Go to Google. Type in “green shoots.” In about a 10th of a second you will find 28,900,000 references. Scrolling through a few pages, you find a lot of references to the beginning of the end of the recession. Today we look at some data to see if we can indeed see the end. Most readers will be surprised to know that the number of people employed in the US went up (!) in April. Yet so did the unemployment rate. Is that green shoot just another dandelion weed in our economic garden?
Are the Green Shoots Really Dandelion Weeds?
When the employment numbers come out, my usual routine is to go the Bureau of Labor Statistics website and peruse the actual tables (www.bls.gov). I was rather surprised to see that the actual number of people employed in the US rose by 120,000. That has certainly not been the trend for a rather long time.
So, are things back on track? Is the recession just about over? Is that a green shoot? I don’t think so.
First, there are actually two surveys done by the BLS. One is the household survey, where they call up a fixed number of homes each month and ask about the employment situation in the household and then take that data and extrapolate it for the economy as a whole. So, while the number of employed rose, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. In
addition, there are 2.1 million who are “marginally attached” to the workforce. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
According to the survey, headline unemployment rose 0.4% to 8.9%, the highest level since 1983. But if you count those who are working part-time but want full-time work, as well as the “marginally attached,” the unemployment rate (called the U-6 rate) is an ugly 15.8%.
For whatever reason, the markets were happy that the headline number of the other BLS survey, the establishment survey of lost jobs, was “only” 539,000, down from a negatively revised 699,000
in March. At least, the thinking was, the numbers were not getting worse, though it is hard for me to be encouraged by half a million lost jobs. That may not be the worst of it, however, since 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 226,000 jobs as a result of new business creation. Really? This will mean that there will likely be a major revision downward at some future point. The number will likely be well over 600,000 in the final analysis.
Further, it is likely that we will see at least another 1.0-1.5 million lost jobs over the rest of the year,
taking unemployment very close to 10%. As an aside, the Treasury used an unemployment rate of 9.5% in their stress test of the banks, which suggests the test was not all that stressful. And, showing further weakness, there were 66,000 fewer temporary jobs. If there was really a nascent recovery, you would see a rise in temporary workers.
Average wages rose by a mere 3.2% on an annual basis, and by just 0.1% for the month, and the average work week was at an all-time record low of 33.2 hours. In nearly any inflation scenario, rising wages play an important part. This suggests that inflation is not in our near future.
Is That a Leaky Bucket?
Let’s play a thought game. Picture the economy as a leaky
bucket, maybe not as bad as the one below, but leaking nevertheless.
We have put holes in the bucket of our economy, and the “water,” or GDP, is
leaking out. We are going to settle at some new lower level of GDP and consumer
spending. At some point, we can fix the holes and begin the process of
increasing the level of the water. Typically, this happens relatively quickly.
However, a recent study showed that
recessions that come as a result of or in conjunction with a financial crisis
take a lot longer to recover from. The study looked at 122 recessions, of
which 15 were associated with financial crises.
The research, published as Chapter 3 in the April 2009 (WEO) of the International
Monetary Fund, finds that recessions that are either associated with financial
crises or that are highly synchronized worldwide have historically been longer
and deeper, and featured weak recoveries (see chart). The combination of these
two features — a rare phenomenon in the postwar period — resulted
in even costlier recessions, which lasted almost two years.
“In addition to the current global recessionary cycle, there were three other episodes of highly synchronized recessions: 1975, 1980, and 1992. These recessions were on average longer and
deeper. Distinct from other episodes, the recoveries from these recessions feature much weaker export growth, especially if the United States is also in recession.
“A perfect storm? Recessions that are associated with both financial crises and global downturns have been unusually severe and long lasting. Since 1960, there have been only six recessions out of the 122 in the sample that fit this description: Finland (1990), France (1992), Germany (1980), Greece (1992), Italy (1992), and Sweden (1990). On average, these recessions lasted some two years, were unusually severe, and featured weaker-than-average recoveries.” (IMF)
In addition, I would suggest that
the current recession is unlike any in the study, in that the habits of the
American consumer are changing right before our eyes. Instead of spending and
borrowing with little or no savings, people are now reducting their borrowing
and increasing their savings. Savings are now 4% of income and are likely to
rise to 7-8% or more in the next few years, as consumers see the need to repair
their balance sheets and retirement funds.
Frugality Is Back in Vogue
While Wal-Mart and other low-cost
retailer sales are up, Saks and other high-end retailers are down by as much as
30%. There is a new frugality in vogue. That new hole in the bucket? It is the
damaged psyche of the American consumer. Consumer spending is going to fall,
and when it does find that new level it is going to grow more slowly than in
And that, gentle reader, is why the
recovery is going to be a long slow Muddle Through. This recession will end, as
all recessions eventually do. We will see a positive number, maybe as early as
the 4th quarter. Employment should turn back up, albeit slowly,
Typically, in a recession jobs are
lost because sales slow and production is not needed. When sales recover, so do
But we are permanently destroying
jobs in this recession, all up and down the food chain and in numerous
industries. There will be fewer cars made, for a long time. Less demand for
financial service jobs. Housing construction will be a long time recovering,
well into 2011 or 2012.
And commercial real estate? General
Growth, the largest operator of malls, with 166, filed for bankruptcy
protection and in a very controversial move took all 166 malls into bankruptcy
as well. General Growth was the largest issuer of Commercial Mortgage-Backed Securities
(CMBS), which is how the great majority of commercial mortgages are created.
The lenders thought they had direct access to the cash flow of the malls. Some
of those malls are quite profitable. Cue the lawyers.
If this rather aggressive move is
allowed to stand up in court, it could do serious damage to the whole
commercial real estate industry, which is already in upheaval, and throw new
construction projects into serious difficulty. And less construction means
Where Will the Jobs Come From?
As the water in our bucket seeks a
new economic level, there are simply going to be fewer jobs to make “stuff,” as
we consume less. We can’t rely on many of the old jobs and industries to come
back in short order, as has been the case in the past. In order for new jobs to
be created, we are going to have to create new businesses and expand current
The vast majority of new job
creation in the US is by small businesses and entrepreneurs. Yet today small
business faces a tough environment. Banks have tighter lending policies.
Venture capital is tough to find. Competition in a shrinking economy is brutal.
And the Obama administration wants
to raise taxes on small businesses by raising taxes on the “rich.” 75% of those
rich he targets are small businesses who need capital in order to grow, but are
having trouble getting it from banks.
Sure, entrepreneurs will do what they have to do,
and higher marginal tax rates will typically not keep them from working as hard
as possible to make their businesses successful. If the tax rates of the large
majority of businessmen and women go back to the pre-Bush level, it will not
make us close our businesses, but it will cut down on the capital we have
available to expand. It will slow down economic growth and hinder job creation.
There is just no getting around that fact.
There is a reason that high-tax
states have higher unemployment rates and lower job growth. Taxes have
consequences for economic growth.
The sad reality is that it is going
to take a long time to get back to acceptable employment levels in the US. It
now takes an average of over 21 weeks to find a new job, a new record. Stories
from friends in the financial services business are particularly difficult, as
there are many very highly qualified people for every job that comes available.
And it is not going to get better any time soon.
How could we add 120,000 new jobs
while unemployment is going up? Because the number of people looking for jobs
is growing far faster, as more and more young people come into the market place
and couples now find they both must look for a job. And that is a trend that is
going to continue.
So many bullish analysts talk about
the second derivative of growth, by which they mean that we are slowing our
descent into recession. But it is not the second
derivative that is important. What is important is that the first derivative, actual growth,
return. Until that time, unemployment will continue to rise, which is going to
put pressure on incomes and consumer spending, and thus corporate profits.
Profits in the first quarter, with nearly
90% of companies reporting, are down over 50% from last year and are 18% less
than estimates. Yes, inventories are down, but so is final demand from
consumers and businesses. There is a reason that GM and Chrysler are shutting
down for two months this summer. That will percolate throughout the economy.
As the realization that the economy
is not due for a robust recovery sinks in, I think the chances for another
serious bear market test of the stock market lows will become increasingly
high. As David Rosenberg said in his final memo from Merrill Lynch (and good
luck to him in his new position, where I hope we all still get to read his very
solid analysis!), if a few weeks ago someone had said you could sell all your
stocks 40% higher, most of you would have hit that bid.
Now that price has in fact been
bid. Do you want to gamble on a renewed bull run in the face of a continually
shrinking economy? I suggest you give it some serious thought, or at least put
in some very real stop-loss protection.
Cleveland, New York, and Mother’s Day
thought I was staying home in May. Well, plans change. I am going to the
Cleveland Clinic on Monday for a full physical with Dr.
Mike Roizen (YOU: The Owner’s Manual, etc.) which I have postponed for too
long. This is an excellent program. I will give you a report next week.
Then on June 3rd I will
be in New York for a very special conference hosted by my friends at The Big Picture. The conference is called “Capitalism after Crisis — A look at Banking, Hedge
Funds, and Media during the Recession … and Beyond.” It is an all-day affair
on June 3, 2009 at the New York Athletic Club. There is a great line-up of
speakers — like Dylan Ratigan, Nassim Taleb, Doug Kass, Barry Ritholtz,
Chris Whalen, and Josh Rosner — and your humble analyst will do the
closing keynote address. The conference is $895, but my readers get a special
deal of $695 if they use this link:
We’ll jump into that and more, but first let me quickly mention the new subscription service that we began offering this year, called “Conversations with John Mauldin.” One of my “secrets” is that I have a very powerful rolodex (or, for the younger crowd, my contacts list). In this new project, each month I call up one or two of my special contacts in the investment and economic world and hold a conversation with them about the important topics of the day — where the US and global economies are going, how we should be investing, what opportunities and pitfalls are out there, etc. Some will be names you recognize, and others will be names you will want to know. You get to listen in, download to your computer, or read a transcript — whichever you prefer.
The reviews from subscribers have been more than excellent. Over the top, actually. You can read some of them at the website below.
I just recorded a Conversation with Donald Coxe and Gary Shilling. Both men are among my favorite analysts, and have been remarkably right with their calls for a long time. However, their
views on how commodity prices will develop over the next few years differ considerably. Mischievously, I thought it would be fun to get them together. Neither are shy or retiring men, and both can articulate their views very well, thank you. The conversation turned into a lively debate, one in which I did not get to say as much as I do in a normal Conversation. I think subscribers will find it one of the best we have done. I certainly came away with a lot to think about.
The Conversation will be posted next week. Subscribers will get an email notifying you when it is up. Also, George Friedman of Stratfor and I are going to start doing a regular quarterly Conversation that will be a separate product, but if you subscribe today you will get it as part of the regular service for a year.
Right now, we are offering a subscription for $109, $90 off the regular $199 price. To learn more
You can click here and subscribe, if you haven’t already. Insert code JM77 for this special offer. You can enter that code on the final screen of the subscription process.
Note: When George and I record that first piece sometime in the next few weeks, the price will rise to $129 a year, so you should act now. As we add more features like the one with George, current subscribers will simply get the new service, but the price for a new subscription will rise. Also, new subscribers will get access to the previous
Conversations, for now.
Much of the family will gather for Mother’s Day. My mother will be 92 in August. She is bionic, with two new knees and two new hips. Mother was in the WACs in World War II and went to Germany, where she met my father. She did not have an easy life, as Dad was an alcoholic
for most of his life, but she stayed with him. She has always had a positive attitude. We almost lost her this last year, when she went into the hospital for minor surgery and ended up getting a very deadly stomach virus. She was actually giving my brother her last requests one night, as they thought she might not make it through the night — but she did. I come from hardy stock.
And speaking of mothers, Tiffani is coming along and is now two months pregnant. I get the blow-by-blow narrative each day in the office. It does bring back memories. Enjoy your weekend; I
certainly intend to enjoy mine. The Mavericks are in the playoffs, although so far Denver is eating our lunch. And Star Trek is out. I am a huge Trekkie. It will be a fun next few days.
Your can’t wait to see Star Trek analyst,
Copyright 2009 John Mauldin. All Rights Reserved
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