Mish's Global Economic Trend Analysis

Corporate Hiring No Longer Improving; American Less Optimistic
Personal Income Flat, Private Wages and Salaries Decline in June; Is Consumer Spending 70% of GDP? Checkmark Recovery Revisited
Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

Corporate Hiring No Longer Improving; American Less Optimistic

Posted: 03 Aug 2010 07:05 PM PDT

Corporate hiring has been in a weak but generally improving condition from January through June according to a Gallup Poll. That positive trend is now broken as noted in U.S. Job Creation Remains Level in July

Gallup's Job Creation Index finds job growth essentially unchanged for the third consecutive month, with a score of +7 in July -- about on par with +8 in June and +7 in May. Job market conditions are better now than they were during the financial crisis at this time a year ago (-2), but remain far below the already-recessionary levels found at this point in 2008 (+20).

Job Creation Index

click on any chart for sharper image

Hiring No Longer Improving

In July, 28% of U.S. workers reported that their companies were hiring, halting the consistent upward trend found from February to June. From a longer-term perspective, hiring reports are up substantially from the same period in 2009, but still below hiring levels at this time in 2008.

Percentage of Companies Hiring Workers

Firing Also Levels Off

Twenty-one percent of U.S. employees report that their companies are letting people go -- unchanged during the past four months. Workers' reports of people being let go in July are down five points from July 2009 but remain five points above July 2008 levels.

Percentage of Companies Firing Workers

What the Charts Don't Say

Unfortunately, Gallup does not say actual numbers of people hired or fired, only that a company is hiring or firing. A company firing one worker is as significant as another company hiring 200 workers.

Gallup also fails to incorporate new business creation as well as death of new businesses. Of course the BLS "birth-death" model is one of the things many like to complain about, including me.

I bring these points up because it is important to understand the potential flaws in the data being reviewed. It would have helped if Gallup broke out results by company size, as well as some order of magnitude as to hiring and firing.

We do have an alternate handle on firing however, simply by looking at Weekly Unemployment Claims.

Weekly Unemployment Claims

The above chart shows no improvement in weekly claims for going on 8 months, dating back to mid-December.

That chart is roughly in agreement with the relatively flat Gallup line on the percentage of companies firing workers.

Small Business Job Creation

A recent Gallup poll on small business conditions strongly suggests small businesses are not going to ramp up hiring plans anytime soon.

Record Pessimism in Future Expectations

The Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.

Small Business Index Future Expectations

For more charts, details and discussion please see Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

Americans Less Optimistic About the Economy in July

Wrapping up a trio of Gallup surveys, please consider Americans Less Optimistic About the Economy in July

Americans' economic optimism declined from 41% at the beginning of May to 30% in mid-July before ticking up to 33% over the past couple of weeks.

Percentage of Consumers Saying Economic Conditions are "Getting Better"

Weekly trends in economic optimism that Gallup has measured over the past three months are surprisingly similar to those of a year ago. That is, consumers are no more optimistic now about the future course of the economy than they were when the economy was just beginning to recover from its late 2008 and early 2009 plunge and as companies were aggressively shedding jobs.

A slightly longer view shows the difference in year-over-year consumer expectations: 38% of Americans in January 2010 said the economy was "getting better," compared with 17% in January 2009, for a difference of 21 percentage points. This year-over-year difference fell to zero in June 2010 and has been essentially maintained during three weeks of July.

Bottom Line

The Conference Board on Tuesday reported a decline in consumer confidence in July, something Gallup has been reporting for weeks. Reuters/University of Michigan also reported a sharp decline in consumer sentiment in its preliminary report for July. While these monthly measures are belatedly catching up with the Gallup weekly trend, they have not reflected the steady erosion in consumer expectations over the past 12 weeks, or the uptick of the past two weeks that most likely came in response to the surge on Wall Street.

The most troubling finding in the Gallup data, however, is that today's consumer expectations are no better than those of a year ago. Americans' views may reflect the prospect of a jobless recovery; the unemployment rate is expected to remain near double digits for the rest of the year. American consumers might also be taking to heart Federal Reserve Chairman Ben Bernanke's assertion that this is a period of "unusual uncertainty" as something that applies to them just as much as businesses and policymakers.

Unusual Uncertainty

I commented at length on Bernanke's assertion in Bernanke Says Economic Outlook is "Unusually Uncertain", Fed Prepared for "Actions as Needed"

In my opinion the Fed is enormously and erroneously overoptimistic about its assessment of the economy, especially unemployment. The odds we get back to 5% unemployment anytime soon are close to zero. And unless the participation rate collapses, we are far more likely to see higher highs, possibly above 12% before we start to see the rate drop.

Be Prepared for "Unusual Actions"

The Fed seems to be sensing it may be wrong in its optimistic assessment judging from Bernanke's "Unusually Uncertain" statements.

Risks are not just "skewed" to the downside, they are enormously skewed to the downside.

Bernanke Has Met His Match

Hyperinflationists will be coming out of the woodwork on the Fed's statements today. However, I calmly note that Bernanke has met his match: consumer attitudes.

We have reached a Consumption Inflection Point - No One Wants Credit and consumer spending plans have plunged. There is nothing Bernanke can do to "fix" that.

Besides, there is nothing to "fix" anyway. Boomers headed towards retirement better be saving more and spending less. The same applies to kids out of college without a job.

Finally, I note that Bernanke thinks consumer spending is on the rise. It's not. Bernanke needs to get out in the real world and see what's happening. He can start by reading Rockefeller Institute Confirms Rising Retail Sales a Mirage.

The Gallup Poll suggests consumers are not about to go on a spending spree. This is a matter of common sense.

Economic Models vs. Common Sense

Repeating a portion of Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever ....

Bernanke no doubt is adhering to his models as to what a recovery from a typical recession looks like. Those models no doubt suggest that the steep yield curve will spur economic growth.

The problem is this is not the typical recession. This is a credit bust recession and consumers are still deleveraging. Moreover, with savings deposits yielding close to 0% and with credit card rates over 20%, common sense dictates consumers pay down bills. Indeed, given all the economic uncertainties, consumers are reacting in a rational manner by not spending.

Bernanke needs to throw his silly formulas out the window and use some common sense. Unfortunately, he cannot do that because he does not have any common sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Personal Income Flat, Private Wages and Salaries Decline in June; Is Consumer Spending 70% of GDP? Checkmark Recovery Revisited

Posted: 03 Aug 2010 10:58 AM PDT

Inquiring minds are digging into the BEA report Personal Income and Outlays, June 2010

Personal Income

Personal income increased $3.0 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $5.1 billion, or less than 0.1 percent, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $2.9 billion, or less than 0.1 percent.

In May, personal income increased $40.5 billion, or 0.3 percent, DPI increased $36.9 billion, or 0.3 percent, and PCE increased $8.6 billion, or 0.1 percent, based on revised estimates.

Wages and salaries

Private wage and salary disbursements decreased $5.2 billion in June, in contrast to an increase of $19.2 billion in May.
Goods-producing industries' payrolls decreased $8.9 billion, in contrast to an increase of $10.4 billion
Manufacturing payrolls decreased $6.0 billion, in contrast to an increase of $7.8 billion.
Services-producing industries' payrolls increased $3.7 billion, compared with an
increase of $8.8 billion. Government wage and salary disbursements decreased $0.6 billion, in contrast to an increase of $7.0 billion.
The decline in the number of temporary workers for Census 2010 subtracted $3.4 billion at an annual rate from federal civilian payrolls in June; the hiring of additional temporary workers had added $5.7 billion at an annual rate in May.

Personal Outlays

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- decreased $7.0 billion in June, in contrast to an increase of $4.6 billion in May. PCE decreased $2.9 billion, in contrast to an increase of $8.6 billion.

Personal Saving

Personal saving -- DPI less personal outlays -- was $725.9 billion in June, compared with $713.9 billion in May. Personal saving as a percentage of disposable personal income was 6.4 percent in June, compared with 6.3 percent in May.

For the most part, June took away some or most of the gains in May, depending on category.

A few inquiring minds have asked me about Personal consumption expenditures (PCE). It is back to all time highs. Let's take a look.

PCE 1960 - Present

PCE 2000 - Present

Has Consumer Spending Recovered?

One person cited the above chart as proof a "checkmark" recovery was in progress.

Others have asked about the chart, presuming that it shows consumer spending and retail sales have recovered.

The chart sure makes it look that way but that is not what is happening at all.

Indeed, state sales tax collections show dramatic declines in retail sales as noted in Did Retail Sales Rise or Did Tax Rates Go Up?.

A few days later the Rockefeller Institute Confirmed Rising Retail Sales a Mirage.

So if retail sales have been declining from 2008 through present (they are flat to slightly turning up now), then how do we account for the PCE chart?

Understanding PCE and Consumer Spending

To understand the discrepancy, we have to know what goes into PCE in comparison vs. retail sales. Here is an interesting article written in August of 2009 that addresses the issue.

Is Consumer Spending is 70% of GDP?

Economist Michael Mandel's article Consumer Spending is *Not* 70% of GDP not only addresses the above question, he also explains the apparent discrepancy between retail sales and consumer spending. Let's take a look.

I opened up this morning's NYT and see the big headline "Retailers See Slowing Sales in a Key Season." And I just know that we are about to have another round of "consumer spending is 70% of gross domestic product, so blah blah blah blah of course we can't recover unless consumers start spending again." (Not in the NYT story, to their credit, but you can find similar quotes everywhere you look).

Blah blah indeed. As a textbook author, there are few things that frost me more than hearing "consumer spending is 70% of gross domestic product," because it perpetuates two very large and very misleading untruths.

First, the category of "personal consumption expenditures" includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom's knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it's misleading to say that "consumer spending is 70% of GDP", when what we really mean is that "consumer spending plus government health care spending is 70% of GDP."

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for "gross domestic product"—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.

Why Consumer Spending Is Important

I disagree with Mandel's last statement because sales tax revenues are extremely important to state budgets.

However, Mandel's excellent article helps explain many things even alleged "productivity" issues of the US vs. Europe.

Productivity Issues Yet Again

The issue of productivity came up twice recently, the first time in Blog Wars? No, Hopefully Not - Just Temporary Insanity at Naked Capitalism Regarding Unions and a second time in Readers Chime in on Union Productivity.

The discussion of productivity was in response to an absurd article that supposedly Debunked the Notion that Unions Hurt Productivity, primarily based on a chart showing productivity to be higher in Europe.

Is productivity higher in Europe or are US health care costs distorting the picture? Certainly health care cost differentials is one of the things that wrecked US manufacturing.

Checkmark Recovery Revisited

Note too, that the more we spend on health care, the larger GDP is. The care does not have to be any good. Indeed, it isn't. The US spends more on health-care than any other industrialized nation, with nothing to show for it other than a PCE chart that makes it appear as if we have a "Checkmark Recovery".

Please see Disputing the Alleged "Checkmark Recovery" for further discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

Posted: 02 Aug 2010 11:13 PM PDT

Bernanke thinks consumers are going to sustain the economy, but small businesses, the lifeblood of the economy sure disagree. Please consider Wells Fargo/Gallup Small Business Index Hits New Low in July

The Wells Fargo/Gallup Small Business Index -- which measures small-business owners' perceptions of six measures of their current operating environment and future expectations -- fell 17 points to -28 in July. This is its lowest level since the index's inception in August 2003.

Small Business Index

Record Pessimism in Future Expectations

Most of the decline in the overall index came in the Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit. The dimension fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.

Small-business owners' future expectations for their operating environment show significant declines in their revenue, cash-flow, capital-spending, and hiring expectations for the next 12 months. Forty-two percent expect it to be "somewhat" or "very difficult" to obtain credit -- no improvement from April and January. One in five (22%) small-business owners expect their companies' financial situations a year from now to be "somewhat" or "very bad."

Small-business owners are the embodiment of America's entrepreneurial and optimistic spirit. As a result, their increasing concerns about their companies' future operating environment do not bode well for the economy in the months ahead. Nor do small-business owners' intentions to reduce capital spending and hiring: 17% of owners plan to increase capital spending in the next 12 months -- down significantly from 23% in April -- and 13% expect jobs at their companies to increase, while 15% expect them to decrease over the year ahead.

Big-firm earnings and global growth may drive profits on Wall Street, but small business is the major source of U.S. job creation. And most small-business owners are unlikely to hire as long as they are becoming increasingly uncertain about the revenues and cash flows of their companies in the months ahead.

Click on the above link for more charts and survey questions.

No Chance of Recovery if Small Businesses do not Join In

If small business hiring does not pick up and it sure does not look like it will, then barring huge changes in the participation rate, unemployment will rise. If employment does not pick up, neither will housing nor consumer spending.

Yet somehow Bernanke thinks consumer spending is poised to lead the recovery. "Growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions" said Bernanke.

I think he is off his rocker. With 10-year treasuries under 3%, the treasury market seems to agree Bernanke is off his rocker as well. Please see Disingenuous Bernanke Calls for Bigger State "Rainy Day" Buffers, No Spending Cuts for further discussion.

Tonight small businesses have chimed in, and they do not see what Bernanke sees either.

Economic Models vs. Common Sense

Bernanke no doubt is adhering to his models as to what a recovery from a typical recession looks like. Those models no doubt suggest that the steep yield curve will spur economic growth.

The problem is this is not the typical recession. This is a credit bust recession and consumers are still deleveraging. Moreover, with savings deposits yielding close to 0% and with credit card rates over 20%, common sense dictates consumers pay down bills. Indeed, given all the economic uncertainties, consumers are reacting in a rational manner by not spending.

Bernanke needs to throw his silly formulas out the window and use some common sense. Unfortunately, he cannot do that because he does not have any common sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Refinance Calculator

Tuesday, August 3, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment