Tuesday, January 22, 2013

The Unemployment Situation Is A Gooey Mess

I have stated before that unique situations created by the Great Recession have rendered some traditional economic indicators unreliable.  And I believe that the indicator that has been impacted the most is the Unemployment Rate reported by the U.S. Government.

Try Getting Your Hands Around This
This post was initially supposed to be an in depth analysis of the current Unemployment Rate.  Soon after starting my research, I found myself looking at a large pile of goo (if you are unemployed you may substitute “poo” for “goo” or probably a much stronger term).  There have been several articles recently about why the Unemployment Rate is not an accurate measurement of this labor market.  People are constantly trying to adjust the rate based on a single factor.  However there are many factors impacting the job market and these factors are very difficult to measure.
Sure, you can still calculate the Unemployment Rate percentage, but it is now just a statistic.  It is not an accurate indicator of the job market.  It is useless to put it on a historical chart.  The recessions of the past occurred primarily in a “blue-collar” labor force.  The recession hit, workers were laid-off.  The recovery begins and people returned to work, often at their previous jobs.  But the Great Recession hit all workers and created some dynamics that are very different.
The Unemployment Rate is greatly impacted by the number of people actively looking for work (the labor participation rate).  Many people have stopped looking for work, but for many different reasons.  For example, Fred the Engineer, age 59, was downsized from his job after 30 years with his company.  In previous recessions layoffs were based on seniority, but in the Great Recession they were based on salary.  Fred looked for a job, but nobody needs an aging engineer in a slow economy, so after exhausting his severance and unemployment benefits, he decides to retire at age 62.  He is not counted as “unemployed”, but he is a “forced” retiree and would gladly be working if a job were available.
The labor participation rate is being impacted by these “forced retirees”, people going on “disability” due to the more lenient government standards, the discouraged workers who have temporarily stopped looking due to the tepid job market.  There are also “mismatched workers” whose jobs were eliminated by new technology and who lack the skills to function in the new economy.  If these people are younger, they may drop out of the labor force to be reeducated, if they are older, they often become the long-term unemployed.  And of course you have the “benefit riders” that ride their benefits out to the end, before seriously looking for work.
The great majority of unemployed people are actively searching for work and hate being without a job.  However, in 2011 a construction worker told me he wasn’t really seeking work because he was on the “Obama Plan” and was enjoying his extended unemployment benefits.  Miraculously, he found a new job just weeks after his benefits ran out.  So yes, it is true as many others have pointed out: If you pay people to be unemployed, you get more unemployed people.
Another factor that is difficult to measure is the thousands of college graduates of the last five years who cannot find jobs in their field of study.  They either have no job or are woefully “under-employed” which may mean a job in fast food.  The underemployed (which aren’t accurately measured) also include the “Fred the Engineers” who are not old or wealthy enough to retire and are working full time at the local telemarking firm.  It is taking some professionals longer than four years to return to work in their field.
Since the Unemployment Rate is currently of marginal value, we are left with the monthly jobs reports (from the government and ADP).  And this measures the number of jobs creted, not the quality of these jobs.  Replacing a manufacturing job with a call center job is not an even swap.
The latest government report said 155,000 jobs were created in December.  This rate of job growth is woefully inadequate to provide for the millions of people seeking work (or better work).  I am hearing about more layoffs and hiring freezes from my local contacts.  And the current plan for creating more jobs is “there is no plan”.  
We need more precise information to better gauge and track the employment/unemployment situation.  Employment surveys need to ask people the reason they are not seeking employment, if they would work if a job was available, and whether they are “underemployed” if they have a job.  There is an opportunity here for a university or survey firm to create a new index.  Hey, that would even create a few more jobs!


Monday, January 7, 2013

Sell Your Stocks in May?

A Milestone: 

This is the 100th posting of Model T Stock Trends blog.  I never would have imaged writing that when the blog debuted in September 2009.  The blog continues to gain readers with over 2,100 hits in over 30 countries in December. This includes a strong following in the United Kingdom, which I greatly appreciate. Ironically this 100th post is the most important one so far.  So enough celebrating, there is some serious work to do!
A History: 

The Model T (short for Model Transportation) is designed to forecast major peaks (and timing) in the S&P 500 index based on various data from the commercial transportation industry.  It is similar to Dow Theory (in theory) but more precise.  I began building the model in 2000.  I started sharing the forecasts with investment professionals in the transportation industry in 2007.   The Model T gained some “Wall-Street Cred” when it was surprisingly accurate in predicting the market peak in October 2007.  For a more complete description of the Model T, please see: What is theModel T and How Does it Work. 

I started writing the blog to test and refine the model publicly.  Anyone can say they “predicted it” after the fact.  And because I’m not an economist, I’m a marketing analyst; I do not have to worry about harming my professional reputation. 

There have not been any major peaks for the Model T to predict since I started writing this blog, until now.  The peak and correction in 2011 were caused by issues in the financial markets and the Model T does not directly consider financial data. 

The Forecast: 

The Model T forecasts the S & P 500 Index will peak at 1550 this year.  Last May the Model T predicted a peak of 1480 occurring in January 2014.  Of course the economy has been weaker than expected and the stock market stronger than expected, so the model has recalibrated. 

The Model T was 2% too high is predicting the 2011 peak and 2% too low in 2012, so a 2% range equals 1520 to 1580 this year.  How does this compare to the “experts” predictions for 2013?

S&P 2013 High
Barclays PLC
Credit Suisse
S&P Capital IQ
Model T
Barron’s Survey Ave.
Goldman Sachs
BMO Cap. Mgmt.

Okay, I like the neighborhood and it looks like the Model T is consistent with some of the much more sophisticated models. 

The Timing 

But the Model T is designed to also forecast the timing of the peaks, so the forecast for 2013 goes like this: 

The S & P 500 Index will peak at around 1550 in May or June.  Often the market is strong for the first half of the years, and then slides the last half.  This forecast would be very consistent with that trend. 

The index will then bottom out between 1320 and 1350 (please note that the Model T has not been as accurate at forecasting market bottoms) 

The stock market will then begin a slow recovery and will finish the year around 1425 (vs.1426 at the beginning)   

Therefore 2013 will basically be a simple rollercoaster ride.  It will go higher, dip lower, but you will exit just about the place where you started. 

Due to the important implications of this forecast, I will issue updates as needed and as addendums when the blog posts are on other economic subjects.  Please bookmark the blog or subscribe (free) using the box at the upper right of the page so you can follow along. 

It is now time to buckle up and enjoy the ride!