Thursday, March 04, 2004

Jobs report out tomorrow...

I. Introduction

Despite the oldman's arguments that the job's picture is indeed much less robust than the 5.6% unemployment rate betokens, the fact is that the economy is on a slow path of recovery. This recovery could be killed in its tanks, as the oldman has written because of the unstable nature of its asset inflation due to the excessive stimulation being applied by the Federal Reserve. This comment has been backed up by none other than the august Economist magazine, that writes of America's phoney recovery.

WHEN The Economist sounded the alarm about America's bubble economy in the late 1990s, what concerned us most was that share prices were no longer just a mirror that reflected the underlying economy, they had become its major driving force: soaring share prices encouraged a borrowing and spending binge. Although the stockmarket is lower today, in some respects the “economic bubble” has still not burst. The value of households' total wealth (in financial assets and homes) is well above its level before share prices started to slide in early 2000—and the American economy is more dependent than ever on asset appreciation.

This economic instability is exacerbated by the speculation on the bond markets by banks. The critical problem would occur if a destabilization of the dollar-hegemony were to rear its ugly head. Dollar-hegemony basically means that dollars are a world currency, that can and are used to buy anything and everything at anywhere and everywhere you can imagine. As the Economist notes in it's article 'Heading for a fall, by fiat?' that:

IS THE problem with the dollar only that it is falling? It has certainly been doing that. This month, it fell to $1.29 against the euro. This is its lowest-ever rate against the euro, and represents a decline of 19% since the beginning of 2003. In trade-weighted terms, the dollar has fallen less over the same period (15%), but mainly because Asian central banks have been intervening heavily to stem their currencies' rise against it. Of late, it has been wobbling around unconvincingly: America needs a weaker dollar to correct its current-account deficit. But given the dollar's role as a currency of last resort, some wonder if its decline heralds not just an economic adjustment by the United States, but a crisis of sorts in the value of paper money itself.

Well, with those cheery thoughts, let's turn to examining the jobs picture. According to MSNBC's chief economic correspondent, Martin Wolk, there is a range of estimates coming in for the expected employment report tomorrow:

On average, according to Thomson Financial, forecasters expect the unemployment rate to remain unchanged at 5.6 percent for February as the economy shows an increase of 128,000 payroll jobs. That would be the best result in more than three years but still below the level typically needed to keep up with growth in the labor force.

Remember however, last time the economists had a range of estimates that was generally too high. The economy only produced 112,000 jobs on the payroll survey. This was because they underestimated certain factors:

Employment industry executive John Challenger said he thinks strong and steady job growth of that magnitude is unlikely in the current business environment, where companies have improved their ability to hone productivity through automation and outsourcing.

“All that has led to a period of low job growth, and it doesn’t matter what you do — that’s the way it is,” Challenger said. “I think this is a period of time where real job creation at the scale we saw in the '90s is impossible.”

II. So what is the oldman's prediction?

From the oldman's feel of things, the economy has mixed signals. As Martin Wolk reports:

Zandi and other forecasters are skeptical the economy is on the verge of a sustained rebound in hiring, partly because employment signals have turned mixed in recent weeks.

This matches the oldman's expectations. He feels that the employment estimate of about 120,000 jobs on the payroll survey is about right, and might be slightly on the high side. The economy feels steadier than it did last month, but it doesn't certainly feel strong the way a 150,000 job addition might indicate. The word the oldman is looking for is steady but 'meandering'. So we have a slightly weaker than usual economy, despite the roughly 4% GDP growth. That's what it looks like.

Why is that?

Well as it turns out, Intel has lowered its revenue expectations toward the weak end of the target range (MSNBC). If we take Intel as a proxy (a crude one to be sure) for the high end US economy and capital investment streams in business expansion (that would also be correlated to hiring) then we could expect the general US economy and hiring to do the same.

Intel Corp. on Thursday narrowed the range of its quarterly revenue estimate toward the weaker end, saying its core microprocessor business was performing at the lower end of historical seasonal patterns.

Intel, the world's largest computer chip maker, said it expects first-quarter revenue to fall within a range of $8.0 billion to $8.2 billion versus its earlier range of $7.9 billion to $8.5 billion.

So if we expand this to the general economy, which feels about right, we have a payroll job's picture of 100,000-120,000 - which is positive but on the weak end of expectations.

In addition, no matter what anyone tries to sell you on inflation is NOT 1.1% or whatever ridiculous number they're touting. Part of it is structural, part of it is deviation from reality in the assumptions in the CPI statistics, and part of it is volatile food and energy prices like high gasoline prices as MSNBC reports:

The Bush administration is “extremely concerned” about soaring retail gasoline prices, which recently topped $1.70 per gallon nationwide and are likely to set a record high this month, according to energy officials

With higher real prices in the system, and greater production efficiencies - due no doubt partly to automation and partly from globalized capital flight to third world country labor pools - we can expect "Real GDP" to be at or near zero with the benefit of the doubt to economic contraction. The population is growing and even if the jobs estimate of 128,000 jobs were hit, it'd be subpar both on a historical basis and relative to the number of people being added to the economy. With that number of jobs, we'd still be in an employment contraction since more people would join the working force than find jobs.

This is consistent with MSNBC's report that:

“There is evidence that firing is abating. As yet there is no evidence that hiring has picked up to any significant degree,” said Mark Zandi, chief economist of, a forecasting firm...

A study released Thursday by two labor-oriented groups show that long-term unemployment of six months or more has risen 300 percent among workers with college degrees over the past three years, compared with 156 percent for workers with no college education. Long-term unemployment also has risen by more than 300 percent for information technology workers and among management, business and financial professionals.

Altogether 22 percent of the nation’s unemployed had been out of work for six months or more by the end of last year, up from 11.4 percent at the end of 2000, according to the Bureau of Labor Statistics. The study was done by the National Employment Law Project and the Employment Policy Institute.

III. Conclusion

Even though as MSNBC reports that: "Manufacturers consistently have been saying in recent surveys that they intend to increase hiring, raising hopes that the hard-hit sector will begin adding jobs again after 40 straight months of losses." the hopes of individuals like Daniel Drezner that manufacturing will rebound are probably premature.

Manufacturing will probably stop contracting, but net job gains of any strength are probably not warrented - just fluctuations around absolute or trend zero. The last reports about Service sector jobs indicate that their hiring was stalled as well. The oldman feels that any slight growth in services will be more than compensated by the seasonal downturn of holiday hiring moving into the spring phase of the retail employment cycle. So there is no real reason to get the hopes up. The economy, barring severe economic shock from a stock market correction and heaven forbid a bond-market firesale and dollar-hegemony destabilization that forces the yield curve and interest rates up as well as monetary blowback flashflodd inflation, barring all of that is on the path for steady but not sub-par growth. It may remain stagnant this way the entire summer, or whenever the "top" in the present stock market decides to take a breather over there on Wall Street. Then we'd get a capital investment crunch and that would make a shallow double-dip recession take hold, which seems to be the path that the American economy is on. But that won't happen without an exogenous shock or an asset price collapse, so until then - subpar growth half-speed ahead!!!


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