Mish's Global Economic Trend Analysis

China Manufacturing PMI Hits 15-Month Low: Is This a Big Deal?
What Happens When Public Unions Control Everything for Decades? (Hint: Look at Chicago and the State of Illinois)
Gearing Up for More War in Ukraine?
Weekly Unemployment Claims Lowest in 41 Years
What's the Rise in People Without Fulltime Employment Since 2009? What "Should" It Be?

China Manufacturing PMI Hits 15-Month Low: Is This a Big Deal?

Posted: 23 Jul 2015 11:09 PM PDT

I have been bearish on China manufacturing and growth in general for years. It is no surprise to me that news is generally negative.

For example, on news today that China's PMI "unexpectedly" declined Yahoo!Finance reported China Factories Falter, Commodities Take the Hit.

Activity in China's factory sector seemingly contracted at the fastest pace in 15 months in July, a preliminary private survey showed on Friday in a blow undercutting recent signs of stabilization in the struggling economy.

The drop confounded forecasts for a rise to 49.7, from June's final reading of 49.4, and slugged the Australian dollar to a six-year low.

"Today, it's big, bad news with this number well below consensus," said analyst Helen Lau of Argonaut Securities in Hong Kong. "It shows there's no signs of recovery in small and mid-sized business in China, but I think it's also related to the summer weak season for demand."

China Rehash

In a complete rehash of the above, but under a different title Yahoo!Finance reported one hour later Asian Shares Tumble as Weak China PMI Revives Demand Concerns.

There's actually less information in the second article than the first.

PMI Report

Let's go straight to the Markit Report for the results of the latest Flash China General Manufacturing PMI™.

Key Points:

Flash China General Manufacturing PMI™ at 48.2 in July (49.4 in June). 15-month low.
Flash China General Manufacturing Output Index at 47.3 in July (49.7 in June). 16-month low.

PMI, Production, New Orders

The above chart shows Chinese manufacturing has been languishing for years. I do not believe, and have not believed Chinese GDP reports for at least as long.

Mainstream media appears to be catching on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What Happens When Public Unions Control Everything for Decades? (Hint: Look at Chicago and the State of Illinois)

Posted: 23 Jul 2015 05:14 PM PDT

I will be on CNBC again Friday, with Rick Santelli. This will be my third appearance, all discussing the sorry state of affairs in Chicago.

Spotlight will likely be on my post a week ago: Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes.

It is very difficult to say what really needs to be said in a 3-5 minute time horizon, typically 4 minutes, so expect an animated summary.

Pension Economics

Michael Bargo, writer for the American Thinker, provides more commentary for the mix.

Here is a lengthy snip from Bargo's recent, well-written article Public Pensions Prove Zero Sum Economics.

One of the major appeals in Democrat presidential campaigns is to explain to voters that they need Democrats in office to take money away from the rich. And since the rich own big corporations, they will pay workers as little as possible. This idea is what Barack Obama had in mind in 2008 when he said he will redistribute money to the working class and poor.

But so far this analysis has only been applied to the private sector; the "rich" who own stocks or run corporations. If public sector workers, particularly pensioners who are not working, are taking significant amounts of money from taxpayers, then this may also be seen as contributing to the shrinkage of middle class incomes.

Of course, Illinois is not the only state dominated by high Democrat taxes and public sector spending but it serves as a good case study of what Democrats do when they have total control of budgets for decades.

The results are startling. Today, Chicago's public sector unions are underfunded, according to the City itself, by $26.8 billion. This is just the City of Chicago. When the state debt is added, the total amount of debt owed by each Chicago household to the city and state rise, according to the Illinois Policy Institute, to $61,000. SEC Commissioner Gallagher stated the number is $88,000.

Pension payments to Chicago public union employees have become so high that today all the property taxes paid by the households of Chicago go exclusively to pensions. The operating expenses are paid by additional taxes on things from packs of cigarettes, to gasoline, sales tax, and cable TV bills. Given these facts about how Chicago's property taxes are used, it's not surprising that its new Republican governor wants to freeze property taxes to rescue the middle class's paychecks from Democrats.

Illinois Democrats have indentured the taxpayers of the state to turn over historic amounts of their incomes to government, shrinking Illinois' middle class.

All public debt creates taxation and the effects have an impact, sooner or later. The more time allowed for debts to go unpaid, the greater the amount of taxes eventually wasted on interest payments.

Chicago is now the slowest growing of all major cities. In 2014 Chicago only gained 82 people in population. Residents are fleeing Illinois, taking their purchasing power with them. Illinois is also the slowest state to recover from the recession.

Chicago households will have to pay, through taxes, muni bond and unfunded pension debt for decades to come. Far into their lifetimes, and the lifetimes of their children. Zero sum theory is true, but the lion's share of the proof shows that government spending, not private sector investing, takes money from average Americans.

Zero sum theory has been used by Democrats as nothing but a rhetorical tool used to exploit voters' emotions of envy and greed. But in the end, the greed is exercised by Democrats while taxpayers in Illinois find themselves deep into a hole of government-created debt.

The private Illinois Policy Institute has uncovered most of the facts used here, and often had to file FOIA requests. In some cases, they had to take state agencies to Federal court to find out how much they were earning, and how much debt they had accumulated. This is all planned, it is a strategy used by Democrats to con taxpayers into putting them into office; saying they want small class size and to help the elderly; while all along they were secretly passing huge public pension contracts and dumping the cost onto average middle class and poor taxpayers.

These facts show two things. One is that these payments are so high that all Chicago households are under a crushing debt burden that takes many thousands per year away from their household budgets. And secondly, these figures provide an opportunity to measure whether this transfer of wealth from households to public pensioners negatively impacts economic grow. Illinois has the most public debt, the lowest credit rating, and the slowest growth.

Who Really Runs Illinois?

Little or no legislation passes through the Illinois legislature without the approval of Michael Madigan.

Wikipedia notes Madigan has been a House member since 1971, and Speaker in all but two years since 1983.

Chicago Magazine named Madigan the fourth-most-powerful Chicagoan in 2012 and second in 2013 and 2014, calling him "the Velvet Hammer—a.k.a. the Real Governor of Illinois."

Rich Miller, editor of the Capitol Fax Illinois political newsletter, wrote "the pile of political corpses outside Madigan's Statehouse door of those who tried to beat him one way or another is a mile high and a mile wide."

Taxes Not the Answer

The results of Madigan's tenure as the long-serving "real governor" of Illinois are as follows:

Pension holes in the hundreds of billions of dollars
Budget deficits
Corruption
Business exodus
Private taxpayer exodus
High taxes
Shrinking middle class

Tax hikes are clearly not the answer. Illinois has a spending problem, not a revenue problem.

Unfortunately for Illinoisans, other than kowtowing to public union demands, raising taxes is about the only thing Madigan knows how to do.

The results of Madigan's tenure speak for themselves.
Isn't it time to try a new tack?

Here's Where to Start

Bankruptcy legislation to allow municipal bankruptcies
Pass Right-to-Work legislation
Scrap prevailing wage laws
Property tax freeze
Freeze defined benefit pension plans
Pension reform
Fair redistricting
Reform worker's compensation laws

That's a big list of things that needs to be done, and Madigan is on the other side of every one of them.

As I said at the top, Emanuel Fiddles While Chicago Burns.

And at the state level, Madigan Fiddles While Illinois Burns.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Gearing Up for More War in Ukraine?

Posted: 23 Jul 2015 03:31 PM PDT

In spite of near continuous ceasefire breakages on both sides in Ukraine, media has turned its attention elsewhere, especially to Greece and China.

Today I have some Ukraine anecdotes from reader Steven, who lives in Prague. He has family ties to Ukraine. Steven writes ....

Hi Mish,

Here are two forced conscription "recruiting" news items.

Recruiters waited inside the doors of a large bread factory one morning last week as 300 workers were coming in. They checked the worker's documents and gave virtually all the males summons to report to the military.
In Odessa, the head of the Vojnkomat announced that all men between the ages of 20 and 60 are required to visit the recruiting offices! No one will go, of course.

Ukrainians who come to the West to work - usually illegally - are frequently subjected to enormous difficulties.

My new son-in-law, who is 19 1/2, came for our wedding and is trying to stay and work. The military would grab him on his 20th birthday and he wouldn't be permitted to cross the border again if he were to return now!

We found him an unskilled construction job (illegal) in the town of Pisek, CZ. The pay is Kc 90 per hour (unusually good) and the Ukrainian "mafia" employer provided a flat of about 50 sq meters free of charge (also highly unusual) with a few air mattresses.

Nine Ukrainian men live in that small flat. My son-in-law broke his foot on the 9th day. He has no health insurance, of course. The employer has been promising to pay everybody for the first month's work, but keeps postponing his visit.

No one can go to the police because they are working illegally. The expectation is that they will get paid, but you never know.

Steven

Here is a snip translated from Ukrainian on new rounds of forced recruitment. I don't have a link to the original article.

In the Reni, Odessa region of Ukraine, recruiter Igor Skrypnyck ordered men to show up for military service. The order applies to men aged 20 to 60 years who have not yet received a summons. The military commissar also prohibits men from changing their place of residence without notifying the military. Odessa lawyer Oleg Obukhov says the order is legal and not contrary to the Law of Ukraine on mobilization preparation and mobilization.

More War?

This latest expansion in forced recruitment all the way up to age 60 suggests one of two things.

Ukraine is planning another offensive
Ukraine believes the separatists are planning another offensive

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Weekly Unemployment Claims Lowest in 41 Years

Posted: 23 Jul 2015 10:16 AM PDT

Weekly initial unemployment claims fell to the Lowest level Since 1973, perhaps distorted by auto retooling summer shutdowns, or lack thereof.

The number of Americans filing new applications for unemployment benefits last week dropped to its lowest level in more than 41-1/2 years, suggesting the labor market maintained a sturdy pace of job growth in July.

nitial claims for state unemployment benefits fell 26,000 to a seasonally adjusted 255,000 for the week ended July 18, the lowest level since November 1973, the Labor Department said.

However, last week's drop likely exaggerates the strength of the labor market as claims are volatile during summer when automakers usually shut assembly plants for annual retooling.

"We believe that retooling shutdowns were likely much smaller in 2015 than in previous years due to lower auto inventories and very strong vehicle sales," said Cheng Chen, an economist at TD Securities in New York.

As such, that would suggest an acceleration in motor vehicle assembly this month, which would support the struggling manufacturing sector and lift industrial production.

The upbeat growth picture was also supported by another report from the Chicago Fed, which showed its National Activity Index rising to +0.08 in June after five straight months of negative readings. The gain was led by improvements in production and employment related indicators.

That last line is interesting. A rise of less than a tenth of a percent after five straight months of negative readings hardly seems worth crowing about.

Econoday on Weekly Claims

Bloomberg Econoday had this to say on today's Weekly Claims Report.

Auto retooling, and related temporary layoffs, is always a major wildcard for jobless claims in July and are likely at play in a startling 26,000 fall in initial claims in the July 18 week to a 42-year low of 255,000. A look at the 4-week average, which helps smooth out volatility, is less startling, down 4,000 to a 278,500 level that is little changed from the month-ago comparison.

Continuing data, where data lag by a week, also fell, down 9,000 to a new multi-year low of 2.207 million with the 4-week average down 10,000 to a 2.254 million level that is also little changed from a month ago. The unemployment rate for insured workers is steady at a very low 1.6 percent.

This report will raise talk of an upside surprise for the monthly employment for July where the sample week is the same as that for the latest initial claims data. Nevertheless, jobless claims data are hard to read at this time of year and there's no guarantee of similar strength for the monthly report.

Jobless Claims

Economists are now upbeat about the July Jobs report due out on August 7. We will find out soon enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What's the Rise in People Without Fulltime Employment Since 2009? What "Should" It Be?

Posted: 23 Jul 2015 12:04 AM PDT

Reader Roger asked me "What is the total number of people without full time work, compared to Jan 2009?"

That's actually an easy number to calculate. The problem is the number is totally misleading. First let's answer the question straight up.

Those Not Working Full Time

The above very scary-looking chart shows the civilian noninstititional population minus those usually working full time.

Noninstitutional means those over the age of 16, not in prisons, mental institutions, etc.

The current noninstitutional population is 129.61 million. At the beginning of 2009 it was 118.92 million and at the start of the recession in November of 2007 it was 111.06 million.

Since the beginning of the recession, the rise in the number of people not working fulltime is 18.55 million.

Calculation Discussion

The first problem with the above chart is that it fails to account for demographics. There is a huge rise in population as well as huge rise in boomer retirement.

Moreover, over time, there has been a legitimate rise in the number of people going to college after high school graduation.

Brief Word on the Unemployment Rate

As pertains to the much ballyhooed declining unemployment rate, there is also a non-insignificant number of people in college who really would rather be working.

Add to that, millions of people who would rather be working, but are not counted as unemployed because they stopped looking for a job.

That is why many, myself included, believe the unemployment rate is a joke.

Proper Comparison

To properly address Roger's question, one needs to factor in

Normal retirement age (say 65)
Rise in population
Relative rise in non-fulltime employment vs. the rise in population

The problem in producing the proper calculation is insufficient data. The St. Louis Fed repository (named Fred), that I used to easily create the above chart, does not have the data.

Not even the BLS has the data we need to properly answer the question. Information on the critical age group 55 to 64 is scant or missing.

However, we can look at age group 16-54 or 25-54 for meaningful comparisons. I selected the latter because it filters out the rising trend of people going to college.

Using BLS data, I produced the following charts.

Not Working Full Time - Age Group 25-54

click on chart for sharper image

A big hat tip goes to Calculated Risk for an example of how to add recession bars. These are the first charts in which I incorporated the idea.

Note the rise over time in this series. Also not the spikes during recessions. The intra-year patterns are because I used non-seasonally adjusted data (that's all that is available).

In regards to non-seasonally-adjusted data: Every year, there are more people working in November and December than January and February. Some hate seasonal adjustments but in general I have no problems with the concept. The charts would be smoother with seasonally-adjusted data, but it's not available.

Regardless, the overall trends are easy to spot.

In November of 2007, at the start of the recession, there were 36.65 million people in age group 25-54 who were not working full time. There are now 40.12 Million, a rise of 3.47 million.

However, that too, is a misleading number. It does not properly factor in population shifts. The following chart addressed the above problem by looking at rise and declines on a percentage basis.

Percentage of People Aged 25-54 Not Working Full Time

click on chart for sharper image

Key Dates and Percentages

32.08% June 2015
28.57% November 2007
26.88% April 2000
28.49% June 1990

The all-time low in this series is 26.88% in April of 2000. That coincides with peak entry of women in the work force coupled with the top of the internet boom.

The pre-recession levels in 2007 and 1990 were around 28.5%. If one uses 28.5% as a measure of normalcy, then in percentage terms we are still about 3.58 percentage points too low in fulltime employment.

If one uses the record low 26.88% as a target, then we are about 5.2 percentage points lower in fulltime employment than we should be.

How Much Lower is Fulltime Employment Than It Should Be?

With the above percentages, we can do the math.

The 25-54 population is 125,085,000.
3.58% of 125 million is roughly 4.48 million.
5.20% of 125 million is roughly 6.50 million.

In the age 25-54 demographic, this recovery lags somewhere between 4.5 and 6.5 million fulltime jobs.

Note that is just age group 25-54.

I am confident age groups 55-62 and 55-64 lag in fulltime employment as well, but I do not have the data to prove it.

We can make similar comparisons about those not working at all (i.e. "real" unemployment) and I will tackle that a bit later.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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