Friday, August 06, 2004

Economy: Can't Keep Their Stories Straight,

It's bad when you see two stories with blatantly contradicting titles in the same edition of a publication like the NYT. The first story is about the "good job environment".

Job Picture Looks Good Now, but Recession Left Fears That Endure
By FLOYD NORRIS

Published: August 6, 2004

WHEN the July employment numbers are released today, the Bush administration will hail them as proof that the economy is doing well, and it will have a point. But despite rapid job growth this year, many Americans continue to believe there is a job crisis.

Why is that? Some blame an overly negative press, but the real answer may be found by delving into the statistics. New numbers from the Labor Department show that the job downturn of 2001 and 2002 was surprisingly damaging to experienced workers, particularly older ones.

During that downturn, the unemployment rate never rose above 6.3 percent, a figure that would have been considered excellent in previous downturns. The latest number, for June, is 5.6 percent. In the late 1990's, American employers had to hire almost anyone who wanted work. There were reports of employers hiring consultants to help them find ex-convicts to take jobs. It stood to reason that when the bust came, it would be a case of last-hired, first-fired. Reliable long-term workers would be safe.

As it happened, many newly hired workers did suffer. But they were not alone. The Labor Department periodically surveys what it calls "long-tenured displaced workers," people who lost jobs they had held for at least three years, and lost them not because they were fired for cause but for other reasons like a plant closing or the elimination of a position. In a dynamic economy, of course, some such workers are always losing their jobs. In the late 1990's, there were relatively few of them and most found new jobs quickly.

But by early 2004 - after anyone laid off in 2001 or 2002 had had more than a year to find work - many long-tenured workers who lost jobs in the downturn were still suffering. During 2001 and 2002, tenured workers were more likely to lose their jobs than in any downturn since 1981-82, when the unemployment rate hit 10.8 percent. And those who found new jobs took bigger pay cuts - an average of 18.7 percent - than in the past.

It used to be that even among experienced workers, the age group most likely to suffer in a downturn was workers who were 25 to 34 years old. It's never fun to lose a job, but the young are more likely to be resilient and less likely to have family responsibilities. Over all, young workers were still most likely to lose jobs in the last downturn. But among workers with at least three years on the job, the most vulnerable workers were those 55 to 64.

Of those experienced workers who lost their jobs in 2001-2, 36.1 percent stayed out of work so long that they exhausted their unemployment benefits. That number is much higher than in the 1990-91 downturn.

There are limits to what can be shown with such data, but the numbers are consistent with a surge in outsourcing of jobs. Such outsourcing may be affecting long-established plants and companies, which are more likely to have experienced, older workers who will have trouble finding jobs comparable to the ones they lost. And people who see friends losing such jobs may be more likely to conclude that the job market is bad, whatever the statistics say.

None of that changes the fact that the economy is expanding, although the pace of growth has slowed, and it should be noted that the layoff numbers are based on a January survey. That was just before hiring accelerated.

I shouldn't probably call this reporter a liar. The interior of the article does contain some good info. But in what sense can this job situation be called "good"? How can anyone run a lead like: "Despite rapid job growth this year, many Americans continue to believe there is a job crisis."

Job growth has not been rapid. Not by absolute terms and not by historical terms. As a matter of fact, the NYT ran a new headline today emphasizing just that:
Job Growth Grinds Nearly to Halt in July, Labor Dept. Reports
By DAVID LEONHARDT

Published: August 6, 2004

Job growth ground nearly to a halt last month, the Labor Department reported Friday, in a new sign that the economy has weakened in recent months.

Employers added just 32,000 jobs in July, a small fraction of what forecasters had expected and the smallest gain this year. The government also announced that job growth in May and June was less than initially estimated.

How can anyone call that rapid job growth? Yet that's the summary and the headline's conclusion, that the job situation is "good" and job growth is "rapid". Is that insane or what? Most analysts were predicting between 200,000 and 300,000 jobs gained, and instead we had both only 32,000 jobs reported and a downward revision of past month's numbers. (MSNBC)

Furthermore, we have reports that Hedge Funds are topping out.
Hedge Fund index falls 1 percent in three months to June 30
By Deborah Brewster

Updated: 10:49 a.m. ET Aug. 6, 2004

NEW YORK - The hedge fund juggernaut appears to have slowed sharply, with inflows from investors drying up along with returns.

Hedge funds, as measured by the Hedge Fund Research Composite index, showed their first quarterly loss in two years in the three months to June 30. The index, which measures 19 strategies worldwide, fell by 1 percent.

Net investment fell sharply to $7.5 billion, also the lowest level in two years. Inflows have averaged more than $20 billion a quarter for the past year.

HFR is one of several hedge fund databases competing for business in the rapidly growing sector. All have slightly different data and methodologies, but tell the same story: investors have been pouring money into hedge funds just as the asset class has begun showing historically low returns.

Returns have been skimpy for months, prompting questions about whether hedge funds are the all-weather performers investors hoped for. The HFR index rose just 2.7 percent for the six months to June, lagging the Standard and Poor's 500 index, which gained 3.44 percent during the same period.

This is a clear sign that the arbitrage market is oversaturated. Too much money and too much leverage chasing too few arbitrage opportunities. JHC, the market is probably completely overwound with derivatives and options contracts out there if this is the case, that the Hedge funds are crowding in so much that they've squeezed all the profit out of a very tightly wound market.

Along with the ever more tightly wound oil market which seems to have no indication of deflating, the entire situation has become pretty shaky. We may be looking at a systemic market top right now. The Federal Reserve has increasingly fewer and fewer options. It can raise interest rates, and stabilize the dollar thereby leading to a gradual decrease of the oil price but at the cost of stalling the already shaky job's growth. Or it can keep interest rates flat or even drop them, but only at the cost of pushing inflationary growth out of control.

Hence we would have a situation where overseas banks are tightening their interest rates while we were flat or loosening our monetary supply. The dollar's value would drop and then we'd have more inflation. More inflation with flat or stagnant growth is a situation called stagflation. As my readers may recall, the oldman has predicted this stagflation scenario many months ago.

It seems that we're just right about on top of that coming true. Nor is their relief around the corner, since as Billmon points out the leading economic indicators are all on a downward trend.
That's why for the past few months I've been keeping a close eye on the Economic Cycle Research Institute's leading index. It has a pretty good record of forecasting major turns in the economy, based on things like jobless claims, mortgage applications and stock prices. And since early May it's been falling at a pretty rapid clip:

This suggests that some of the conventional excuses offered for the second quarter slump in growth - like the notion that was all due to higher gas prices - are just wishful thinking. The economy does appear to be heading into a more prolonged slowdown - as the ECRI's director recently told the Financial Times:

"Our indicators clearly say that the June softness was not a pause that refreshes - they turned down in a very convincing way," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

"Yes, profits are going to slow and job growth will slow - they may even disappoint - but the economy is still going to grow. A recession is not in the cards at this point."


The problem - not least for Bush - is that the economy doesn't have to fall back into recession in order for him to lose his job. Given recent productivity trends, slower GDP growth - say in the 2-3% range - would imply much slower job creation, maybe even no job creation. Wage growth, which is already lagging inflation, would slow to a crawl.

Billmon is just agreeing with a conclusion that the oldman came to many months ago. The signs were pretty clear for anyone to read who actually paid attention to what was really going on, and didn't let themselves get carried away by the hype over a few select numbers. The economy is on the verge of laying down being either very sick or actually falling back. It is a situation where older workers are at an all time high of unemployment and disatisfaction. It is also a situation hedged in on every side by the continuing and past outlays of our government, and where an increasing interest rate environment would jack up debt service so much it would cripple discretionary spending.

I thought we would have more time before it all started coming home to roost, but apparently from the sick noises the economy is making the beginning of the time of turbulence and trials isn't very far away at all.

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