WHAT A WEEK! Jobs, Macroeconomics, Markets and More
Instead of instant comment on the jobs report alone, today we offer a compendium of observations on this tumultuous week.
The jobs picture:
Today’s report happily smoothed out the trailing three months to an average of 72,000 new jobs per month. It was welcome, albeit that we are tracking at less than half the 150,000 jobs/month necessary to keep pace with population growth. Is the upward move for July meaningful? Hard to tell in a month where the seasonally UNADJUSTED number of net new jobs FELL by 1.231 million (teachers and other employees that typically exit the number in the summer). So when you have a statistic entirely reliant on seasonal adjustments, just hold on to your adjustment algorithms and hope they are right.
The decrease in the unemployment rate to 9.1% from 9.2% is not a happy number at all. The size of the labor force fell by 193,000 (the denominator in the unemployment rate) and the number of people employed according to the Household Survey (the numerator) fell as well by 38,000. The employment population ratio continues to fall – to 58.1%. And when you remove the 8.4 million people working part time for economic reasons (as little as an hour a week according to the survey methodology) we are down to 54.6% of our civilian non-institutional population employed full time – 30 year lows (at least). This is a much worse situation than we were in at the depth of the recession and reflects quite a sick economy. U-6, the underemployment rate, was near unchanged at 16.1% – but, again, due to the reduction in the civilian labor force.
Wages recovered (both on an hourly and aggregate average basis) after declining in June. This surprised us and we will continue to look at this carefully going forward. The specter of rising wages, with hours flat (as they have been for months) and the historically low number of people working relative to the population, should not be sustainable. We expect downward pressure on wages going forward as the number of under-/un-employed member of the civilian population continues to increase.
The domestic economy:
Now that jobs report and the kabuki theatre of the “debt crisis” is behind us – at least for the time being – it is time to refocus on the macro trends and what is going on in the real economy. More about that in a bit……
…As to the debt ceiling issues we’ve just finished haggling over, one should take note of what the market has told us during the last 10 trading days (if not before):
- The U.S. does NOT have a credit issue. Uncertainty has sent traders flocking for the SAFETY of U.S. treasuries (which remain in short supply, relative to global demand), as traders have done for decades;
- Inflation was just a QE2-induced, bad liquidity dream (despite Chairman Bernanke’s protestations to the contrary) – gone and forgotten; and;
- Amidst all of the bad data – domestic and international – the market is looking again towards “what your country can do for you” and has concluded that (a) monetary policy has no lasting effect in a secular downturn and (b) fiscal policy is – given the political environment – a non-starter.
After the not-as-bad-as-it–could-have-been jobs report, the market has concluded that QE3 is not likely and that it wouldn’t work anyway, even if we got another Jackson Hole surprise.
In short, the U.S. economy is now “non-performing without a net.”
So where are we left, now that the unnecessary debt ceiling distraction is over?
- We are going to start hearing more from folks like Janet Yellen: Disinflation is the principal risk to the U.S. economy because of the toxic combination of (i) a mountain of unresolved household and other financial asset debt (Irving Fisher’s 1933 “debt deflation”); and (ii) external pressures resulting from the principal, secular challenges we face from emerging markets.
- Too many associations have been made comparing the prevailing economic environment and past cyclical downturns. This is not business cycle problem – it is a secular problem arising from the excess supply of global labor and productive capacity; together with attempts in the first 6 years of the last decade to attempt eradicate the business cycle (and ignore the global challenge) through extraordinary monetary, fiscal (tax) and regulatory policies.
- The U.S. cannot rebalance through (i) currency devaluation or (ii) reflation given, respectively, the ability of our principal trading partner/creditor (China) to prevent the former, and domestic debt deflation preventing the latter. Protectionist measures are not conceivable. Thus, disinflationary pressures will dominate and eventually force the balancing of wages and prices relative to our global competition (not to parity, of course, but what is necessary to have us produce more of what we consume and reduce net imports).
- The downward pressure on real wages (following an increase in real wages during the brief, first installment of recessionary deflation) is already baked in, But we still expect to see nominal wages begin to fall if we are going to meaningfully absorb domestic excess labor. For July, hourly wages for production and non-supervisory workers actually rose 0.4% in comparison to the prior month. Not only do we believe that to be unsustainable (and possibly a seasonal adjustment aberration) but we believe the fall in nominal wages must resume, as liquidity-induced inflationary pressures subside. Prices and asset values will, of necessity, begin to respond accordingly – thus offsetting real wage declines.
- It seems apparent, to economists and the markets alike, that the U.S. economy will not produce sufficient growth to prevent the foregoing adjustments, as a consequence of the aggregate impacts of (i) extraordinary levels of outstanding household and government debt, (ii) the likelihood that continued deficit spending is off the agenda and tax increases will eventually be required, and (iii) the continued drag of falling real asset values – on both households and creditors.
- Even the doves on the Fed are coming to the conclusion that monetary intervention amounts to pushing on a string at this point.
The thing that ails us is really more secular (i.e. the unprecedented global competition that proceeded from the collapse of socialism and the entry into the competitive labor force of 3.5 billion aspiring capitalists, challenging the 600 million in the developed nations).
The excess of global supply, relative to global demand, is the ultimate “supply-side” nightmare….because you can’t further grow supply to get out of it.
A restoration of competitiveness will be required through a combination of:
(a) infrastructure improvements,
(b) rebalancing of wages and prices relative to global pressures, and
(c) the enhancement of educational programs producing more of the engineering and research skills that the world will require as it gradually adds emerging market demand to offset the supply imbalance.
- Rogoff and Reinhardt have correctly pointed out that we did not suffer a cyclical recession, but rather a financial debt crisis. But they do not adequately take into account that it is a debt crisis occurring amidst a backdrop of supply shock – the result of a wholly extraordinary (an arguably economically – at least cyclically – exogenous) historical event in the form of the fall of the bamboo and iron curtains.
The global economy:
- There is no “grand solution” that sufficiently ring-fences the problem of the PIIGS indebtedness. Ultimately this will be a political issue: Either preserve the Eurozone through additional wealth transfer and risk assumption by the core in favor of the periphery, or endure the unendurable and face up to the failure of the entire Euro enterprise. I do not believe that the electorate in the core countries will support stable governments backing the former.
- It appears that China may well be successful in sufficiently containing domestic inflation, and will avoid a hard landing. The slowing of excess liquidity creation by the U.S. will help as well.
- We note that the banking system in China is not that of the west – the banks in China are subsidiaries of the state. Those here are merely de facto so! The state will recapitalize as necessary – and there is no currency issue offsetting its ability to do so, given hard reserves. Having said that, we question whether Chinese growth won’t itself be sufficient to bail out loans that are currently out of the money.
- China, and the other emerging markets, have enormous “bench strength” in tapping still-peasant-level populations to limit wage and price inflation (somewhat less so in terms of coastal asset inflation). China has dedicated its prodigious infrastructure spending to inward (inland) expansion – connecting dozens of cities/prefectures with coastal ports. The impact will be the tapping of cheaper labor and the redistribution of productive capacity to hold down prices until domestic demand (over the next decade) begins to replace more of offshore demand by the developed markets.
- Developed market demand is likely to remain fairly static or depressed during this period – as discussed above. But just as the Asian Tigers displaced the Japanese in the ‘90s, the other emerging markets will continue to challenge China if prices get out of hand. Although they are developing infrastructure and capacity at a far slower pace, the other emerging markets constitute a cap on the export of price inflation from China to the developed world (which, again, should diminish with the ending of U.S. QE). The biggest threat to China does not appear to be her internal pressures, it is a renewed collapse of demand OR greater wage competitiveness, in the west (the two of which are not mutually exclusive).
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