Friday, September 7, 2012 - More Than You Want to Know About the Jobs Report

More Than You Want to Know About the Jobs Report

By Sinclair Noe

DOW + 14 = 13,306
SPX + 5 = 1437
NAS + 0.61 = 3136
10 YR YLD - .01 = 1.66%
OIL +.89 = 96.42
GOLD + 34.00 = 1736.30
SILV + .97 = 33.78
PLAT + 10.00 = 1597.00

The first Friday of each month the Bureau of Labor Statistics reports on nonfarm payrolls for the previous month. While that sounds rather mundane, the jobs report is a pretty big deal. The results attempt to measure some of the most vital data about the economy; who's working and where and how much are they being paid; from this we can estimate how much people will or will not spend, the strength or weakness of businesses, the overall health of the economy. The fates of Presidents and political parties can hang on the results. The Federal Reserve will use the report to determine if they will turn on the printing press. This in turn affects the prices we pay for almost everything. So, it's a pretty big deal.

The economy added 96,000 jobs in August, far below the consensus of 125,000 to 150,000. In addition, July's tally was revised down to 141,000 from 163,000. The unemployment rate unexpectedly fell to 8.1% from 8.3% and the "real" unemployment rate (U6) fell to 14.7% from 15%, but the unemployment rate came down for the wrong reason; a sharp drop in the size of the labor force. The labor participation rate fell to 65.3%, its lowest level since September 1981. In other words, people have given up, and 368,000 people stopped looking for a job, and 5 million Americans were classified in August as "long-term unemployed." Meanwhile, teenage joblessness rose to over 24%; that should make your nervous.

At the same time, the report marks the 30th straight month of private-sector job gains. On the other hand, August is the 43rd consecutive month of unemployment above 8%. We're not seeing the massive declines of 4 years ago, but we're not seeing enough growth to lift us out of the weakness. In the 27 months since the start of the current employment recovery, the private sector has added 4.3 million jobs. Once one takes account of population growth there has been essentially no progress in repairing the labor market after the recent downturn. We are better off than we were when jobs bottomed out in 2009 but we're not as well off as we need to be.

Why the slow recovery? In the past, local government employment has been almost recession-proof. This time it’s not. Going back as long as the data have been collected (1955), with the one exception of the 1981 recession, local government employment continued to grow almost every month regardless of what the economy threw at it. But since the latest recession began, local government employment has fallen by 3 percent, and is still falling. In the equivalent period following the 1990 and 2001 recessions, local government employment grew 7.7 and 5.2 percent. Even following the 1981 recession, by this stage local government employment was up by 1.4 percent. Without this austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent.

We've talked about the failure of the austerity programs in Europe. There is no meaningful federal government for the Euro-zone to provide either stimulus or austerity. And while we have seen stimulus programs on the federal level in the US, we have had unprecedented austerity at the level of state and local government. Going on a diet may help you get healthier, but the quickest way to lose 40 pounds is to cut off your leg, which would not make you healthier. Sadly, austerity will never balance a budget; actually it will increase deficits.

Let's break down the report. Average hourly wages dipped a penny to $23.52 and are only slightly ahead of inflation in the past year. The average work week was unchanged in August after being revised downward in July to 34.4 hours. And the number of temporary jobs fell for the first time in five months. Both figures suggest that companies are seeing less demand for their services and need fewer workers. Many of the jobs were in lower-paying industries such as retail, which added 6,100 jobs, and hotels, restaurants and other leisure industries, which gained 34,000. Higher-paying manufacturing jobs fell by 15,000, the most in two years.

That may seem incongruous with some of the retail sales reports lately; in July and August, auto sales and overall sales were moving higher. Generally, when people are out of work or especially when they give up looking for work, they start pinching pennies; we have seen that, at least not yet. Another possible explanation is that we are starting to slide into the subterranean economy much like we've seen in Europe. Still, we have a consumer driven economy, and if people tighten up, the GDP will slip down.

And that may seem incongruous with with the multi-year highs we've seen on Wall Street. At some point, consumers squeezing dollars hurts corporate earnings, and even though sales are decent they don't seem sustainable. Where are we finding ongoing demand? No demand means revenue dries up, unemployment moves up. Meanwhile, the Dow, the S&P 500 and the Nasdaq Composite are all more than 100% higher than the March 2009 lows. Remember the Pop Quiz? What does Wall Street love? Answer: Free money.

The Federal Reserve is now ready for another round of Quantitative Easing. In the minutes from the most recent FOMC meeting the Fed indicated they will dish up more free money. At the speech last week in Jackson hole, Fed Chairman Bernanke told investors and economists that he believes QE still has more to give, essentially priming markets for QE3, suggesting it’s now just a matter of time; he said the first two rounds of QE pushed GDP up by 3% and added more than 2 million jobs.

Yesterday, European Central bank president Mario Draghi announced a major, open-ended, bond buying program designed to push down the borrowing costs of the peripheral countries, specifically Spain and Italy, and if Portugal and Greece ever get back in the bond market, it would theoretically aid them. Draghi's plan doesn't solve the problems of the Euro-zone but it should prevent those problems from immediate implosion. It makes sense for Bernanke to get some extra bang for the buck by piggybacking on the ECB bond buying scheme. Because the reality is that the central banks are globalized.

Next week, the FOMC meets again. It is almost dead certain they will announce a large easing policy. This is what Bernanke does; this is what Bernanke has telegraphed he will do. Nothing in today's jobs report changed that inevitability. What is not certain are the results of QE3; it would take monetary policy into uncharted territory, and there is not much to support Bernanke's enthusiasm for QE as a job generator. Fiscal policy does have the power to put people to work but Congress is a mess. Earlier this summer, the bank of International Settlements wrote in its annual report that central banks had basically reached the end of their ropes, and that from there on out, it was all up to fiscal authorities. Bernanke's Jackson hole speech didn't offer any new ideas, just an endorsement for more QE. And since the economy hasn't improved enough, Bernanke is promising to do more of what hasn't been working.

So, we have central banks kicking the can again, and political parties partying and maybe you're wondering what the banksters are up to. Same old, same old.

IKB Deutsche Industriebank is suing, or at least it seems that way: the German lender is suing Citigroup and Goldman Sachs over losses of $137.4 million and $73.2 million, respectively, on mortgage-backed securities. In May, IKB sued Bank of America over losses of more than $200 million on mortgage bonds.  

Meanwhile, a federal appeals court has revived a lawsuit accusing Goldman Sachs Group Inc. of misleading investors about the risks associated with mortgage securities offerings. Thursday's decision by the Second U.S. Circuit Court of Appeals in New York could subject banks to a wider array of claims by mortgage securities investors, by letting them sue over securities in which they did not specifically invest themselves. The decision allows lead plaintiff NECA-IBEW Health & Welfare Fund, an electrical workers' pension fund that owned some mortgage-backed certificates underwritten by Goldman, to pursue a class-action case on behalf of investors in other certificates backed by mortgages from the same lenders.

A regulator has sued UBS, accusing the Swiss bank of violating federal and state laws through misrepresentations in the sale of mortgage-backed securities to two credit unions that later failed, according to a court filing. The two unions, U.S. Central Federal Credit Union and Western Corporate Federal Credit Union (WesCorp), paid more than $1.1 billion for the securities in 2006 and 2007, according to a complaint filed by the regulator, National Credit Union Administration (NCUA).

In the lawsuit filed in a Kansas court, NCUA said that at the time of purchase, U.S. Central and WesCorp "were not aware of the untrue statements or omissions of material facts" in the offering documents of the residential mortgage-backed securities (RMBS). The misrepresentations in the offering documents had caused US Central and WesCorp to believe the risk of loss was minimal, when in fact the risk was substantial. NCUA has previously filed similar lawsuits against JP Morgan Chase, Royal Bank of Scotland Group, Goldman Sachs, and Wachovia, now a unit of Wells Fargo .

NCUA has settled claims worth more than $170 million with Citigroup, Deutsche Bank, and HSBC.