“I’m not really unemployed. The government stimulus package just hasn’t saved or created my job yet.”
The government’s response to unemployment was to pass a $787 billion stimulus package that was designed to save jobs --- mainly their own. It has probably “saved” more jobs than it has created so far by funneling money to important political constituencies in key political states. And what about the notion that the stimulus will eventually create jobs in 2010 and 2011? That offers little comfort to people who are going to run out of money in 2009.
Having “solved” the unemployment issue, the government has gone to work on reforming health care, tightening financial regulations and fighting global warming (cap-and-trade). But health insurance doesn’t help the hungry, financial regulations are meaningless to those draining their savings and people concerned about losing their homes are feeling the heat, but it has nothing to do with carbon emissions.
Some people even believe the debate about healthcare and cap-and-trade has actually hurt the creation of new jobs, since they impact business costs. Companies may delay hiring workers until they know what their new costs are.
It is easy to view the reporting of 15 million unemployed workers as just a statistic. But these numbers represent 15 million individuals, many with families which are going through pain, stress, and life challenges. Throw in a few million struggling underemployed people (characterized by the Jim Croce song “Working at the Car Wash Blues”) and you have a significant social malaise. This should be the government’s top priority, but for some reason it is not.
Personal Observations
My current situation gives me a unique perspective on what is happening in the job market. Consider me as an “embedded analyst” in the economic battle. The following are my “boots on the ground” observations:
1. The situation is pervasive. There are four couples in my wife’s immediate family. Three have been impacted by job losses and the fourth is dealing with a significant pay cut applied to a tight household budget.
2. The situation is unique. Many degreed, professionals with 20-30 years of continuous experience with one company have been downsized. This has led to the formation of and expansion of job seeker support groups throughout the country. A large group in the Cleveland, Ohio area is now drawing close to 300 unemployed people at their meetings and has recently maxed out the parking lot at the church where they meet.
3. It takes considerable more time to find a job. People that have jobs have a difficult time understanding just how tough things are. I have two friends, Kirk and Jerry (names changed to maintain some dignity). They are superior, high-quality, workers and outstanding individuals. Under any normal circumstances, they should never experience involuntary unemployment in their careers. They both have been job hunting for around a year. To see more examples go to: http://blogs.wsj.com/laidoff and http://www.usatoday.com/money/economy/employment/2009-10-07-long-term-joblessness_N.htm .
4. The job market is improving. A friend just told me he has more leads than any time in the last six months. The bottom of the job market was probably in July or August, but don’t look for strong growth real soon. This is again consistent with the “UL” recovery curve I introduced two weeks ago.
Cue Jim Croce:
“Tried to find me an executive position
But no matter how smooth I talk
They wouldn't listen to the fact that I was a genius
The man said we got all that we can use
Now I got them steadily depressin', low-down, mind-messin'
workin' at the carwash blues”
Disclaimer:
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Thursday, October 29, 2009
Thursday, October 22, 2009
The Unemployment Problem - Part 1
Last week’s post identified “continued high unemployment” as a hindrance to future economic recovery. Unemployment is in the news every day and economists are predicting that it will take longer for the jobless rate to fall after this recession. What makes this time different?
In previous recessions (we will ignore the one in 2001 for now) an economic downturn would send many factory workers out of the workforce as demand for products dropped. There would be some reduction in white-collar workers at firms with weak balance sheets or those that went bankrupt due to the bad economic conditions. When demand improved, the blue collar workers returned to their factory jobs and the white-collar workers found new jobs at companies in growing industries or new start ups. The pain for most people was short-term and 26-39 weeks of unemployment insurance usually provided an adequate safety net.
This time is very different. Blue-collar workers are getting hit as usual, but skilled, degreed, white-collar workers have been cut in record numbers. The 2001 recession was a preview of this as the workforce was much less manufacturing based than the 1990’s. But with the economy continuing to be much less manufacturing based and this recession being about four times as severe, the impact on the white collar work force is intensified.
Here are the stone cold numbers. There have been almost 8 million total jobs lost since December 2007. There are over 15 million people unemployed. There were only 2.4 million jobs openings in August (this is 1.8% of the total number of jobs, an all-time low). This means there are roughly six unemployed people for every job opening. It is taking on average six months for people to find work, but 5.4 million people (36% of total unemployed) have been unemployed more than six months.
The forecasts are for the unemployment rate to peak at 10-11% sometime between February and May of 2010. Please be aware the unemployment rate can give “false readings” at the bottom of the employment cycle. The unemployment rate is calculated from a monthly census bureau survey that determines if people have jobs or are looking for work. People who are unemployed, but have given up looking for work are not counted as unemployed. Therefore the job situation could be getting worse, but the unemployment rate could actually decrease in a given month.
The unemployment rate is calculated as follows:
(Total people unemployed and looking for work / (Total people employed + total people looking for work).
Conversely when job growth begins, the unemployment rate can actually increase as many people who had previously stopped looking start searching again (they are now counted again as unemployed). So you may soon hear the confusing news reports that 200,000 new jobs were created last month and unemployment went up .2%.
The forecasts for when unemployment will fall to traditional levels range from 2014 to 2017. Why will it take so long this time? Many of the blue-collar jobs have been lost for good. Manufacturing plants and warehouses continue to be closed and consolidated. There are also structural issues with white-collar job growth. Many of these jobs were created in the economic growth cycle that started in the 1990’s. The jobs were needed to create structures and systems that facilitated corporate growth. However now that the infrastructures are in place, it takes fewer workers to actually maintain them. Dr. Dave Altig (Macroblog) reports the percentage of employee separations labeled as permanent is at 65%, an all-time high.
This is why it will take longer for job growth to return during this recession. This recession is more severe and there are structural changes going on in the economy that will restrict the traditional rate of job growth in the economic recovery.
It is strange for the stock market to rally when unemployment is high and increasing. But companies have cut expenses so much that they are making profits on much fewer sales. Of course the biggest reduction in cost has been workers. So this is just a short-term solution to the problem. In the long run, companies need new customers, generating increased sales, to grow. However, many of these potential new customers don’t have jobs. You can’t win at this game forever.
In previous recessions (we will ignore the one in 2001 for now) an economic downturn would send many factory workers out of the workforce as demand for products dropped. There would be some reduction in white-collar workers at firms with weak balance sheets or those that went bankrupt due to the bad economic conditions. When demand improved, the blue collar workers returned to their factory jobs and the white-collar workers found new jobs at companies in growing industries or new start ups. The pain for most people was short-term and 26-39 weeks of unemployment insurance usually provided an adequate safety net.
This time is very different. Blue-collar workers are getting hit as usual, but skilled, degreed, white-collar workers have been cut in record numbers. The 2001 recession was a preview of this as the workforce was much less manufacturing based than the 1990’s. But with the economy continuing to be much less manufacturing based and this recession being about four times as severe, the impact on the white collar work force is intensified.
Here are the stone cold numbers. There have been almost 8 million total jobs lost since December 2007. There are over 15 million people unemployed. There were only 2.4 million jobs openings in August (this is 1.8% of the total number of jobs, an all-time low). This means there are roughly six unemployed people for every job opening. It is taking on average six months for people to find work, but 5.4 million people (36% of total unemployed) have been unemployed more than six months.
The forecasts are for the unemployment rate to peak at 10-11% sometime between February and May of 2010. Please be aware the unemployment rate can give “false readings” at the bottom of the employment cycle. The unemployment rate is calculated from a monthly census bureau survey that determines if people have jobs or are looking for work. People who are unemployed, but have given up looking for work are not counted as unemployed. Therefore the job situation could be getting worse, but the unemployment rate could actually decrease in a given month.
The unemployment rate is calculated as follows:
(Total people unemployed and looking for work / (Total people employed + total people looking for work).
Conversely when job growth begins, the unemployment rate can actually increase as many people who had previously stopped looking start searching again (they are now counted again as unemployed). So you may soon hear the confusing news reports that 200,000 new jobs were created last month and unemployment went up .2%.
The forecasts for when unemployment will fall to traditional levels range from 2014 to 2017. Why will it take so long this time? Many of the blue-collar jobs have been lost for good. Manufacturing plants and warehouses continue to be closed and consolidated. There are also structural issues with white-collar job growth. Many of these jobs were created in the economic growth cycle that started in the 1990’s. The jobs were needed to create structures and systems that facilitated corporate growth. However now that the infrastructures are in place, it takes fewer workers to actually maintain them. Dr. Dave Altig (Macroblog) reports the percentage of employee separations labeled as permanent is at 65%, an all-time high.
This is why it will take longer for job growth to return during this recession. This recession is more severe and there are structural changes going on in the economy that will restrict the traditional rate of job growth in the economic recovery.
It is strange for the stock market to rally when unemployment is high and increasing. But companies have cut expenses so much that they are making profits on much fewer sales. Of course the biggest reduction in cost has been workers. So this is just a short-term solution to the problem. In the long run, companies need new customers, generating increased sales, to grow. However, many of these potential new customers don’t have jobs. You can’t win at this game forever.
Thursday, October 15, 2009
What the Model “T” Says About the Economic Recovery
Tim, one of my fellow job seekers, told me last week he had found a new job. However, I could tell by his stoic expression and lack of enthusiasm in his voice that there was a catch. “They are going to make me an offer when things pick up”, he explained. Then he asked, “Don, when are things going to pick up?”
The truthful answer is I don’t know and if fact, no one knows. It is so difficult to forecast anything in the current economic situation. These conditions have not existed previously, or at least not since the 1930’s, and economic models and indicators may not be very accurate as a result.
For example, every month the Wall Street Journal surveys 50 of the top economists in the country and publishes their forecasts for the major economic indicators. There is a wide disparity in opinions about how the economy will perform in Q1, 2010 (the start of which is a mere 77 days away). The most optimistic forecast is for 5% growth, the most pessimistic is -1.0%. So you have a huge six percentage point difference in GDP predictions. Barring a major event, it is virtually certain that the real number will be between these two extremes. The average of all the respondents for Q1, 2010 is 2.6%. The average of the high and low forecasts is 2.0%. A forecast of 2% is as legitimate as the rest of them and so simple even a caveman (who knows some math) can do it.
The optimistic economists are predicting a “V”-shaped recovery, with the economy snapping back after the sharp downturn. This has happened in the past, but doubters say the continued weak financial system will prevent this from occurring this time. Many economists are forecasting a “U”-shaped recovery, with the economy treading water for a period, before gaining strength. The pessimistic economists forecast an “L” pattern, with the economy very weak for a long period of time. There is much talk about a “W” shaped recovery; with at least one quarter of negative GDP occurring after a recovery has begun. It is significant to note that not one economist in the WSJ survey is predicting a “W” type recovery.
The general consensus is the recovery will be very gradual. Because it is starting at a low level, the recovery will take more time to gain momentum.
The reasons behind the slower recovery forecast are:
▶ Continued high unemployment
▶ Increase in the savings rate
▶ Continued weak housing market and declining commercial real estate market
▶ Credit markets remain tight
Because economic recoveries are traditionally started by increases in consumer spending and a growing housing market, you can understand why the National Association of Business Economists is predicting a “slow and painful” recovery.
What does the Model “T” say about the economic recovery? Although the model is designed to predict movements in the stock market and not the economy, when certain forward looking components of the model are graphed, it forms he pattern shown below.
Definitely not a “V”. Somewhere between the “U” and the “L”, so maybe call it the “UL” recovery pattern. The Model “T” cannot predict timing since several of the components tend to lag economic recovery.
A gradual recovery has begun, hopefully strong enough to get Tim his job offer soon.
Disclaimer Statement:
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
The truthful answer is I don’t know and if fact, no one knows. It is so difficult to forecast anything in the current economic situation. These conditions have not existed previously, or at least not since the 1930’s, and economic models and indicators may not be very accurate as a result.
For example, every month the Wall Street Journal surveys 50 of the top economists in the country and publishes their forecasts for the major economic indicators. There is a wide disparity in opinions about how the economy will perform in Q1, 2010 (the start of which is a mere 77 days away). The most optimistic forecast is for 5% growth, the most pessimistic is -1.0%. So you have a huge six percentage point difference in GDP predictions. Barring a major event, it is virtually certain that the real number will be between these two extremes. The average of all the respondents for Q1, 2010 is 2.6%. The average of the high and low forecasts is 2.0%. A forecast of 2% is as legitimate as the rest of them and so simple even a caveman (who knows some math) can do it.
The optimistic economists are predicting a “V”-shaped recovery, with the economy snapping back after the sharp downturn. This has happened in the past, but doubters say the continued weak financial system will prevent this from occurring this time. Many economists are forecasting a “U”-shaped recovery, with the economy treading water for a period, before gaining strength. The pessimistic economists forecast an “L” pattern, with the economy very weak for a long period of time. There is much talk about a “W” shaped recovery; with at least one quarter of negative GDP occurring after a recovery has begun. It is significant to note that not one economist in the WSJ survey is predicting a “W” type recovery.
The general consensus is the recovery will be very gradual. Because it is starting at a low level, the recovery will take more time to gain momentum.
The reasons behind the slower recovery forecast are:
▶ Continued high unemployment
▶ Increase in the savings rate
▶ Continued weak housing market and declining commercial real estate market
▶ Credit markets remain tight
Because economic recoveries are traditionally started by increases in consumer spending and a growing housing market, you can understand why the National Association of Business Economists is predicting a “slow and painful” recovery.
What does the Model “T” say about the economic recovery? Although the model is designed to predict movements in the stock market and not the economy, when certain forward looking components of the model are graphed, it forms he pattern shown below.
Definitely not a “V”. Somewhere between the “U” and the “L”, so maybe call it the “UL” recovery pattern. The Model “T” cannot predict timing since several of the components tend to lag economic recovery.
A gradual recovery has begun, hopefully strong enough to get Tim his job offer soon.
Disclaimer Statement:
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Thursday, October 8, 2009
Is The Model "T" Forecast Too Low?
The response to the blog has been very positive. But several people have questioned whether the 580 number (S &P 500 index) is too low when the index is currently above 1050 (see the first post). I have to agree, I think it might be too low. But the great thing about the Model “T” is that the model doesn’t think, it doesn’t read the newspaper and it doesn’t surf the Internet. It just forecasts based on inputs, with no emotional bias.
If 580 is indeed too low, what factors could cause this? First, the model does not take into account government intervention. And we have seen extensive government intervention in the banking system, stimulus bill, General Motors takeover and programs to boost the auto and housing industry. It would be difficult to add these factors to the model because they have never been tried before and their long-term impact is uncertain.
Second, all models attempt to predict the future based on how things have operated in the past. The Model “T” is based on factors in the transportation market. The transportation market may not be as significant to the economy as it has in the past due to the decline in domestic manufacturing. Therefore a large drop in the transportation segment factors will not have the same negative impact to the model as previous cycles.
If the bottom of this cycle was the 676 low reached in March, then maybe the Model “T” did its job and was off by only 96 points (not too shabby). Of course this assumes that the stock market and economy hit bottom then and with the help of the successful government stimulus efforts began a new recovery cycle.
But the Model “T” does have a timing aspect to it and it indicates that the stock market fell too low, too fast, in Q1. This was due to emotional panic caused by the financial crisis. Once that panic stopped, optimism has replaced it and the market has risen in the words of Nouriel Roubini (Dr. Doom) “too much, too soon, too fast”. The stock market has been driven by more emotional factors than usual over the last 12 months and understandably so.
While many of analysts are predicting continued good things for the stock market, Robert Pracher (Elliot Wave International Inc.) recently said his model is forecasting the S & P 500 will fall “substantially” below the March bottom of 676. Economists predicting a market correction cite weak consumer spending, a fragile economy and continued problems in the banking and housing industries as reasons.
If government stimulus is important and the Model “T” is based on the transportation industry, a relevant question is: How much has the government’s actions benefitting the transportation industry? The answer is, not much. FTR Associates (a respected industry forecasting firm) reports that truck freight volumes continue to drop with no significant improvements until mid-2010. Railroad freight is still down more than 10% from last year.
It appears the government’s economic interventions were successful at stabilizing the economy and the stock market, but they may have extended out the down cycle. This opinion is supported by Chris Ciovacco (greenfaucet.com) who predicts the stock market may not fully correct until well into 2010 based on his model. He also infers that 676 may not be the bottom. At this point the 580 forecast of the Model “T” does seem low; however it is interesting that the model is providing a forecast similar to other, more sophisticated, statistical models.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
If 580 is indeed too low, what factors could cause this? First, the model does not take into account government intervention. And we have seen extensive government intervention in the banking system, stimulus bill, General Motors takeover and programs to boost the auto and housing industry. It would be difficult to add these factors to the model because they have never been tried before and their long-term impact is uncertain.
Second, all models attempt to predict the future based on how things have operated in the past. The Model “T” is based on factors in the transportation market. The transportation market may not be as significant to the economy as it has in the past due to the decline in domestic manufacturing. Therefore a large drop in the transportation segment factors will not have the same negative impact to the model as previous cycles.
If the bottom of this cycle was the 676 low reached in March, then maybe the Model “T” did its job and was off by only 96 points (not too shabby). Of course this assumes that the stock market and economy hit bottom then and with the help of the successful government stimulus efforts began a new recovery cycle.
But the Model “T” does have a timing aspect to it and it indicates that the stock market fell too low, too fast, in Q1. This was due to emotional panic caused by the financial crisis. Once that panic stopped, optimism has replaced it and the market has risen in the words of Nouriel Roubini (Dr. Doom) “too much, too soon, too fast”. The stock market has been driven by more emotional factors than usual over the last 12 months and understandably so.
While many of analysts are predicting continued good things for the stock market, Robert Pracher (Elliot Wave International Inc.) recently said his model is forecasting the S & P 500 will fall “substantially” below the March bottom of 676. Economists predicting a market correction cite weak consumer spending, a fragile economy and continued problems in the banking and housing industries as reasons.
If government stimulus is important and the Model “T” is based on the transportation industry, a relevant question is: How much has the government’s actions benefitting the transportation industry? The answer is, not much. FTR Associates (a respected industry forecasting firm) reports that truck freight volumes continue to drop with no significant improvements until mid-2010. Railroad freight is still down more than 10% from last year.
It appears the government’s economic interventions were successful at stabilizing the economy and the stock market, but they may have extended out the down cycle. This opinion is supported by Chris Ciovacco (greenfaucet.com) who predicts the stock market may not fully correct until well into 2010 based on his model. He also infers that 676 may not be the bottom. At this point the 580 forecast of the Model “T” does seem low; however it is interesting that the model is providing a forecast similar to other, more sophisticated, statistical models.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
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