree to which the rate still has to rise is more pronounced this time. Look for 11% by summer.

Taking a minute to clarify the two surveys that make up the jobs data: The Establishment Survey is used by the Labor Department to measure the change in payrolls – the +/-monthly jobs number you read in the headline; it is a survey of 150,000 businesses. The Household Survey is how the government measures the unemployment rate, this number includes the self-employed; it is a survey of 60,000 households.

The U6 unemployment rate (also referred to as under-employment), which includes discouraged workers and those working part-time because they can’t find full-time work, ticked back up, rising to 17.3% from 17.2% in November – although still below the high of 17.4% hit in October.

The number of unemployed that have been out of work for at least 27 weeks (the longest duration the labor statistics track) is now 4 out of every 10 – actual percentage is 39.8%. The average duration of unemployment rose to another new high, increasing to 29.1 weeks from 28.6 in November – the third straight month in which it has exceeded the 27 weeks figure. This completely jibes with what the jobless claims data has been suggesting as continuing claims keep rising.

The average weekly hours worked reading also failed to improved, holding at the low level of 33.2 hours. The figure rose in November from its record low of 33.0 in October, but we need to see something closer to 33.8-34.0 before firms begin to substantially add workers. Hours worked were adversely affected by weather, particularly construction jobs, so one hopes some improvement would have resulted otherwise but we’ll need confirmation from the data in the coming months.

Last month I mentioned that the excitement over the November jobs report appeared a little amateur. There were a lot of people that expected the data to magically begin to post increase beginning in December and statistically significant improvements beginning in January. But it doesn’t happen this way, especially since there remains too much room with which to stretch current employee workloads, as that weekly hours worked figure suggests. However, we should begin to see a trend of positive monthly results by February/March and with some luck statistically significant increases by early summer. The problem is that firms are not seeing much by way of sales growth and that means they’ll wait eve

While that’s the brighter side of the situation, the labor market participation rate continues to make new 25-year lows and that means there will be an enormous number of people re-entering the workforce when they feel better about the labor outlook. This means we will have to see more than the usual 100K/month job growth for an extended period in order to bring the jobless rate lower. Based on what the data is suggesting, we may need 200K/month for more than 12-18 months to even bring the unemployment rate back to 8.0-8.5% by mid-2011. And even this rate is elevated from a historical perspective, the peak level of joblessness during the normal recession. To get back to our long-term average of roughly 6%, we could be waiting until 2014-2015.

I think the response we have taken to combat this serious downturn is actually doing more harm than good My concern is that as the jobless rate rises just ahead of the 2010 election, Congress will scurry to endeavor upon polices they believe will increase jobs in the short term, but does significant damage to the longer-term situation.

Consumer Credit

A point we’ve touched on a number of times, the slashing of credit-card lines, is going to work as a drag on consumer activity. There are approximately $4.5 trillion in credit-card lines outstanding (a significant percentage of which is for businesses, which is not relevant to this topic) and $874 billion is drawn upon via the consumer. These lines of credit run off of models based upon the national delinquency rate, and since delinquencies are at a record level, according to Fitch Ratings (I assume they mean post-WWII record), that means these lines will continue to be cut.

The latest Federal Reserve data on consumer credit was out Friday, showing it got whacked by $17.5 billion in November (a decline of $5 billion was expected) and is down for 10-straight months – both are the most on record. Records go back to 1943.


Have a great day!


Brent Vondera, Senior Analyst