November 6th, 2009
Updated General Outlook, Employment/Unemployment, Money Supply
-- Annual Payroll Loss Rivals End of World War II
---- Unemployment Jumps to 10.2% (22.1% SGS)
------ Systemic Liquidity Problems Still Intensifying
-------- Fed Continues to Explode Monetary Base
PLEASE NOTE: The next planned Commentary is for Friday, November 13th, following the release of September’s monthly trade balance in goods and services. A preliminary estimate of annual change in and level of the SGS-Ongoing M3 for October will be posted over this weekend on the Alternate Data tab at www.shadowstats.com.
– Best wishes to all, John Williams
Updated Outlook: Economic Contraction Continues. The most severe economic downturn since the onset of the Great Depression continues, as does the systemic liquidity crisis. The employment and unemployment numbers remain coincident, not lagging indicators of broad economic activity, and their ongoing deterioration in October means that the economy is not recovering. At best, activity in key areas such as retail sales, housing and production has flattened out at extremely low levels. Those levels also have enjoyed short-lived support from one-time stimulus gimmicks that largely have run their courses.
Regardless of deficit issues, with the mid-term election just one year away, the Administration likely will move quickly to introduce further economic stimulus, in hopes of moderating the impact of consumer pocketbook pain at the polls, and correspondingly helping to maintain Democrat control of Congress. There are no short-term stimuli available that will have other than fleeting impact, since the downturn is structural, tied to consumer income growth failing to keep up with inflation. The traditional offset to weak income issues in recent years has been encouragement of consumer debt expansion. Such debt expansion, however, is not available at present, at least not in quantities that would support an expanding economy.
Happy Wall Street hype of the last day or so has included rising year-to-year same-store retail sales and sharply improving productivity. Those retail store sales likely will prove negative, after adjustment for inflation. Economic activity usually is measured with the effects of inflation removed from growth estimates.
Long-term subscribers may have noted that I rarely discuss productivity; this is because the published numbers are of such poor quality that they are worthless. Generally, productivity is measured — with modifications — as the ratio of GDP to payroll employment, two seriously flawed series. The GDP is so heavily gimmicked and politicized as to be worthless in its own right, while the payroll series currently is overstating employment levels meaningfully (see below). Taking the ratio of two bad numbers usually does not generate a result more meaningful than seen in the individual series.
In the current circumstance, where reported GDP growth is surging as payrolls plummet (even as reported), of course reported productivity would surge. Given the poor quality of related government data, however, a more meaningful issue might be whether GDP growth really surged. Again, payroll employment is a coincident, not a lagging indicator of broad economic activity.
The Fed continues in panic mode, spiking the monetary base at annualized pace not seen since the "worst" of the crisis a year ago. At the same time, broad money supply is contracting at a pace that even in the best of times would promise a recession in the months ahead.
The broad outlook remains unchanged. I cannot remember stock market prices ever being so far removed from reflecting underlying economic and financial-system reality. Irrespective of near-term market gyrations, the long-term outlook remains extremely bearish for U.S. equities and the U.S. dollar, and extremely bullish for gold and silver. The economy still faces an eventual hyperinflationary great depression, with high risk of that circumstance beginning to unfold in the year ahead. Such will be discussed in the forthcoming Hyperinflation Special Report Update (2009).
October Employment/Unemployment Reporting Showed Ongoing Recession.
As discussed last month in the Flash Update of October 2, 2009, I contend that the household survey (unemployment, measuring the employment status of individuals) is statistically sounder than the establishment survey (payroll employment, measuring the number of nonfarm jobs). The Bureau of Labor Statistics (BLS) attributes narrower statistical confidence intervals around the payroll numbers, claiming a broader-based survey.
Specifically, while the payroll survey is more broadly based, the BLS never knows what it really is receiving in data (did a company just not get its report in on time, or did it go out of business?), and revisions over the last year or two have been well outside the bounds of the estimated confidence intervals. The household survey, however, is one where the sampling universe is fairly well established, and the unadjusted raw data are not revised. The issues with the household survey usually are more in the area of how survey questions are defined, rather than problems with the nature of survey’s universe. That said, accounting for all definitional differences, the BLS never has been able to reconcile fully the numbers in the two surveys.
The issues here are significant, because last month, the BLS found it had a flaw in its payroll surveying that was going to require a very large annual benchmark revision. Current underestimation of monthly jobs loss likely exceeds 200,000. In October, employment was down by 589,000 per the household survey, versus a 190,000 jobs loss reported in the payroll survey. Underlying employment series are more consistent with the reported household survey than the payroll survey, which is known to be flawed at the moment.
Payroll Survey. The BLS reported a statistically-significant, seasonally-adjusted jobs loss of 190,000 (down 99,000 net of revisions) +/- 129,000 (95% confidence interval) for October 2009, following a revised 219,000 (previously 263,000) jobs loss in September.
From peak-to-trough (the peak month was December 2007; the current month of October also is the short-lived trough of the current cycle), payroll employment has declined by a seasonally-adjusted 7,304,000 jobs, or by 5.3%. Net of the pending benchmark revision, the peak-to-trough decline likely has been closer to 9 million jobs or 6.5%.
As the pace of reported monthly decline has slowed against year-ago comparisons, year-to-year contraction (unadjusted) in total nonfarm payrolls narrowed to 4.0% in October from an unrevised 4.2% in September, and a 60-year low of a 4.4% decline in August. Adjusted for the benchmark revision due for release in February 2010, however, October’s annual decline likely was around 6.0%, the most severe annual contraction seen since the production shutdown following World War II, which hit a record trough of a 7.6% contraction in September 1945. Disallowing the post-war shutdown as a normal business cycle, the current annual decline would be the worst since the Great Depression.
Underlying economic series (such as the purchasing managers and help-wanted advertising surveys, and new claims for unemployment insurance) are consistent with a monthly October jobs loss of roughly 500,000. Such reflects the current reporting, likely near-term revisions and aggregated birth-death model understatement of roughly 200,000 jobs per month.
Concurrent Seasonal Factor Bias. The pattern of impossible biases being built into the headline monthly payroll employment continued to reverse for the third month in the last four, with a downside bias of 107,000 jobs in October 2009 reporting. Instead of the headline jobs loss of 190,000, consistent application of seasonal-adjustment factors — net of what I call the concurrent seasonal factor bias (CSFB) — would have shown a less-severe monthly jobs loss of about 83,000. This factor has generated an upside reporting bias seen in eight of the last 12 months, with a rolling 12-month total upside headline-number bias of 755,000. The recent reversals may reflect a shift in payroll reporting, which will be assessed in a future Commentary. A worksheet on this is available upon request. (See SGS Newsletter No. 50, for further background.)
Birth-Death/Bias Factor Adjustment. As discussed last month and in SGS Newsletter No. 51, Birth-Death Model biases tend to overstate payroll employment during recessions. The flaws here were confirmed with last month’s BLS estimate of an 824,000 downside benchmark revision for May 2009, with a suggested ongoing monthly understatement of 200,000 or more in jobs losses per month. The BLS indicated that their underlying assumptions to the Birth-Death Model were missing certain jobs losses. Specifically, if a company fails to report its payroll employment, the BLS assumes the company did not go out of business and assigns it a level of employment commensurate with its prior reporting and industry trends.
Never designed to handle the downside pressures from an economic contraction — in addition to the flawed underlying assumptions — the model adds a fairly consistent upside bias to the payroll levels each year, currently averaging about 74,000 jobs per month. The unadjusted October 2009 bias was a monthly addition of 86,000 jobs, down from 94,000 the year before, but up from 34,000 in September 2009.
Household Survey. The usually statistically-sounder household survey (see above), which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including multiple job holders), showed employment dropped by 589,000 in September, versus a decline of 785,000 in September.
The October 2009 seasonally-adjusted U.3 unemployment rate showed a statistically-significant increase to 10.20% +/- 0.23% (95% confidence interval), from 9.83% in September. Unadjusted U.3 held at 9.5% in October versus September. The broader October U.6 unemployment rose to an adjusted 17.5% (16.3% unadjusted), from 17.0% (16.1% unadjusted) in September.
During the Clinton Administration, "discouraged workers" — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been "discouraged" for less than a year. This time qualification defined away the long-term discouraged workers. The remaining short-term discouraged workers (less than one year) are included in U.6.
Adding the excluded long-term discouraged workers back into the total unemployed, unemployment more in line with common experience — as estimated by the SGS-Alternate Unemployment Measure — rose to about 22.1% in October, up from 21.4% in September. See the Alternate Data tab at www.shadowstats.com for a graph and more detail.
While 22.1% unemployment might raise questions in terms of a comparison with the purported peak unemployment in the Great Depression (1933) of 25%, the SGS level likely is about as bad as the peak unemployment seen in the 1973 to 1975 recession. The Great Depression unemployment rate was estimated well after the fact, with 27% of those employed working on farms. Today, less that 2% work on farms. Accordingly, for purposes of a Great Depression comparison, I would look at the estimated peak nonfarm unemployment rate in 1933 of 34% to 35%.
Broad Money Growth Continues to Falter as Monetary Base Explodes. Irrespective of the niceties of wording an FOMC statement so as not to disrupt the financial markets, the Fed still is panicking, flooding the system with liquidity. The monetary base surged again in the two-week period ended November 4th.
As shown in the above graph of the St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted), the level of the monetary base has been pushed to a record high, at annualized rate of growth since the series’ near-term trough in the two-week period ended August 16th, nearly three months ago, of 126.1%. The monetary base consists of currency in circulation plus bank reserves, and it is the Fed’s traditional tool for targeting money supply growth.
The money supply measures, however, still are not reflective of the surge in bank reserves, with banks leaving heavy excess reserves on deposit with the Fed, rather than lending into the normal stream of commerce. Formal monthly estimates for M1, M2 and the SGS-Ongoing M3 will be published this weekend on the Alternate Data tab at www.shadowstats.com. While M1 and M2 (which includes M1) appear to risen month-to-month for October, year-to-year growth has softened. October M3, however, appears likely to show its fourth consecutive month-to-month decline, with year-to-year change slowing to around 2% from an estimate 2.3% in September. There have large declines in institutional money funds and large time deposits, which more than have offset any small growth in M2. There is nothing in the data of the last two months that would alter the content of the September 2nd Alert.
Week Ahead. Given the underlying reality of a weaker economy and a more serious inflation problem than generally is expected by the financial markets, risks to reporting will favor higher-than-expected inflation and weaker-than expected economic reporting in the month ahead. Such is true especially for economic reporting net of prior-period revisions.
Trade Balance (September 2009). Due for release on Friday (November 13th), reporting of the September trade deficit is expected to show minor deterioration per Briefing.com. With rising oil prices and potential catch-up reporting in import paperwork flows, a widening in the deficit beyond consensus is a reasonable prospect. Any significant worsening of the deficit beyond expectations, however, has the potential for dampening estimated growth in the upcoming first-revision (second estimate) to third-quarter GDP on November 24th.