Monday, October 1, 2012 - Ghosts in the Machine

Ghosts in the Machine

by Sinclair Noe

DOW + 77 = 13,515
SPX + 3 = 1444
NAS – 2 = 3113
10 YR YLD - .01 = 1.62%
OIL - .02 = 92.46
GOLD + 4.10 = 1776.20
SILV +.16 = 34.75
PLAT + 16.00 = 1685.00

You can watch the Presidential Debate this Wednesday but if you're looking for clues about who will live at 1600 Pennsylvania Avenue over the next four years, the thing to watch is the Non-Farm Payroll Report from the Bureau of Labor Statistics on Friday morning. It's all about jobs.

In August, the report show the economy added 96,000 jobs. The September report needs to show that the economy added even more; it needs to show we're moving in the right direction, not slipping back. The unemployment rate is currently at 8.1%. That's a lousy number but at least it has been heading in the right direction. Of course, a major reason the unemployment rate has been falling is because people have dropped out of the workforce; they are no longer actively looking for a job and so they no longer get counted; that's been the methodology for quite some time now; these are people who are not working but they aren't considered unemployed. They have become ghosts in the machine.

Now, there is a big difference between the 800,000 jobs lost in the last month of the Bush administration and the 96,000 jobs gained last month under the Obama administration, but the reality is that 96k jobs is just a sign of a stagnant economy. The employment report on Friday is projected to show a net increase of 130,000 jobs in September. the unemployment rate is seen edging up to 8.2% from 8.1%.

The working-age population in the US grows on average by at least 100,000 a month, so the economy would need to add about 250,000 jobs a month over several years to reduce the jobless rate to old levels or around 6% or less. Don't hold your breath.

There are several impediments to job growth. There is a looming fiscal cliff and a dysfunctional Congress that seems willing to drive right off it. To call the Congress recalcitrant is an understatement. Certain elements of Congress have stated that political partisanship is a higher priority than jobs. How dangerous is the fiscal cliff? It's probably not as important as some fear mongers would have you believe. Businesses will invest in capital equipment and hire additional workers if demand for their goods and services increase. The problem is that demand is slack.

America is still deleveraging from the small “d” depression. Consumer spending is almost three quarters of economic activity and the vast majority of the nation, what we once considered the middle class, is still tightening their belts. Most of the economic gains of the past few decades have gone to the top. Inequality has grown but middle class wages have stagnated and even declined.

Paychecks continue to shrink. Disposable income dropped 0.3% after adjusting for inflation. Consumer spending rose 0.1% in August after adjusting for inflation and most of the increase was a change in gas prices, not a matter of consumers heading to the shopping malls. The most certain way for most people to increase their net worth is to default on their debt. Deleveraging does not increase demand.

The Euro-zone is learning that austerity does not equate to growth. GDP is contracting through many European countries, not just the peripheral states. Over the weekend, thousands of demonstrators took to the streets of Paris to protest against the spread of economic austerity. The anti-austerity movement is gaining strength in Europe. The Bank of Japan is pushing on a string and can't seem to make any progress. China is experiencing a slowdown, and the emerging markets are affected as well. The economies of the world seem to be swirling around in a downward spiral.

And so, we will have a debate over how to get the economy moving again. We know that demand is the ticket to more jobs; and we know that the best way to increase demand is more jobs for more people. It might seem like a Catch 22, but it isn't; we need to invest in jobs. We need a big bold investment. The good news is that there is plenty of work that needs to be done. So, whether you decide to watch the Debates or the Non-Farm Payroll Report, it's all about the jobs.

There are a few more items on the docket to grab your attention. Along with the European Central Bank, the central banks of England, Japan and Australia host scheduled meetings, and the minutes of the Fed's September meeting are due on Thursday. Today, Fed Chairman Bernanke gave a speech at the Economic Club in Indianapolis to explain why the Fed is doing what they do.

Last month, the Fed moved to start QE to Infinity and Beyond, which is just open-ended buying of $40 billion of mortgage bonds per month until there is a sustained improvement in labor-market conditions. Bernanke says low inflation is not a sign of a weak economy and he is not very concerned about inflation. The Fed chairman stressed that the Fed has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures. So far, inflation warnings haven't come to fruition because, at the end of the day, the fundamentals of a weak global economy are offsetting Bernanke's best efforts to spur inflation.

Bernanke stressed that he isn't expecting a recession and QE to infinity and beyond is in response to concerns that growth will continue at a pace that is insufficient to put people back to work. I wish Mr. Bernanke good luck. We could very easily see the sentiment shift from “Don't Fight the Fed” to “The Fed is Pushing on a String”.

Today, we heard a report on manufacturing that suggests it is too early to push the string. The ISM index of national factory activity rose to 51.5 from 49.6 in August. It was the first time since May that the index has been above the 50 threshold that indicates expansion in the sector. Still, manufacturing growth wasn't exactly robust and some components remained in contraction territory. Exports continued to shrink a bit as foreign demand for US goods fell sharply. Manufacturing had faltered in recent months.

Euro zone factories suffered their worst quarter since early 2009. Factory activity in China also contracted for a seventh consecutive quarter. Big manufacturers General Electric and United Technologies last week told investors they expected their earnings to grow in 2013 despite the uncertainties domestically and abroad. GE last week won $1.2 billion in orders for gas turbines from customers in the United States, Japan and Saudi Arabia, while Boeing said All Nippon Airways ordered 11 Dreamliner jets worth about $2.7 billion at current list prices. Not all the news from top manufacturers has been so bright. Heavy equipment maker Caterpillar last week lowered its long-term 2015 growth target, citing an "anemic" world economy.

Two of the most economically distraught countries in the euro zone, Greece and Spain, mapped out additional budget cuts last week. In the case of Greece, under last-chance pressure from its international creditors, the governing coalition tentatively agreed on an austerity package that includes some of the most severe cuts in public pensions ever imposed in a developed country. Pension payouts to retirees would be trimmed by as much as 10 percent. Only Greece seems prepared to risk the consequences of severe pension cuts.

Pressure is building for Spain's Prime Minister Rajoy to tap the European rescue fund. Spain's Budget Minister today announced plans to borrow $267 billion next year, but that money would come through the financial markets, supposedly. Spain’s borrowing plans may test investors’ willingness to continue financing the government. But Spain is not ready to tackle pensions of 10 million retirees, not at a time when people are marching in the streets and the economically crucial region of Catalonia is threatening to secede.

Portugalis under pressure from a fresh wave of street protests and the government is siding with the protesters and saying no to a plan that would have required workers to increase their personal contributions to pension plans. And in Britain, the coalition government of Prime Minister David Cameron continues to resist any pension changes that would come down hard on older conservative voters.

France, under its new president, François Hollande, has lowered its retirement age to 60 from 62 for certain categories of workers. To be sure, the French budget outlook is not as dire as that of Spain. To the dismay of French bankers, business leaders and the wealthy, President François Hollande has remained true to his word and unveiled about $30 billion in new taxes, including a 75% "supertax" that will hit the rich. Hollande described the plan as France's harshest budget in 30 years, but it does not include cuts in public spending, including pensions and state salaries.

From the Monkey Cage, this article:

So, by now, you've heard all about the 47%; you know what Romney said about the people “who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it.”

The discussion of dependence on government is at the heart of the Republican case against Democrats. So, let's look at the data from the 2011 Current Population Survey March Supplement.

Of the 24.7% of Americans who did not work and received government benefits in 2010, more than 70% are either disabled or retired. 7.7% are not working in order to care for home or family – not a group that family values conservatives typically malign. 12.8% are going to school, which likely indicates at least a degree of taking responsibility for oneself.

The bottom line here is that there aren’t that many takers in America. The most restrictive definition pegs the percentage of takers at 2.4%. If we’re willing to include people in households with at least one earner, that number increases to 5.2%. ... But these numbers simply don’t line up with the rhetoric of a massive class of lazy people taking advantage of the rest of us while eating solely at the trough of government.

Finally, it’s worth pointing out that these are really upper-bound estimates. Being a taker involves motives as well as work and benefit status. Takers, so the argument goes, feel no responsibility for themselves and believe that they are entitled “to you name it.” The CPS data don’t allow us to examine motives, but if we could, we would likely find even fewer takers.

Workers have not received their fair share of output in recent decades, as wages have lagged behind increased productivity; so other groups must have received more than their share.

There's been very little said about another prominent group that’s “dependent upon government”: the many American companies whose profits rely, in one form or another, on government assistance. … (from the New Yorker)

Corporate welfare isn’t necessarily a bad thing. Some of these giveaways arguably do a lot of good. But companies that benefit from these policies are just as dependent on the government as the guy who gets the earned-income tax credit. Sometimes it's hard to see if there really is an argument for small government, or whether it's an argument for government that’s small when it comes to helping people and big when it comes to helping business.

For example: Energy companies lease almost forty million acres of onshore land in the U.S. and more than forty million offshore, and keep the lion’s share of the profits from the oil and natural gas that they pump out. In theory, this is O.K., because we get paid for the leases and we get royalties on what they sell, but in practice it often works differently. In 1996, for instance, the government temporarily lowered royalties on oil pumped in the Gulf of Mexico as a way of encouraging more drilling at a time of low oil prices. But this royalty relief wasn’t rescinded when oil prices started to rise, which gave the oil companies a windfall of billions of dollars. Something similar happened in the telecom industry in the late nineties, when the government, in order to encourage the transition to high-def TV, simply gave local broadcasters swathes of the digital spectrum worth tens of billions of dollars. In the mining industry, meanwhile, thanks to a law that was passed in 1872 and never rewritten, companies can lease federal land for a mere five dollars an acre, and then keep all the gold, silver, or uranium they find; we, the people, get no royalty payments at all.

The tax code, too, is a useful tool for helping businesses. Domestic manufacturers collectively get a tax break of around twenty billion dollars a year. State and local governments give away seventy billion dollars annually in tax breaks and subsidies in order to lure (or keep) companies. The strategies make sense for local communities keen to generate new jobs, but, from a national perspective, since they usually just reward companies moving from one state to another, they’re simply giveaways.