"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Friday, January 7, 2011

Big Ben: "The Federal Government Is On An Unsustainable Fiscal Path"

"Big" Ben Bernanke spoke before the Senate Budget Committee, and he didn't really pull any punches. The full text of his prepared remarks are available on the Federal Reserve's web site. Here's some excepts, with comments, grouped more by category than by chronological order:
"The economic recovery that began a year and a half ago is continuing, although, to date, at a pace that has been insufficient to reduce the rate of unemployment significantly."
The economy is finally showing signs that things are recovering:
"More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. In particular, real consumer spending rose at an annual rate of 2-1/2 percent in the third quarter of 2010, and the available indicators suggest that it likely expanded at a somewhat faster pace in the fourth quarter. Business investment in new equipment and software has grown robustly in recent quarters, albeit from a fairly low level, as firms replaced aging equipment and made investments that had been delayed during the downturn. However, the housing sector remains depressed, as the overhang of vacant houses continues to weigh heavily on both home prices and construction, and nonresidential construction is also quite weak. Overall, the pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010."
Except for employment. That recovery hasn't really spread to employment, which could be a threat to the recovery:
"Although recent indicators of spending and production have generally been encouraging, conditions in the labor market have improved only modestly at best. After the loss of nearly 8-1/2 million jobs in 2008 and 2009, private payrolls expanded at an average of only about 100,000 per month in 2010--a pace barely enough to accommodate the normal increase in the labor force and, therefore, insufficient to materially reduce the unemployment rate.... Persistently high unemployment, by damping household income and confidence, could threaten the strength and sustainability of the recovery. Moreover, roughly 40 percent of the unemployed have been out of work for six months or more. Long-term unemployment not only imposes exceptional hardships on the jobless and their families, but it also erodes the skills of those workers and may inflict lasting damage on their employment and earnings prospects."
Unfortunately, we're not really expecting employment to recover really soon:
"Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve's statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully."
Changing to a different subject, inflation really isn't a problem. Stop thinking it is:
"Recent data show consumer price inflation continuing to trend downward. For the 12 months ending in November, prices for personal consumption expenditures rose 1.0 percent, and inflation excluding the relatively volatile food and energy components--which tends to be a better gauge of underlying inflation trends--was only 0.8 percent, down from 1.7 percent a year earlier and from about 2-1/2 percent in 2007, the year before the recession began."
In fact, inflation probably will remain stable for a while:
"Despite the decline in inflation, long-run inflation expectations have remained stable; for example, the rate of inflation that households expect over the next 5 to 10 years, as measured by the Thompson Reuters/University of Michigan Surveys of Consumers, has remained in a narrow range over the past few years. With inflation expectations stable, and with levels of resource utilization expected to remain low, inflation is likely to be subdued for some time."
But, (returning to a previous topic) part of what's keeping inflation down is unemployment. And we're kind of concerned about that:
"The downward trend in inflation over the past few years is no surprise, given the low rates of resource utilization that have prevailed over that time. Indeed, as a result of the weak job market, wage growth has slowed along with inflation; over the 12 months ending in November, average hourly earnings have risen only 1.6 percent."
Also, did we mention that the simple fact that inflation is low could also be a serious problem? Because maybe we should mention that:
"FOMC participants also projected inflation to be at historically low levels for some time. Very low rates of inflation raise several concerns: First, very low inflation increases the risk that new adverse shocks could push the economy into deflation, that is, a situation involving ongoing declines in prices. Experience shows that deflation induced by economic slack can lead to extended periods of poor economic performance; indeed, even a significant perceived risk of deflation may lead firms to be more cautious about investment and hiring. Second, with short-term nominal interest rates already close to zero, declines in actual and expected inflation increase, respectively, both the real cost of servicing existing debt and the expected real cost of new borrowing. By raising effective debt burdens and by inhibiting new household spending and business investment, higher real borrowing costs create a further drag on growth. Finally, it is important to recognize that periods of very low inflation generally involve very slow growth in nominal wages and incomes as well as in prices. (I have already alluded to the recent deceleration in average hourly earnings.) Thus, in circumstances like those we face now, very low inflation or deflation does not necessarily imply any increase in household purchasing power. Rather, because of the associated deterioration in economic performance, very low inflation or deflation arising from economic slack is generally linked with reductions rather than gains in living standards."
Now, in terms of dealing with inflation and unemployment, we're kind of tapped out on resources:
"In a situation in which unemployment is high and expected to remain so and inflation is unusually low, the FOMC would normally respond by reducing its target for the federal funds rate. However, the Federal Reserve's target for the federal funds rate has been close to zero since December 2008, leaving essentially no scope for further reductions."
Changing gears, let's talk about this laughable collection of numbers you lot pass every year that you claim is an operating budget. A real budget balances income and outflows. What you pass just assumes that ever-increasing deficits are a mandatory part of the budgeting process. As a result, if you are under 40, by the time you retire this nation's "budget" will make the PIIGS nations look fiscally responsible.
"However, an important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal. For example, under the Congressional Budget Office's (CBO) so-called alternative fiscal scenario, which assumes that most of the tax cuts enacted in 2001 and 2003 are made permanent and that discretionary spending rises at the same rate as the gross domestic product (GDP), the deficit is projected to fall from its current level of about 9 percent of GDP to 5 percent of GDP by 2015, but then to rise to about 6-1/2 percent of GDP by the end of the decade. In subsequent years, the budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programs. Under this scenario, federal debt held by the public is projected to reach 185 percent of the GDP by 2035, up from about 60 percent at the end of fiscal year 2010."
There has not yet been a serious attempt to fix this:
"It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be."
We still have a chance not to be a third world country:
"By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation about our medium- and long-term fiscal situation."
Please, as our elected officials, act like grown-ups and govern. Make a hard choice or two.
" I hope that, in addressing our long-term fiscal challenges, the Congress will seek reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit but also to enhance the long-term growth potential of our economy--for example, by encouraging investment in physical and human capital, by promoting research and development, by providing necessary public infrastructure, and by reducing disincentives to work and to save. We cannot grow out of our fiscal imbalances, but a more productive economy would ease the tradeoffs that we face."
Please note that, while my "explanatory comments" may be a little.. sarcastic, they really aren't inaccurate. If you don't believe me, read the transcript and see if I've taken anything out of context.

US Employment Situation: A Fata Morgana Looks Pretty Good, Too

A Fata Morgana, in case you're wondering, is a rare and complex form of superior mirage.
And now, the US Employment Situation. Last month we had a surprisingly bad increase of only 39,000 nonfarm jobs (badly missing expectations), with the unemployment rate at 9.8%. For December, particularly after the ADP Employment Report earlier this week, the Street is feeling optimistic. They're looking for 160,000 new jobs (with 180,000 of them coming from the private sector, implying 20,000 public sector job cuts), with the unemployment rate falling to 9.7%.
Drumroll, please.
Here's the data[1]. Nonfarm payrolls missed expectations, coming in with a 103,000 increase in nonfarm payrolls. Within that figure,
  • Leisure and hospitality employment increased by 47,000, with the bulk of those jobs (25,000) coming from food services and drinking places{2].
  • Health care employment increased 36,000 - 21,000 in ambulatory services, 8,000 in hospitals, and 7000 in nursing and residential care facilities.
  • Temporary jobs increased 16,000.
  • Retail trade jobs increased by 12,000.
  • Mining employment increased by 5000.
  • Manufacturing employment increased by 10,000.
Interestingly enough, though, the unemployment rate has dropped 40 bps to 9.4%. The number of unemployed persons fell 556k to "only" 14.5 million.
  • The number of job losers and persons who completed temporary jobs dropped by 548,000 to 8.9 million.
  • The number of long-term unemployed (jobless for 27 weeks or more) remains largely unchanged at 6.4 million, and accounts for 44.3% of the unemployed.
  • The number of persons employed for economic reasons[3] remained largely unchanged at 8.9 million.
  • 2.6 million persons were not counted as unemployed because, although they are available for and want work, they had not looked for work in the last four weeks. 1.3 million of them are considered discouraged, meaning they have given up all hope of finding employment.
Putting all of that in perspective, unemployment is at 9.4%. But, if you count in the "marginally attached", it goes to 11.1%. If you also count in the "involuntary part-time workers" (and there have been a number of good arguments about why you should[4]), it goes to around 16.8%.
So really, even though the report looks good on the surface, it really isn't much of an improvement.
[1] Assume all of these numbers are seasonally adjusted, unless I say otherwise.
[2] Not to stereotype, but I think that it's safe to read this as fast food and waiters, neither of which typically make a lot of money.
[3] AKA "involuntary part-time workers".
[4] Why? Consider someone with a Masters in Engineering, working as a part-time janitor. Or a GM assembly line worker, laid off, delivering newspapers. Or any one of 8.9 million other cases in which the only difference between the skilled worker working a semi-skilled part-time job (and most part-time jobs are semi-skilled) and a skilled worker drawing unemployment is the fact that one of them has something approximating a job.

Commissioner's Statement on the Employment Situation News Release

The latest Commissioner's Statement on the Employment Situation (http://www.bls.gov/news.release/pdf/jec.pdf) was issued today by the Bureau of Labor Statistics. The text is below.

Advance copies of this statement are made available to the press under lock-up conditions with the explicit understanding that the data are embargoed until 8:30 a.m. Eastern Standard Time.

Statement of

Keith Hall
Bureau of Labor Statistics

Friday, January 7, 2011

In December, the unemployment rate fell by 0.4 percentage point to 9.4 percent, and nonfarm payroll employment increased by 103,000. From a recent low point in December 2009, payroll employment has risen by 1.1 million, or an average of 94,000 per month. In December, employment increased in leisure and hospitality and in health care but was little changed in other major industries.

The leisure and hospitality sector added 47,000 jobs over the month, with continued gains in food services. Employment also rose in amusements, gambling, and recreation. Since a recent low point in leisure and hospitality employment in December 2009, the industry has added nearly a quarter of a million jobs.

Health care employment expanded by 36,000 in December and by 266,000 in all of 2010. Over the month, employment continued to rise in several health-related services, including outpatient care centers, hospitals, and nursing and residential care facilities. Employment in temporary help services also continued to trend up in December and has increased by 495,000 since a recent low in September 2009.

Over the month, job growth continued in support activities for mining operations; the industry has added 77,000 jobs since a recent low in October 2009.

Construction employment changed little in December and, on net, has been essentially flat since March. In contrast, job losses from August 2006 through February 2010 totaled 2.1 million. In December, retail trade employment was little changed, although job gains in the industry totaled 116,000 for all of 2010. Over the month, motor vehicle and parts dealers added 8,000 jobs, in line with the trend since July. December's employment gain among motor vehicle and parts dealers was offset by a loss of 8,000 in health and personal care stores.

Manufacturing employment was little changed over the month. Following modest job growth earlier in 2010, manufacturing employment has been relatively flat, on net, since May. The factory workweek for all employees was down 0.1 hour in December but was 1.5 hours above the low point of 38.7 hours in June 2009.

Average hourly earnings of all employees on private nonfarm payrolls rose by 3 cents in December to $22.78. Over the past 12 months, average hourly earnings have risen by 1.8 percent. From November 2009 to November 2010, the Consumer Price Index for All Urban Consumers (CPI-U) increased by 1.1 percent.

Turning to measures from our survey of households, the jobless rate declined by 0.4 percentage point in December to 9.4 percent. A year earlier, the unemployment rate was 9.9 percent. The number of unemployed persons also declined over the month, from 15.0 million to 14.5 million, largely reflecting a decrease in the number of unemployed adult men. Among the unemployed, 44.3 percent had been jobless for 27 weeks or more in December, up from 40.1 percent a year earlier.

The labor force participation rate edged down in December to 64.3 percent and was slightly lower than a year earlier (64.7 percent). The number of persons working part time who would have preferred full-time employment was essentially unchanged in December at 8.9 million. The number of discouraged workers grew over the year by 389,000 to 1.3 million in December (not seasonally adjusted). Discouraged workers are persons outside the labor force who are not looking for work because they believe their job search efforts would be unsuccessful.

Data users are reminded that seasonal adjustment factors for the household survey are updated each year with the release of the December data. Seasonally adjusted estimates going back 5 years--to January 2006--were subject to revision.

Summarizing labor market developments for December, the jobless rate fell to 9.4 percent, and nonfarm payroll employment rose by 103,000.

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Metrics: European And Canadian

Let's start with Europe, shall we? We've got economic data flowing in from Switzerland, Germany, France, and the EU as a whole.
In Switzerland, seasonally adjusted unemployment remains flat at 3.6% (missing expectations by 10 bps), while non-seasonally adjusted unemployment rises 20 bps to a level of 3.8% (also missing expectations by 10 bps).
Germany's got a ton of data coming out, and it's all bad. First off, their merchandise trade[1] surplus dropped E2.4 billion (brutally missing expectations, which anticipated an increase in the trade surplus to E15.0 billion) to a level of E11.8 billion in November. Imports jumped 380 bps for the month to a level of 4.1%, while exports rose 160 bps to a level of 0.5%. Retails sales fell 250 bps in November, dropping from a revised 0.1% (revised downward from the original 2.3% reported for October[2]) increase to decline 2.4% (also brutally missing expectations, which anticipated a decline to an increase of only 1.0%). Finally, to round out this trifecta of misery, industrial production fell 370 bps in November from a revised 3.0% increase to a 0.7% decline (missing expectations by 40 bps).
France is not experiencing much joy either. Their merchandise trade figures for November can be read in one of two ways: either as a E7.3 billion shift from a E3.43 billion trade surplus in October to a E3.87 billion trade deficit in November, or (using the revised October figures) as E0.16 billion shift from a E3.71 billion trade deficit to a E3.87 billion trade deficit. The first is an almost inexplicable single-month face-heel turn, and the second smacks of sheer incompetence amongst the offices of the French equivalent of the Department of Labor[3].
Do things get any better for the European Union as a whole? Well, their Q3 final revision for GDP cuts the quarter over quarter growth to 0.3% (down from the previous revision of 0.4%, and missing expectations that the final figure would remain 0.4%). Year over year GDP remains unchanged at 1.9%. the EU's unemployment rate remains unchanged at 10.1% in November, exactly meeting expectations.
On to Canada, where the Labor Force Survey shows things improving by at least a small amount. Employment rose 22,000 in December (up 6800) beating expectations by a small margin (analysts were expecting to see 20,300 new jobs). As a result, the unemployment rate for the year comes in at 7.6%, beating expectations by 10 bps.
Coming up next, we'll be looking at the US Employment Situation!
[1] Merchandise trade is imports and exports of tangible goods and services.
[2] There's no real explanation about how 0.1% was mistaken for 2.3% in the original data.
[3] I mean, really. How else do you look at the trade figures one month and say "Aha! We exported 3.43 billion more Euros worth of goods than we imported! Viva la France!" and then the next month say "Our bad. We made a 7.3 billion Euro mistake in our calculations"? Were they holding the balance sheet upside down?

Thursday, January 6, 2011

Seasonal Adjustment

Something interesting to keep in mind about the 409,000 new first time jobless claims, is that that figure is the seasonally adjusted figure. The actual, unadjusted figure for first time jobless claims was 577,279 for the same period, up 52,038 from the week ending Christmas Day. Quite a substantial difference from 409,000 (up 21,000), hey?
So what is this "seasonal adjustment" anyway? The US Census Bureau has a pretty good FAQ on Seasonal Adjustment, and here's the explanation they give: "Seasonal adjustment is the process of estimating and removing seasonal effects from a time series in order to better reveal certain non-seasonal features. Examples of seasonal effects include a July drop in automobile production as factories retool for new models and increases in heating oil production during September in anticipation of the winter heating season."
As to why seasonal adjustment is used, the explanation is that "seasonal movements are often large enough that they mask other characteristics of the data that are of interest to analysts of current economic trends. For example, if a month has a different seasonal tendency towards high or low values it can be difficult to detect the general direction of a time series' recent monthly movement (increase, decrease, turning point, no change, consistency with another economic indicator, etc). Seasonal adjustment produces data in which the values of neighboring months are usually easier to compare. Many data users prefer seasonally adjusted data because they want to see those characteristics that seasonal movements tend to mask, especially changes in the direction of the series."
And finally, here's what they have to say about what what sort of seasonal effects are removed: "Seasonal adjustment procedures for monthly time series estimate effects that occur in the same calendar month with similar magnitude and direction from year to year. In series whose seasonal effects come primarily from weather (rather than from, say Christmas sales or economic activity tied to the school year of the travel season), the seasonal factors are estimates of average weather effects for each month, for example the average January decrease in new home construction n the Northeastern region of the US due to cold and storms. Seasonal adjustment does not account for abnormal weather conditions or for year-to-year changes in weather. It is important to note that seasonal factors are estimates based on present and past experience and that future data may show a different pattern of seasonal factors."
In a nutshell, this seems to say that the actual numbers do not fit nicely into mathematical models. They are unwieldy, and they do not take into account various factors that could make the results look worse (or better) than they really are[1]. As a result, in order to make the actual numbers fit the model and to try to account for these various factors, a "fudge factor" is applied.
It's tempting to point at this and scream "ZOMG THEY"RE FAKING THE DATA!!!!! The government is lying to us!!!!! Blood of Liberty! BLOOD OF LIBERTY!!! Information MUST BE FREE!!!! Free Assange! ASSANGE!!!!!!!!"[2]
But, before you work yourself into a "9/11 Truth" kind of conspiratorial hysteria, have a look at Report r539cy from the US Department of Labor. This report, run using the Labor Department's own data, is Unemployment Insurance Weekly Claims Data from 1/2/2010 through 12/11/2010[3]. Fifty weeks of data.

Initial Claims Continued Claims I.U.R Covered Employment
N.S.A S.F. S.A. N.S.A S.F. S.A. N.S.A S.A.
01/02/2010 645,446 141.4 456,000 6,013,891 123.7 4,862,000 4.6 3.7 130,128,328
01/09/2010 815,593 173.7 470,000 5,791,080 118.3 4,895,000 4.5 3.8 130,128,328
01/16/2010 652,327 133.3 489,000 5,602,357 115.8 4,838,000 4.3 3.7 130,128,328
01/23/2010 502,710 105.7 476,000 5,683,683 116.8 4,866,000 4.4 3.7 130,128,328
01/30/2010 533,320 108.8 490,000 5,683,530 118.5 4,796,000 4.4 3.7 130,128,328
02/06/2010 507,634 115.6 439,000 5,597,688 115.5 4,846,000 4.3 3.7 130,128,328
02/13/2010 478,235 99.9 479,000 5,546,408 115.7 4,794,000 4.3 3.7 130,128,328
02/20/2010 454,492 93.6 486,000 5,597,500 118.8 4,712,000 4.3 3.6 130,128,328
02/27/2010 471,256 101.1 466,000 5,538,966 118.0 4,694,000 4.3 3.6 130,128,328
03/06/2010 459,523 102.0 451,000 5,393,589 114.9 4,694,000 4.1 3.6 130,128,328
03/13/2010 434,424 95.6 454,000 5,344,610 114.5 4,668,000 4.1 3.6 130,128,328
03/20/2010 408,653 91.8 445,000 5,195,732 111.0 4,681,000 4.0 3.6 130,128,328
03/27/2010 408,204 92.3 442,000 5,040,758 110.5 4,562,000 3.9 3.5 130,128,328
04/03/2010 417,296 90.2 463,000 4,981,687 106.3 4,686,000 3.9 3.7 128,298,468
04/10/2010 510,927 106.4 480,000 4,924,111 105.6 4,663,000 3.8 3.6 128,298,468
04/17/2010 434,438 94.6 459,000 4,788,288 102.9 4,653,000 3.7 3.6 128,298,468
04/24/2010 426,412 94.5 451,000 4,668,932 100.9 4,627,000 3.6 3.6 128,298,468
05/01/2010 394,640 88.5 446,000 4,547,308 97.6 4,659,000 3.5 3.6 128,298,468
05/08/2010 409,759 91.8 446,000 4,469,365 96.0 4,656,000 3.5 3.6 128,298,468
05/15/2010 410,264 86.6 474,000 4,407,799 95.1 4,635,000 3.4 3.6 128,298,468
05/22/2010 406,875 87.9 463,000 4,377,445 92.8 4,717,000 3.4 3.7 128,298,468
05/29/2010 415,129 90.5 459,000 4,200,676 93.6 4,488,000 3.3 3.5 128,298,468
06/05/2010 395,396 86.2 459,000 4,308,561 93.8 4,593,000 3.4 3.6 128,298,468
06/12/2010 444,172 93.4 476,000 4,307,793 94.2 4,573,000 3.4 3.6 128,298,468
06/19/2010 423,438 92.2 459,000 4,330,835 93.4 4,637,000 3.4 3.6 128,298,468
06/26/2010 441,130 92.9 475,000 4,314,532 97.3 4,434,000 3.4 3.5 128,298,468
07/03/2010 468,456 102.2 458,000 4,394,779 93.3 4,710,000 3.5 3.7 126,763,245
07/10/2010 511,135 119.8 427,000 4,577,842 102.1 4,484,000 3.6 3.5 126,763,245
07/17/2010 502,473 107.3 468,000 4,568,163 100.0 4,568,000 3.6 3.6 126,763,245
07/24/2010 413,678 90.0 460,000 4,450,714 97.4 4,570,000 3.5 3.6 126,763,245
07/31/2010 402,135 83.4 482,000 4,333,520 96.5 4,491,000 3.4 3.5 126,763,245
08/07/2010 424,506 86.9 488,000 4,289,548 95.0 4,515,000 3.4 3.6 126,763,245
08/14/2010 404,503 80.3 504,000 4,219,684 94.2 4,479,000 3.3 3.5 126,763,245
08/21/2010 384,911 80.5 478,000 4,125,425 92.1 4,479,000 3.3 3.5 126,763,245
08/28/2010 383,111 80.2 478,000 4,138,969 90.5 4,573,000 3.3 3.6 126,763,245
09/04/2010 381,838 83.5 457,000 3,933,940 86.7 4,537,000 3.1 3.6 126,763,245
09/11/2010 341,664 75.5 453,000 3,930,917 86.7 4,534,000 3.1 3.6 126,763,245
09/18/2010 382,323 81.5 469,000 3,810,931 84.5 4,510,000 3.0 3.6 126,763,245
09/25/2010 372,536 81.7 456,000 3,779,896 83.8 4,511,000 3.0 3.6 126,763,245
10/02/2010 373,681 83.3 449,000 3,705,942 83.4 4,444,000 2.9 3.5 125,845,577
10/09/2010 462,667 97.4 475,000 3,715,958 83.0 4,477,000 3.0 3.6 125,845,577
10/16/2010 394,016 86.6 455,000 3,769,435 85.9 4,388,000 3.0 3.5 125,845,577
10/23/2010 408,488 93.4 437,000 3,759,357 85.7 4,387,000 3.0 3.5 125,845,577
10/30/2010 421,097 91.8 459,000 3,783,092 87.1 4,343,000 3.0 3.5 125,845,577
11/06/2010 452,657 103.5 437,000 3,735,928 86.4 4,324,000 3.0 3.4 125,845,577
11/13/2010 409,545 92.9 441,000 3,870,994 91.8 4,217,000 3.1 3.4 125,845,577
11/20/2010 464,813 113.4 410,000 3,665,773 85.7 4,277,000 2.9 3.4 125,845,577
11/27/2010 412,922 94.2 438,000 4,216,367 102.5 4,114,000 3.4 3.3 125,845,577
12/04/2010 585,678 138.4 423,000 4,062,518 97.5 4,167,000 3.2 3.3 125,845,577
12/11/2010 490,276 115.9 423,000 4,179,504 102.7 4,070,000 3.3 3.2 125,845,577
What's interesting in that 50 weeks of data, the Seasonally Adjusted figures are only better than the Non-Seasonally Adjusted figures 16 times[4]. The other 34 weeks, the SA figures were worse than the NSA figures.
So, before you whip yourself into a hysterical anti-authoritarian frenzy, ask yourself why - if there really is a conspiracy to "cook the numbers" - the numbers would be cooked so that almost 70% of the time the situation looks even worse than it actually is? I mean, really. That's almost the worst conspiracy ever.
Feel free to look at the NSA figures to see how many people are actually applying for UI in any given week. Then look at the SA figures to see how, assuming the correct seasonal factor was chosen[5], the given week compares to other weeks.
[1] I can't find the official list of these factors for first time jobless claims. I would assume that it includes things like the potential impact of seasonal positions ending in December (for the Christmas shopping season), massive one-time layoffs from a single large employer, companies that lay employees off for part of the year and then rehire them (**cough**Faygo**cough**cough**), and so forth.
[2] It's all right to admit that you had this response. I had it, mostly because I tend to assume that the government lies. All the time.
[3] I tried to run it through 12/31/2010, but apparently everything after 12/11 isn't in the database yet.
[4] 1/2, 1/9, 1/16, 1/23, 1/30, 2/6, 2/27, 3/6, 4/10, 7/3, 7/10, 7/17, 11/6, 11/20, 12/4, and 12/11.
[5] No guarantee, there. Economics isn't physics, after all.

Europe Is Happy, And Jobless Claims Are Better Than Expected

In Europe, Swiss CPI fell 20 bps to a level of 0.0% for December - good news, but still missing expectations by 20 bps (and bringing the annual CPI increase to a 0.5%, which also misses expectations by 20 bps). German Manufacturer's Orders climbed 360 bps in November to finish at a 5.2% increase for the month.
The European Union released a couple of average figures as well. Across the member states, retail sales fell 130 bps to a level of -0.8% for November (missing expectations by 90 bps). Economic sentiment is positive though, improving 110 bps in December to a level of 106.2, with industrial sentiment up 310 bps to 4, but consumer sentiment falling 160 bps to -11. Obviously, European manufacturers and retailers are more positive than consumers at this moment.
And is Europe up on this overall good news? Let's see... As of 8:36 AM, the FTSE 100 is up 0.59%, the DAX is up 1.26%, and the CAC 40 is up 0.86%. So yes, yes they are.
Leaving Europe behind, we travel north and then south to the United States, where First Time Jobless Claims are due out any moment now. If you remember from last week, we had unexpectedly good news with only 388k new claims. For the week ending January 1, analysts are expecting to see that climb back up (possibly on seasonal employment coming to an end) to 412k new claims. The actual figures - 409,000 new claims - are mildly better than expected. Six states (Florida, Texas, Georgia, Oklahoma, Illinois, and Arizona) saw their first time jobless claims improve, but seventeen states saw things get worse (with California almost single-handedly counteracting the improvement in the six positive states)[1]
Later today, we get the US Chain Stores Sales report[2], the EIA Natural Gas Report (at 10:30 AM EST), and the Fed Balance Sheet and the Money Supply Report (both at 4:30 PM EST).
[1] If that's not clear, try this: Combined, Florida, Texas, Georgia, Oklahoma, Illinois, and Arizona saw jobless claims decline by 17,209. California saw it's first time jobless claims increase by 15,972.
[2] Target, Wal-Mart, K-Mart, and so on and so forth. This is not a huge market mover, but these chain stores do represent about 10% of domestic retail sales. So they are considered to indicate the direction of general retail sales and of consumer spending trends. It comes out when it comes out.

Wednesday, January 5, 2011


Your POMO du jour is an Outright Coupon[1] Purchase, with $9,360 million face submitted, and $1,500 million face purchased. There will be similar transactions tomorrow (looking for $6-$8 billion), Friday (looking for another $6-$8 billion), Monday (looking for $7-$9 billion) and Tuesday (looking for another $7-$9 billion). The new tenative schedule will then be released at 2 PM on 1/12 at 2 PM EST.
[1] Presumably STRIPS, although I feel like a slacker because I haven't been able to confirm this.

Petroleum and Manufacturing

The ISM Non-Manufacturing Index came in at 57.1% for December, beating expectations by 110 bps. Meanwhile, looking to the EIA Petroleum Balance Sheet, crude oil stocks dropped 4.2 million barrels (about 0.4%), with all of it draining from commercial supplies - the Strategic Petroleum Reserve was untouched at 726.5 million barrels. The gasoline supply increased by 3.3 million barrels (1.5%), though.

Food: More Expensive, Still Not Core

The Food Prices Indices are out from the Food and Agriculture Organization of the United Nations. The overall Food Price Index climbed 9 bps to a level of 215 in December. Meat[1] climbed 1 bps to 142, dairy[2] remained flat at 208, cereals climbed 15 bps to 238, oils and fats climbed 20 bps to 263, and sugar climbed 25 bps to 398.
Yes, you can accurately think of those increases as the actual average worldwide change in prices. Meat increased 0.01% in December, cereals increased 0.15%, and so forth. It also means that the food price index increased 41 bps (0.41%) in 2010, with meat prices up 22 bps, dairy prices down 8 bps, cereals up 68 bps, oils and fats up 94 bps, and sugar up 22 bps.
JP Morgan's downgrade of Safeway on concerns that rising food costs will eat away at profits seems more and more well-founded.
[1] Weighted average of 3 poultry meat quotes, 4 bovine meat quotes, 2 pig meat quotes, and 1 ovine meat quote.

Fidelity Preps Clients for Interest Rate Changes

This isn't so much an article about Fidelity Investments, as it is about Liability-Driven Investing. This is the radical concept that pensions, 401(k)s, and really anything else, should have enough assets to meet all liabilities - current and future. You would think that this would be a straight-forward concept.
You would be wrong, of course.
The history of pension plans is littered with what you could call "Ponzi-Driven Investing", in which current contributions to the fund are used to pay current liabilities, and the future liabilities to those current contributors are assumed to be able to be paid by future contributions from new participants. (There is a reason why so many companies have eliminated pensions, and so many existing pensions end up getting bailed out by the US government through the Pension Benefit Guarantee Corporation.)
The comparison between liability-driven investing and Social Security is left as an exercise for the student.

View this article on our website: Fidelity Preps Clients for Interest Rate Changes

Here's the article:

Fidelity Preps Clients for Interest Rate Changes

One of the most significant deterrents that have kept pension plans from adopting liability-driven investing (LDI) – the expectation of rising interest rates – might in fact be misunderstood. Pyramis Global Advisors, the institutional arm of Fidelity Investments, is looking to educate investors on the intricacies of how interest rates impact LDI and says that interest in the strategy is picking up steam.

LDI lacks a standard definition, but basically means matching a plan’s assets to its liabilities, usually using long-term fixed income and derivatives. Managers have touted its imminent arrival for years, though it has yet to actually take off. One key point that Pyramis is making these days, in part through a newly released white paper, is that when the level and slope of the yield curve are taken into consideration, the performance between a core bond strategy and LDI might not show much differentiation.

Experts say that plan sponsors should consider using LDI as a way to protect against pension funding risks--something that has taken on even greater importance after 2008, or even after August when the average funding ratio for U.S. corporate plans dropped by 5.6%. Besides interest rates concerns, plans have also been hesitant to use an LDI strategy because of their underfunded status, which has improved since the late summer swoon.

Daniel Tremblay, an institutional portfolio manager for Pyramis, says that interest rates have “a rather dynamic impact on the plan,” depending on how rates rise or change. In August, for instance, rates declined on the long end of the yield curve, which along with falling equity markets helped push funding levels down. But even though the general consensus among plan sponsors appears to be that interest rates are going to rise, Pyramis cautions that this might only be true for the front end of the yield curve, where rates are near record lows.

Longer term rates, on the other hand, are not as low as intermediate rates from a historical perspective and still have room to fall. This would be especially true if deflation picks up, which would put “significant downward pressure” on the funding levels of pension plans, the firm says. In other words, trying to predict how the volatility of rates along the yield curve might impact funding status could be a losing cause.

“The curve is historically steep, so when [interest rates] rise, they will not rise evenly along the curve,” Tremblay says. “There is no clear answer on the impact it will have on a pension plan. You can’t paint this with one broad stroke.”

In the white paper, Tremblay, along with Michael Senoski, the firm’s LDI investment director, and Ben Tarlow, quantitative analyst, argue that the underperformance of an LDI strategy relative to a core bond strategy would be mitigated in the “fairly likely event” of the yield curve flattening. This assumes that interest rates “rise from the current levels toward more typical levels.” But if deflation does increase, this would lead to a “substantial” uptick in liabilities and a drop in plan funding levels – especially in the case of a core bond strategy.

Christopher Levell, a partner at consulting firm NEPC, advises clients not to wait for better rates before implementing LDI because it’s difficult to predict how they are going to move. Plan sponsors should instead go through the manager search process and then even fund a manager they like at a small level. This way they have the facility in place and then can activate or increase the hedge based on the conditions. He also advises sponsors not to go beyond a 70% to 80% hedge on their liabilities. This means getting past the “performance race,” in which the focus is weighted heavily to how assets are doing, and instead focusing on the volatility of the liabilities.

Sean McShea, president of Ryan Labs Asset Management, says it’s also important for a plan sponsor to look at its own risk capacity when implementing LDI. The stronger the balance sheet, the more freedom a sponsor has in attacking the liability.

“If your funding level is at 75%, then that’s going to require more contributions and not just aggressive asset allocations,” he says.

Although many would argue that LDI in the U.S. has seen a lot of talk but relatively little action, Tremblay says that there has been more movement over the past 12 to 18 months to “set some kind of action plan” by clients interested in LDI. In fact, Pyramis has funded $800 million in LDI over the last six weeks. Tremblay notes that at the past couple of conferences that he and Senoski have attended, the questions about implementation are getting much more detailed.

“It is moving from the academic to the real world and about how to get this done,” Tremblay says.

No, The Article Title Isn't A Typo

New Northern Trust Unit Targets Wealthy Gays

Northern Trust is adding a new practice to its wealth management services that it says will meet the needs of lesbians, gays, bisexuals, transgenders and “non-traditional” families. So reports the Chicago Tribune.

John McGowan, the national practice leader for the new unit and formerly a senior relationship manager in Northern Trust’s wealth management group, says the move recognizes that the “definition of family has evolved.”

McGowan says Northern Trust has helped LGBT clients develop wealth management strategies for decades. He says the bank has “the experience to deal with unique legal, tax and wealth transfer challenges.”

Northern Trust, the largest bank in Chicago, piloted the unit in that city over the past year. McGowan says the service will soon move to other large markets, namely South Florida and Southern California. Eventually, the service will be available in all 18 states where Northern Trust has a presence, Crain’s Chicago Business reports.

Industry experts say Northern Trust appears to be one of the few wealth management firms to create a special unit dedicated to serving the needs of the LGBT community.

Mark Braun, formerly a Northern Trust private banker, is the unit’s new national practice liaison. His duties include building relationships among LGBT individuals and families, community organizations, and other advisors, the company says.

Northern Trust has offered benefits to its employees involved in same-sex relationships for at least 13 years, McGowan notes.

ADP: Employment Is Good. (Also, Other Metrics)

Starting in Europe, the European Union reported its November PPI around 5 AM EST today. October saw a 0.4% increase (for a 4.4% increase year over year), and the consensus expectation was for an additional 0.1% increase (keeping the year over year figures flat). The EU actually came in at a 0.3% increase, bringing the year over year PPI to 4.5%. Not great, but not terribly bad.
Hopping across the Arctic to Our Neighbors to the North, Canada has released its Industrial Product Price Index (IPPI). Which has missed expectations. For November, analysts were expecting to see a 0.3% increase, and they actually had a 0.5% increase. Oddly, however, their year over year IPPI has declined 20 bps to 2.1%, so investors probably won't take this all that badly.
Here in the states, the Mortgage Bankers Association released its Weekly Mortgage Applications Survey figures for the week ending 12/31. The Market Composite Index (which measures margin loan application volume) was up 2.3% for the week, while the Refinance Index (which tracks refinancing volume) was up 3.9% and the Purchase Index (which tracks volume for first-time mortgages) was down 0.8%. Refinancing made up 71.0% or all mortgage activity for the week, and the average contract interest rate for 30-year fixed-rate mortgages fell to 4.82%.
The implication is that we're starting to find ourselves in a more favorable interest rate environment and that banks are more willing to refinance, but that that we may be expecting home sales to remain soft. Still, while interesting, this report isn't a huge deal for the markets.
ADP has released its monthly National Employment Report for December, and the word is, well, surprisingly good. November saw 92,000 new nonfarm private sector jobs (revised downwards from the original release of 93,000, but we can live with that[1]) . The Street doesn't make predictions for this one, so I'll just go ahead and tell you that ADP sees nonfarm private-sector employment increasing by 297,000 in December. Here's the breakdown:
  • Service sector jobs increased by 270,000[2], the single largest monthly increase in the history of the report. Financial services, a subset of this sector, shed 8000 jobs.
  • Goods-producing sector jobs rose 27,000. As a subset of this, manufacturing sector jobs increased 23,000 and construction sector jobs remained unchanged (meaning they didn't drop for the first time since June 2007)
  • The greatest gains came from medium businesses, which hired 144,000 new employees. Small businesses hired 117,000, and large businesses hired 36,000.
At 10 AM EST we're looking for the Institute for Supply Management's Non-Manufacturing Index. This tracks the health of all of the various sectors of the US economy that aren't factories - agriculture[3], mining, construction, retail trade, whatever. Just so long as it doesn't come from a factory. Anything over 50% is considered a growing economy. November had a 55%, and we're looking for a 56% for December.
Then at 10:30 EST, we get the Energy Information Administration's weekly figures on petroleum inventories. This has an inverse impact on oil prices in the US - if supplies are increasing, prices tend to fall (and vice-versa). It's not a huge market mover, but commodities traders and people who invest in oil stocks tend to like it.
[1] Unless you're one of the 1000 people revised downwards, anyway.
[2] No word on how many of these are seasonal jobs, though, so this could be a fluke driven by the Holiday shopping season. I'm not saying it is, since I don't know. I'm just saying that January's employment situation report could be a letdown in the face of this explosive growth.
[3] Yeah, yeah, factory farming. Doesn't count.