Wednesday, November 30, 2011

The Importance of Small Business Hiring

The WSJ details the potential good news on the job front:

Private-sector jobs in the U.S. rose by 206,000, according to a national employment report published by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Economists surveyed by Dow Jones Newswires expected ADP would report an increase of 130,000. The October data were revised to show a rise of 130,000 versus 110,000 reported earlier.
The chart below shows that the bounce has come almost entirely by small and medium sized businesses (i.e. those with payroll of less than 499 employees). I would note that hiring among companies with payroll of less than 50, saw the highest jump in hiring since November 2006. I personally wonder whether those that can't find jobs are creating their own or if there are opportunities out there that corporations aren't seeing as they have downsized and focused on reducing expenses.

Either way, this is part of a longer term trend in the job market. Corporate payroll now makes up less than 16% of overall payroll, according to ADP, down from almost 18.5% a decade ago. The issue of course is that small and medium size businesses haven't grown their share, but rather corporations have reduced their share through the outsourcing of jobs overseas.

Source: ADP

Tuesday, November 29, 2011

Are Home Prices Inexpensive Relative to History?

It depends on the time frame you are looking at. The below charts show real appreciation (after inflation), by city where available, going back 5, 10, and 15 years.

5 Years (Home Prices Appear VERY Cheap)

10 Years (Home Prices Appear Quite Cheap)

15 Years (Regions Impacted Most by the Recent Recession Appear Cheap... Others Quite Expensive)

Source: S&P

Consumer Confidence.... Things Are Looking Up as it Can't Get Much Worse Editition

BusinessWeek details:

Consumer confidence climbed in November by the most in more than eight years as Americans grew more upbeat about employment and income prospects.

The Conference Board’s index increased to 56 from a revised 40.9 reading in October, the biggest monthly gain since April 2003, figures from the New York-based private research group showed today. The gauge, at a four-month high, exceeded the most-optimistic forecast in a Bloomberg News survey of economists.
An improvement (a much stronger than anticipated one at that) is a good thing, but we are bouncing off of extreme lows.

Sunday, November 27, 2011

The European Impact on Financials and Risk Assets

I wrote back in early October that financials have been an important factor in risk asset performance for the better part of the past four years. The below chart shows that since June, financials are still an important sector to keep an eye on, but that the sector appears to be driven (remarkably well) by the situation in Europe.

Friday, November 25, 2011


What was down (risk assets), was up, then down again. What was up (Treasuries), was down, then up again. Below is an assortment of sector ETFs sorted by three month performance (Long Treasuries are up the most, EM Equities down the most).

Wednesday, November 23, 2011

European Industrial New Orders Crumble

Industrial production within Europe for the month of September was ugly (see here), but nothing compared to new orders made during the same month (which leads to future production). The Economic Times details:
Euro zone industrial new orders slumped in September, the EU said on Wednesday, the deepest fall since December 2008 and far worse than economists had forecast, in the latest sign that Europe may be heading for a recession.

Orders in the 17 countries sharing the euro tumbled 6.4 percent in the month compared to August, well below expectations of a 2.5 percent fall, with Germany and France registering sharp contractions, the EU's Statistics Office Eurostat said.

"The scale of the deterioration is surprising," said Clemente de Lucia, an economist at BNP Paribas. "We are entering some kind of contraction in the last quarter of this year that will continue in the first quarter of next year," he said.
Interesting to note that the core of Europe appears to be doing much worse than the periphery (a reader noted that the core is where "stuff" is made").

Source: Eurostat

Corporate Profits vs. Personal Income

Stagnant wages and outsourced production (reduced expenses for corporations - higher unemployment / underemployment for individuals), combined with cheap financing (lower interest payments for corporations - lower income on savings for individuals) have fed record corporate profits, while personal income slowly rebounds (and remains below pre-crisis levels).

Another way to view the same data is to compare real corporate profits (still the red line) with the difference between real GDP growth and real personal income. What we see is that when real GDP grows faster than real personal income, more of national income makes its way into corporate bottom lines.

What this misses is that for corporate income to continue to grow either:
  • National income needs to grow
  • Corporations need to grab an even larger slice of national income from individuals
Both of which will be much tougher on a going forward basis (the former a good thing, the latter not so much).

Source: BEA

Tuesday, November 22, 2011

GDP Growth Revised Down Due to (Lack of) Inventory Rebuild

Bloomberg details:

The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.
Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter.
As can be seen below, the decline was almost entirely due to the negative impact from inventories (i.e. we consumed what we had previously stored and businesses didn't restock), offset in part by an increase in net exports.

As I mentioned following the most recent trade release:
Trade (imports) is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories.

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.
Source: BEA

Monday, November 21, 2011

Morality and Religion

Lots of interesting topics in the PEW Research Center's The American-Western European Values Gap. Here's one...

Note: bringing up religion among any group of individuals where everyone is not like-minded is the equivalent of playing with fire, so I will not be making any comments.

Source: PEW

Friday, November 18, 2011

EconomPics of the Week

U.S. (Pointing Up)
Leading Indicators... Full Steam Ahead
Retail Sales Ratchet Higher
Capacity Utilization vs. Inflation

Employment (Ugly / Stagnant)
Unemployment: Due to Lack of Domestic Expansion, Not Layoffs
R.I.P. Teen Workforce

Europe (Getting Uglier)
European Recession?
France is No Germany

Investing Isn't Easy
Bill Miller Stepping Down as CIO

And your video of the week... AWOLNATION with Sail

Leading Indicators... Full Steam Ahead

Whether or not the U.S. can truly break away from European concerns is still an open question, but recent economic data points to a decreased likelihood of a double dip.

Bloomberg details:
The index of U.S. leading indicators climbed more than forecast in October, signaling the world’s largest economy will keep growing in early 2012.
The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Thursday, November 17, 2011

Unemployment: Due to Lack of Domestic Expansion, Not Layoffs

The BLS released their latest Business Employment Dynamics report that breaks out positive change in employment (by expansions and new business openings) and negative change in employment (by contractions and business closings). The data lags a few quarters so it is not very good for looking at short-term trends, but the long-term trend is quite interesting.

The first chart outlines each component, which I then normalized by population to get an apples to apples comparison over the years. What may be surprising is that the negatives (contractions and closings) have actually come down as a percent of population over the past few decades (in fact there has been a huge "contraction in contractions" recently). The bad news is that the level of expansions and openings are down (by an even larger amount) over that time frame.

The next chart compares expansions vs contractions (i.e. existing business employment dynamics) and openings vs closings (i.e. new business employment dynamics). From the below chart we can see that the largest contributor to (the lack of) job growth has been existing business dynamics (though a long-term decline of new businesses have likely played a role in the lack of expansion hiring).

Taken together, we can summarize the charts as follows:
  • Layoffs via contractions and closing may be less of an issue (than at least I thought)
  • There has been a decline in new business employment over the past few decades
  • The lack of expansionary hiring (and negative expansionary "shocks" during the last two recessions) seems to be the the likely reason we are facing high unemployment
The issue we face is that the lack of expansionary hiring among businesses is structural in nature. As I've detailed before, the shift in hiring by existing businesses from the U.S. to overseas has played a huge role (the example of China is shown here). The good news is that policy may be able to fix some of this, either through incentives for new business development and/or shifting employment back to the U.S. (the latter of which I expect targeted policy at some point, regardless of the kicking and screaming by pro free-trade economists and corporations).

Source: BLS

Bill Miller Stepping Down as CIO

Update: the Yahoo Finance data for LMVTX that I had used appears to be wrong (no clue why and quite frankly concerning). The chart has been replaced by one from Morningstar.

Following the Legg Mason announcement that Bill Miller will step down as CIO after a 30 year run with the firm, Abnormal Returns details the difficulty of providing consistent above average equity returns:
Bill Miller co-manager of Legg Mason Capital Management Value Equity announced he was stepping down as CIO of LMCM effective April 2012. Like Woods Miller had a fifteen year period where he was seemingly unstoppable. His fund topped the performance of the S&P 500 every year over this time period.
Bill Miller has managed the Legg Mason Capital Management Value Equity fund (LMVTX) since 1982 and results of that data (relative to the S&P 500) is shown below. The data now shows the average performance pre-1991, the remarkable performance from 1991-2006, and the underperformance since due to the misplaced bets on financials.

Back to Abnormal Returns on the potential danger of allocating to outperforming managers:
In investing a fall from grace is a common occurrence. In 2011 we have seen both John Paulson who conducted the “The Greatest Trade Ever” and Bruce Berkowitz, Morningstar’s manager of the decade both stumble badly.
Source: Morningstar

Wednesday, November 16, 2011

Capacity Utilization vs. Inflation

Marketwatch details:

The output of the nation’s factories, mines and utilities rose 0.7% in October, the Federal Reserve said Wednesday in another sign the manufacturing industry is still expanding.

The October gain was the biggest since July and was stronger than the 0.4% increase expected by analysts.

Source: BLS / Federal Reserve

Tuesday, November 15, 2011

France is No Germany

FT Alphaville details:

The 30-year German bond yield is close to a record low, around 2.48 per cent at pixel time. France might be able to borrow for 30 years at just 4.4 per cent (i.e. hardly a distressed credit)… but the days of convergence are long gone.

Retail Sales Ratchet Higher

The WSJ details:

U.S. retail sales rose in October as Americans spent their dollars at electronics stores and on the Internet, a sign that consumers are willing to open their wallets ahead of the all-important holiday shopping season.

Separately, U.S. wholesale prices in October dropped at the fastest monthly pace since February 2010, a move that gives the Federal Reserve leeway to boost the economy and jobs with its monetary stimulus.

Retail and food services sales climbed 0.5% last month from September to an adjusted $397.67 billion, the Commerce Department said Tuesday. That came on top of a strong 1.1% gain in September retail sales.

Electronics saw a spike due to huge demand for the latest iPhone, but strong results across the board in the face of declining energy prices during the month.

Source: Census

Monday, November 14, 2011

R.I.P. Teen Workforce

Last Thursday, my friend GYSC had a post at his blog Economic Disconnect titled Odd Jobs Over the Years. He outlined the jobs he has had over the years, many of them during his pre-teen / teenage years.

Reading the post allowed for some self reflection on jobs I had before turning 20 (lawn mowing, snow shoveling, race track concession stand, snack bar at a swim club, waiter at a retirement community, waiter at a diner, painter, medical assembly line, data entry at a local college... to name a few). While some of these jobs were miserable and some quite enjoyable, I truly believe that in aggregate they helped me figure out what it was that I wanted to be (and what I didn't), the "rules" of work, as well as the importance of hard work.

Which is why the below chart is absolutely terrifying to me. It shows that for the next generation of teens (and now early 20-somethings) only 1 in 4 teens are employed, down from the 40-50% range from 1950 through the end of the century. A large portion of the next generation will be left behind.

I had the above post all ready to go, when I came across a similar post over at Rortybomb, but that post points to something perhaps more concerning:
To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of mass youth unemployment and inequality. Given how high unemployment has been in these MENA – Middle-East and North African – countries, what else could we expect besides revolution?
He then shows a series of charts (this one is telling) that shows unemployment among the youth in MENA countries is awfully similar to levels seen among 16-24 year olds in the U.S.

Source: BLS

European Recession?

Expect there to be a larger focus on European economic data in the coming months. With that in mind, Bloomberg details European industrial production for September:
European industrial production declined the most in 2 1/2 years in September, led by capital and consumer goods, as the sovereign-debt crisis pushed the economy toward a recession.

A few things to note in the above...
  • Germany appears to have been severely impacted by broader European austerity
  • Italy was crushed
  • Eastern Europe (an area that was initially impacted more by the crisis) saw positive growth in industrial production
Warning: While my guess is the above is more of a trend than a blip, the data is backward looking (over a month ago) and just one data point, thus it will be important to see how this progresses.

Source: Eurostat

Friday, November 11, 2011

EconomPic Recap: We're Not Gonna Take It Edition

Similar to the sentiment hopefully shared by all of you, I am appalled by the horrific events that have taken place over the course of the last 15 years by one sick individual and a lot of potential individuals that didn't report it (and allowed it to continue) at Penn State. What most readers don't know is that I happen to be an alum of the university, thus in addition to the disgust I had a huge sense of disappointment in the (lack of) leadership from the organization. That disappointment led to initial feelings of shame as I called Penn State home for four years of my life.

Fortunately for me, a fellow alum (and good friend) Jerry Needel, didn't allow that shame to linger as he (along with his wife and a few friends) put the control back into our own hands. The thought was if the leadership of the university was going to hide when needed most and the (minority of) students were going to provide the media an easy way to showcase the worst reactions, then we all needed to show what the Penn State community was really about.

Hence, the Proud to Be a Penn Stater movement, which outlines that we are:
  • A grassroots network of proud Penn State alumni, students, parents, and fans, who are embarrassed and shocked by the recent events at Penn State
  • Here to stand up for the victims of abuse and help Penn Staters get their pride back
  • Tired of feeling helpless in this situation and are compelled to do our part by mobilizing the Penn State fan base - alumni, students and college sports fans - to ensure something like this never happens again - anywhere
  • Partnered with, one of the largest anti-sexual violence organizations in the country, to launch a Penn State-specific donation campaign
  • Looking to raise over $500,000 - one dollar for each of the 557,000 Penn State alumni
And how's that going? Parabolic. As of this writing, "we" have raised over $130,000 (about $10,000 an hour) showing that we will not be defined by the acts of a few individuals. Regardless of whether you have a connection with Penn State, I encourage everyone to think about donating to a great cause. If interested, go to Proud PSU for RAINN.

Make your own comparisons to the Occupy Wall Street movement and the potential of that energy if it is focused on making actual change.

Now, to links from the past few weeks:

Income / Spending


Breaking Down Trade

On the Seasonality of Equities

Breaking Down Trade

While the U.S. still imports MUCH more than we export ($43.1 billion more in September alone to be exact), the trend has shown positive signs. The below chart outlines the year-over-year change in the real (adjusted for inflation) level of imports and exports, broken out by petroleum and non-petroleum trade. Note that an increase in exports is shown as a positive contributor below, while an increase in imports is shown as a detractor.

What can be seen:
  • The pace of growth in non-petroleum imports is down significantly over the past year
  • The pace of growth in non-petroleum exports is relatively flat over that time
  • Petroleum imports are actually down in real terms (i.e. we are importing less)
  • The net change is actually positive (i.e. trade is a positive contributor to GDP)

The good news is that this net decline in trade balance has not been met with reduced consumption (i.e. it is not a reflection of reduced aggregate demand). Potential bad news is that petroleum trade is down (good for the long-term independence of the U.S., but a potential short-term signal of an issue - see Bonddad Blog for further detail) and that trade is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories (see here).

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.

Source: Census

Thursday, November 10, 2011

Job Opening and Labor Turnover Point to (Slow) Recovery

NPR reports:
U.S. employers advertised more jobs in September than at any other point in the past three years. The increase suggests hiring could pick up in the next few months. Competition for jobs is fierce. And many employers aren't rushing to fill some because they are worried about the strength of the economy. Still, most economists say the increase in openings is a reassuring sign. Nearly 3.4 million jobs were posted in September, the Labor Department said Tuesday. That's the most since August 2008, one month before the financial crisis intensified.
Digging into the data, we see that hiring, openings, and layoffs are moving in the right direction, but the levels of hiring and openings are still significantly below pre-crisis levels. Also note that while job openings are bouncing, we haven't seen the same improvement in actual hiring (perhaps this points to the difficulty in finding talent and/or we are due for a bounce in hiring).

Diving a bit deeper, the below chart shows the ratio of quits and hires to layoffs. In a nutshell, when people are confident enough to quit or are being hired at an increasing pace relative to layoffs, it means things are improving.

So we are bouncing off of lows (a good thing), but still need a lot of improvement.

Source: BLS

Tuesday, November 8, 2011

Deleveraging is Not a Myth

The New Yorker's The Develeraging Myth states (at a high level) that consumers are not deleveraging because they are still spending:

Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected.
EconomPic has explained how spending has remained strong in the face of lower income and higher savings here. More curious is why an article on consumer credit focuses on spending, rather than consumer credit.

Looking at the actual consumer credit data, we see that consumers (with the exception of student loans) have reduced consumer credit dramatically. Both revolving (mainly credit card loans) and non-revolving (excluding student loans) credit levels are back to 2004 levels. As a percent of GDP, the reduction has been even greater.

Note that in the chart above, federal non-revolving loans are assumed to be 100% student loans. Likely close, but I can't find specific details.

Friday, November 4, 2011

Breaking Down Employment

BusinessWeek details:

U.S. employment climbed in October at the slowest pace in four months, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.
The 80,000 increase in payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent even as the labor force expanded.
The above 80,000 figure was non-farm payroll. Taking a deeper dive into the household data (the figure used for the unemployment rate and one that historical has better captured any upturn in employment), we see a slightly improved, but sluggish employment recovery.

Month over Month
  • 277,000 more employed individuals (better than the headline payroll figure of 80,000)
  • 95,000 less unemployed (the difference being population growth)
  • Only 17,000 individuals leaving the labor force


The sluggishness of the recovery can be seen below in both the longer term picture of unemployed (i.e. unemployment rate) and underemployed (i.e. broader total unemployment), which remains extremely elevated.

How About the Levels

Another way to view the magnitude of the downturn and lack of recovery is below. While the number of individuals employed is roughly 3% higher than seen 10 years ago, the number after normalization for population growth is down a whopping 8% and has not seen any improvement since the downturn (i.e. since the downturn in employment bottomed, the rate of employment growth has matched population growth).

Source: BLS

Wednesday, November 2, 2011

How's the Job Recovery?

While MF Global and the situation in Europe significantly reduce the importance of any economic release, I thought I would highlight today's ADP employment figure anyhow.

The chart below outlines the change in goods producing, service providing, and total employment figures going back ten years. Note that over this time there have been no jobs added, while the population has grown roughly 10% (i.e. it looks bad, but it's been even worse).

The good news: service providing jobs (the type that make up the majority of jobs these days) are rebounding
The bad news: goods producing jobs (the type that actually produce stuff) are down almost 25% (yes 25%) since 2001

Source: ADP