The media-driven focus on the (inevitably revised) monthly non-farm payroll numbers has always seemed a bit misplaced to us. The employment picture matters enormously, of course, but more in terms of its medium- and long-term trends than its short-term vicissitudes.
Which makes the following charts all the more disconcerting. Note that the total/absolute NFP number has now fallen back to levels first reached nine years ago. In the second chart, you'll see that at no time in the last 50 years has the absolute NFP number fallen so far below its long-term trend.
Given persistent population growth, the economy has to create lots of new jobs just to keep the employment rate steady. The job losses of the last two years have made it all the more difficult to return to the long-term trendline.
A new normal? Unfortunately, for a while at least, it looks like the answer is yes.
(From this morning's Bloomberg report on consumer spending and incomes...)
It was the best of times:
Spending by U.S. consumers climbed in
August by the most since 2001, indicating the biggest part of
the economy is starting to rebound from its worst slump in
almost three decades.
It was the worst of times:
Automakers including General Motors Co. benefited from the
Obama administration's $3 billion "cash-for-clunkers"
incentives. A projected drop in auto purchases last month is a
reminder that such gains will be hard to sustain as the stimulus
programs expire and households grapple with rising joblessness
and stagnant incomes.
And the Bloomberg 'graph that falls between those two explains the disconnect (emphasis added in bold):
The 1.3 percent increase in purchases was larger than
forecast and followed a 0.3 percent gain in the prior month that
was bigger than previously estimated, Commerce Department
figures showed today in Washington. Incomes climbed 0.2 percent
for a second month and inflation decelerated.
So incomes rose 0.2%. And spending rose 1.3%, thanks largely to government spending. Is such a pattern sustainable when deleveraging is the financial imperative of the day? Here's John Hussman to explain:
My discomfort about strenuously overbought and moderately overvalued
conditions overlaps with skepticism about the U.S. economic "recovery,"
which appears to be nothing but an artifact of government spending,
while intrinsic economic activity remains weak. Stimulus induced "strength" is unlikely to propagate because, as I've noted before,
economic recoveries are invariably led by expansion in debt-financed
forms of spending such as gross domestic investment and durable goods.
These classes of spending tend to lead other forms of economic activity
by nearly a year, and it is difficult to expect this in an environment
of heavy continued deleveraging pressure. Rather than abating,
foreclosures and mortgage delinquencies are setting further records
(pressured even more by continued net job losses), and we have now hit
the point where Alt-A and Option-ARM resets are beginning (after a lull
in the reset schedule since March).
Indeed. Save more, spend less. That's what's rational at the household level. But short-term Uncle Sam isn't crazy about deleveraging, so periodically we get these induced departures from the larger (and ultimately more durable and powerful) trend. But that trend persists, like it or not.
In this space, we've written on the widespread misunderstanding of the investment value of residential real estate. Whether it's short, anomalous bursts of rapid appreciation that warp people's sense of long-term averages, or gross underestimates of the true costs of ownership, many people have made enormous financial mistakes on the premise that owning (to say nothing of "flipping") a home is a sure path to financial security.
So we were delighted to see last Penn professor Thomas Sugrue's piece on rentership and ownership in last Friday's Wall Street Journal. As usual when we make reading recommendations, the whole thing is worth your time. But this struck us as a key passage, in many ways the key to the entire story:
Yet the story of how the dream became a reality is not one of
independence, self-sufficiency, and entrepreneurial pluck. It's not the
story of the inexorable march of the free market. It's a different kind
of American story, of government, financial regulation, and taxation.
We are a nation of homeowners and home-speculators because of Uncle Sam.
It's a story riddled with irony--for at the same time that Uncle Sam
brought the dream of home ownership to reality--he kept his role mostly
hidden, except to the army [of] banking, real-estate and construction
lobbyists who rose to protect their industries' newfound gains. Tens of
millions of Americans owned their own homes because of government
programs, but they had no reason to doubt that their home ownership was
a result of their own virtue and hard work, their own grit and
determination--not because they were the beneficiaries of one of the
grandest government programs ever. The only housing programs
prominently associated with Washington's policy makers were
underfunded, unpopular public housing projects. Chicago's bleak,
soulless Robert Taylor Homes and their ilk--not New York's vast
Levittown or California's sprawling Lakewood--became the symbol of big
Then there's the other part of the residential real estate story we've returned to repeatedly. The fallout from the housing bubble is (and will continue to be) especially awful because unlike railroads or telecommunications or the Internet, excessive residential real estate--too many homes that are too big and too far-flung--does nothing to promote future economic productivity. Indeed, it impairs future productivity by diverting public and private resources from other, better uses. Your town could benefit from more solar power? From a more efficient grid or better schools? Sorry. They spent the money on that (largely empty) subdivision out in the fields.
Sugrue's closing lines apply to the U.S. as a country as much as to individuals and families:
If there's one lesson from the real-estate bust of the last few years,
it might be time to downsize the dream, to make it a little more
realistic. James Truslow Adams, the historian who coined the phrase
"the American dream," one that he defined as "a better, richer, and
happier life for all our citizens of every rank" also offered a
prescient commentary in the midst of the Great Depression. "That
dream," he wrote in 1933, "has always meant more than the accumulation
of material goods." Home should be a place to build a household and a
life, a respite from the heartless world, not a pot of gold.
Appearing on CNBC's Squawk Box this morning, Leon Cooperman fired off one of the better lines we've heard in quite a while, arguing that the shape of the recovery won't be a "v" or a "u" or a "w"...but that of a square root sign.
We don't have much to add here. Just thought that was a clever (and more than that, a plausible) way of describing what lies ahead.
John Hussman's most recent weekly comment contains the following insights, with which we happen to agree wholeheartedly:
In recent weeks, the dominant view of investors
and analysts has shifted clearly to the expectation that the U.S.
economy is in recovery. Appearing to seal the deal for some analysts
was the third consecutive increase in the index of leading economic
indicators. For that index, interest rate spreads and the S&P 500
Index have been the strongest contributors in recent months, as 10-year
yields have shot higher from near 2% at the beginning of the year to
about 4% before retreating a bit, and stocks have similarly rebounded
from deeply oversold levels. Unfortunately, as I've noted before, there
is little information content in mean reversion following extreme
moves, and that's what the LEI is picking up here–-to a much greater
extent than has typically been the case at the end of recessions. Put
another way, the case for an economic recovery is based largely on mean
reversion from the early 2009 extremes (not on improvements in jobless
claims or other measures to a level that is on par with prior
Taking the rally in stocks as an indicator of economic recovery (which
the LEI largely does), and then taking the presumption of an economic
recovery as a reason to buy stocks, all strikes me as circular
Yesterday we took the risky step of turning our dial to CNBC. To our immediate delight, we were greeted by the visage of one David Rosenberg, formerly the Chief North American Economist at Merrill Lynch, now the Big Thinker at Gluskin Sheff in his native Canada.
We'd transcribe some of Rosenberg's discussion with the Squawk Box crew, but as Barry Ritholtz noted yesterday, his entire appearance was such a command performance that there's simply no substitute for watching it from beginning to end. Our only quibble is that it ended so soon.
For a super smart, perfectly balanced, historically aware, clearly articulated take on where we've been, where we are, and where we're headed, behold these clips:
Back on April 1st, we produced an excerpt from Simon Johnson's excellent Atlantic essay "The Quiet Coup." We called our post "Line of the Year," with reference to Johnson's statement that "anything too big to fail is too big to exist."
Yesterday, at The Baseline Scenario, Johnson extended that line of thinking by wondering out loud whether the Fed--or any other "macroprudential regulator"--can "sniff" bubbles before they threaten the financial system.
"Asset bubbles may not be that hard to identify," [New York Fed President William C.] Dudley argues.
Fine, but it would help to know exactly the Fed would do this ex ante-–not using the rear view mirror.
Of course, if the Fed can't get better at spotting bubbles, the
implication is that no one can. Which means that "macroprudential
regulator" is just a slogan-–a nice piece of what Lenin liked to call
And if macroprudentially regulating is an illusion, what does that
imply? There will be bubbles and there will be busts. Next time,
however, will there be financial institutions (banks, insurance
companies, asset managers, you name it) who are-–or are perceived to
be–-too big to fail"?
You cannot stop the tide
and you cannot prevent financial crises. But you can limit the cost of
those crises if your biggest players are small enough to fail.
We think Johnson's exactly right, not just in sensible-capitalist principle, but in practical terms as well. Government has a fighting chance to get antitrust-style stuff right. But identifying bubbles? And doing something about them at the right moments...neither too soon nor too late? We just don't see it.
Is the United States economy headed for a Japan-style lost decade? Evoking our February, 2008, item "Faster Markets," Slate's Daniel Gross suggests that the deep, ongoing recession in the United States may unfold much more quickly than Japan's analogous bubble-bust of the 1990s. This is good stuff:
Why the accelerated pace? It has to do in part with changing global
circumstances. Nishimura argues that both crises started because
problems in the property and credit markets contributed to an adverse
feedback loop between financial distress and economic activity. But
information, events, and distress move much more quickly around the
globe today than they did in the 1990s. With just-in-time production
systems, and with 21st-century communications technology,
bad news travels much more quickly--and farther. In the 1990s, much
important exchange of international market information was still done
by fax. In addition, traders can now act more quickly on real-time bad
news. In the early 1990s, analysts had to wait several months for data.
And since the level of financial integration was much less intense in
the early 1990s, Japan didn't export its financial problems.
upshot: In the current crisis, "the velocity of market dysfunction has
been much faster and its contagion much more widespread than in Japan's
case." And so the damage has been more devastating.
the duration of the crisis also has something to do with the mentality
and action of the first responders. A lesson from both crises, he
argues, is that once an adverse feedback loop is established, it's
difficult and very expensive to break it and restore confidence. It
took a very long time for good news to reach critical mass in Japan in
the 1990s, in part due to the slowness of the policy response. But this
time, it's different. The Federal Reserve--and, indeed, global central
banks and governments--have responded with alacrity. Japan's central
banks didn't adopt a zero-percent interest-rate policy until more than
eight years after the crisis started; the Fed did so within 20 months.
It took Japan nearly eight years to inject funds into troubled banks,
compared again with 20 months for the United States to do so. And,
Nishimura argues, efforts like the stress tests and TARP exits are