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Friday, October 02, 2009


AWHI recovery in question

i've previously blogged on the aggregate weekly hours index as a leading indicator of cyclical recovery and revisited that view after last month's jobs report. today's employment situation release from the BLS, though better than those from the depth of the recession some months ago, was nevertheless somewhat disappointing.

the employment ratio, or EMRATIO, one of my favorite leading indicators of recession, ticked lower to 58.8% -- a level reminiscent of times before the mass migration of women into the workforce. most disturbingly, in falling over the previous three months from 59.5%, or (-0.7%), the pace of employment contraction is -- almost two years into this contraction -- seen to be accelerating again.

similarly, AWHI has reversed a moderation in its decline and ticked lower to 98.5. total hours (weekly) fell to a new low of 33.0 hours from 33.1. there's quite a bit of noise in the first derivative of AWHI, though there's little doubt that the rate of contraction peaked in march. but this will bear watching over coming months. turns up in AWHI have tended to lead EMRATIO, but if the recent stimulus-aided inventory cycle upswing has run its course further contraction in AWHI is likely.

and that double-dip scenario is really the primary concern. the excellent edward harrison posted his updated macro framework yesterday.

A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom. Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

However, longer-term things depend entirely on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a recent post about Richard Koo from Prieur du Plessis which got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

This view of a second, more serious downturn mirrors the one I wrote of when I wrote about high structural unemployment last week. And, again, it is predicated on what government does. I wrote last November that if government stops the support, recession is going to happen. ...

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

this looks a massive problem for the economy going forward. i've already been eyeing fed pressure for liquidity withdrawal, but given the pileup of excess reserves its questionable as to how much an expansionary fed has really aided the economy (beyond, of course, preventing the cascading collapse of bank liabilities that was otherwise inevitable following lehman brothers). but stimulus spending is another thing entirely. there's no question but that government deficits have enabled the economy to tread water since such spending began in earnest, offsetting the collapse of private consumption and increased savings. with pressures on household and business balance sheets as severe now as ever, such spending remains perhaps the only pillar on which the economy is supported. and yet, as eric sprott and others have noted, fiscal stimulus will gradually become a drag on GDP henceforth, as GDP is a first derivative statistic and stimulus was as frontloaded as was practicable. with the passing of one-off programs like cash-for-clunkers and the $8000 housing credit as well, the change in the level of stimulus spending is set to be down without the congressional passage of some further degree of deficit spending.

is there any political will for another, perhaps yet larger fiscal stimulus? i doubt it -- but i also suspect that a consensus in favor will be built out of the desperation of coming quarters, as it becomes apparent that (changes to net exports aside) increased private sector saving and balance sheet repair will be possible only through sustained, planned, large government deficits. failing that, we'll see a depressionary contraction in incomes and tax revenues which will force the necessary deficits at a much lower level of economic activity.

UPDATE: more commentary via mark thoma.

UPDATE: via pragmatic capitalist, david rosenberg picks up on the household survey.

[C]onsider that the Household Survey showed a massive 785,000 plunge in September which again was sequential deterioration because the decline the month before was 392,000. We’ll see if the legions of bulls will add this in their post-payroll write-ups today, but the Household survey actually leads the labour market at true turning points in the business cycle – and employment on this score has now slid by 1.2 million in the past two months.

These numbers far from validate the overwhelming consensus view that the recession has come to an end just because of one positive stimulus-crazed GDP print (didn’t we have that in 2008 too?); not to mention the fact that the last time we came off such a two-month falloff in Household employment was back in March when the stock market was testing fresh 12-year highs. Sustainability is the key and there can be no durable recovery without net job creation and organic wage growth. Both were lacking in today’s report – in fact, the combination of the workweek edging back down to retest the all-time low of 33.0 hours and the near-stagnation in hourly wages dragged the proxy for personal income down 0.2% (reads: in nominal terms) and the year-over-year trend is getting perilously close to deflation terrain at +0.7% from +0.8% in August and +1.2% in July.

UPDATE: and to reiterate rosenberg, spencer of angry bear.

[E]mployment growth in the household survey no longer appears to be bottoming. Usually the household survey leads the payroll survey at bottoms and the latest data does not look encouraging. Even the apparent bottoming in the decline in payroll employment stems more from the point that the employment drop was more severe a years ago, not that the current data is improving.

Finally, average hourly earnings were virtually unchanged as they rose from $18.66 to $18.67. With the drop in the hours worked this means that nominal weekly wages actually fell and the year over year gain fell to 0.7%. Consequently, the growth in nominal personal income is likely to remain negative. Something that has not happened since the depression.

UPDATE: albert edwards via zero hedge makes the point about GDP change all too well.

The lesson from the balance sheet recession in Japan is that the massive private sector headwind to growth has a long, long way to run.

If that is the case, we can expect, just like Japan, frequent relapses back into recession. The market now understands how an end of inventory de-stocking can boost GDP, i.e. it is the change in the change that matters. Similarly as Dylan Grice points out - link, it is the change in the fiscal deficit that is a net stimulus or drag to GDP. A massive 6pp stimulus last year is likely to turn into a 2pp drag on growth next year (see chart below). With continued private sector de-leveraging likely next year and beyond, how can one seriously not expect the global economy to relapse back into recession next year taking nominal GDP deep into an abyss?

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