The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10% by later this summer--around August or September--and will be closer to 10.5%, if not 11%, by year-end. I expect the unemployment rate is going to peak at around 11% at some point in 2010, well above historical standards for even severe recessions.
It's clear that even if the recession were to be over anytime soon--and it's not going to be over before the end of the year--job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over.
The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we're looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours and average hourly wages--and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone.
The details also suggest that other aspects of the labor markets are worsening. If you include discouraged workers and partially employed workers, the unemployment rate is already above 16%. If you consider also that temporary jobs are falling now quite sharply, labor market conditions are becoming worse and the average duration of unemployment now is at an all-time high. So people not only are losing jobs, but they're finding it harder to find new jobs. So every element of the labor market is worsening.
The unemployment rate rose only marginally from 9.4% to 9.5%, but that's because so many people are discouraged that they exited the labor force voluntarily and therefore are not counted in the official unemployment rate.
The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model--that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that's distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it's more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.
These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We've also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms.
This suggests that most of the tax rebates are being saved rather than consumed. The same thing happened last year: With a $100 billion tax rebate, only thirty cents on the dollar were spent while seventy cents were saved. Last year, people expected the tax rebate to stimulate consumption through September. Instead, there was an increase in April, May and June, with the increase fizzling out by July.
This year it's even worse. We have another $100 billion in tax rebates in the pipeline. But the numbers suggest that in April, real consumption fell. And in May it was practically flat. So this year households are even more worried than they were last year about jobs, income, credit cards and mortgages. Most likely only around 20 cents on the dollar--rather than 30 cents last year--of that increase in income is going to be spent. In any case, that increase in income is just temporary and is going to fizzle out by the summer. So you can expect a significant further reduction in consumption in the fall after the effects of the tax rebates fade.
The other important aspect of the labor market is that if the unemployment rate is going to peak around 11% next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11% in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans and commercial loans--much bigger numbers than what the stress tests projected.
In the stress tests, the average unemployment rate next year was assumed to be 10.3% in the most adverse scenario. We'll be already at 10.3% by the fall or the winter of this year, and certainly well above that and close to 11% at some point next year.
So these very weak conditions in the labor market suggest problems for the U.S. consumer, but also increasing problems for the banking system as these sharp increases in job losses lead to further delinquencies on loans and securities and lower than expected recovery rates.
The latest figures on mortgage delinquencies and foreclosures suggest a spike not only in subprime and near-prime delinquencies, but now also on prime mortgages. So the problems of the economy are significantly affecting the banking system. Even if for a couple of other quarters banks are going to use the new Financial Accounting Standards Board (FASB) rules and under-provisioning for loan losses to report better-than-expected results, by Q4, with unemployment rates above 10%, that short-term accounting fudge will have a significant impact on reported earnings. And this will show the underlying weakness in the economy. So banks may fudge it for a couple of other quarters, but eventually the effects of very sharp unemployment rates and still sharply falling home prices are going to drag down earnings and have a sharp effect on losses and capital needs of the banks and the entire financial system.
Essentially, the results today suggested that there are not as many green shoots. These green shoots, as I've argued, are mostly yellow weeds that may even turn into brown manure if a double-dip, W-shaped recession occurs in 2010-11. And it's not just the employment situation. Real consumption and retail sales remain weak. Industrial production remains weak. The housing market, in terms of price adjustment, remains weak, even if the quantities--demand and supply--may be closer to bottoming out. Indeed, the inventory of unsold new homes is so large that you could stop producing new homes for almost a year to get rid of that inventory. Moreover, about 50% of existing home sales are distressed sales (short sales and foreclosed homes).
The labor market conditions may have a significant effect on how long it takes for the housing market to bottom out. It's already estimated that by the end of this year, there will be about 8.4 million people with a mortgage who have lost jobs, and therefore have little income. Therefore, the number of people who will have difficulties servicing their mortgages is going to rise very sharply.
Home prices have already fallen from their peak by about 30%. Based on my analysis, they are going to fall by at least 40% from their peak, and more likely 45%, before they bottom out. They are still falling at an annualized rate of over 18%. That fall of at least 40%-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage--about 25 million of the 51 million that have mortgages--are going to be underwater with negative equity and will have a significant incentive to walk away from their homes.
The job market report is essentially the tip of the iceberg. It's a significant signal of the weaknesses in the economy. It affects consumer confidence. It affects labor income. It affects consumption. It affects the willingness of firms to start increasing production. It has significant consequences of the housing market. And it has significant consequences, of course, on the banking system.
Overall, it's an extremely weak report and suggests that weakness in the labor markets is going to continue, and that the recession is more likely to continue through the end of the year and the beginning of next year. It also suggests that recovery will be anemic, subpar, below trend. We are still estimating that U.S. growth next year is going to be 1% above the 2009 level, well below a potential growth rate of 3%. This is because there is little deleveraging of households, corporate firms and financial institutions while there is a massive re-leveraging of the public sector with sharply rising deficits and debts as many of the private losses have been socialized.
There are also signs that there may be forces leading to a double-dip recession sometime toward the second half of next year or toward 2011. If oil prices rise too much, too fast, too soon, that's going to have a negative effect on trade and real disposable income in oil-importing countries (U.S., Europe, Japan, China, etc.).
Also, concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation--after three years of deflationary pressures--that's going to push interest rates even higher.
For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.
But eventually, large budget deficits and their monetization are going to lead--toward the end of next year and in 2011--to an increase in expected inflation that may lead to a further increase in 10-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up by this wall of liquidity rather than fundamentals alone, this could be the double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.
So the outlook for the U.S. and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse-than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.
Re: Nouriel Roubini: Brown manure, not green shoots
I thought this was going to be about biofuels.
07-09-2009
LnGrrrR
Re: Nouriel Roubini: Brown manure, not green shoots
Hurray!
Thank goodness we gave all that money to banks to distribute to assholes who got us into this mess in the first place!
On a side note: Why do raised taxes automatically mean that the price of the product must be raised, or, as it's frequently put, "passed along to the consumer"? Why not just less profit? I know that sounds ridiculous, but surely, some company heads could realize, "Hey, I could live off 500 million a year nearly as well as I could on 400 million a year"?
07-09-2009
DarrinS
Re: Nouriel Roubini: Brown manure, not green shoots
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
(oops, wrong thread)
07-09-2009
SnakeBoy
Re: Nouriel Roubini: Brown manure, not green shoots
Eh Dr. Doom, just another america hating conservative hoping for the worst.
07-09-2009
Viva Las Espuelas
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by DarrinS
every member in congress and the white house should have this sent to their email. and not once did i hear "democrats this" or "republicans that".....................................
07-09-2009
boutons_deux
Re: Nouriel Roubini: Brown manure, not green shoots
yellow weeds can turn in manure? That analogy stinks. Nouriel needs to get down on the farm more often. :)
The economy is still badly broken. As many economists have been saying all along, the risk of the first fiscal stimulus package was always that it would be too small. That seems to be the case.
All this Fed and bank secrecy is shell game to hide how screwed up so many banks still are from their $Ts of toxic assets.
07-09-2009
SnakeBoy
Re: Nouriel Roubini: Brown manure, not green shoots
I actually enjoyed that video Darrin. Violence, outrage, plus facts and figures. Well done, the computer monitor gave him a little trouble though. Dem rednecks ain't supposed to understand all those statistics.
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by SnakeBoy
Eh Dr. Doom, just another america hating conservative hoping for the worst.
I don't know. the shape of the recession has changed since last fall. Roubini used to mention a 30% chance of an L-shaped recession. Now he's talking about a double-dip, w-shaped, two step crash. I don't think Roubini is locked into the results of any particular forecast, and it can't really be said that he's exaggerated the dangers so far IMO, or that he is inflexible in his views.
07-09-2009
SnakeBoy
Re: Nouriel Roubini: Brown manure, not green shoots
I was just being sarcastic. That's what the more liberal posters called me in a thread a while back when I said similar things. Roubini is pretty good. He is right on IMO, especially about home prices.
We're in a deep hole, washingtons answer is to keep digging.
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by boutons_deux
All this Fed and bank secrecy is shell game to hide how screwed up so many banks still are from their $Ts of toxic assets.
It can't be hidden forever, but it does look like the banks are sandbagging their mispriced legacy assets, with an assist from the USG. Thing is, the mistrust this arrangement inspires makes price transparency -- a very basic dimension of economic trust -- impossible.
07-09-2009
Wild Cobra
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by LnGrrrR
Hurray!
Thank goodness we gave all that money to banks to distribute to assholes who got us into this mess in the first place!
It's all about redistributing our money to their friends.
Quote:
Originally Posted by LnGrrrR
On a side note: Why do raised taxes automatically mean that the price of the product must be raised, or, as it's frequently put, "passed along to the consumer"? Why not just less profit? I know that sounds ridiculous, but surely, some company heads could realize, "Hey, I could live off 500 million a year nearly as well as I could on 400 million a year"?
Because in a competitive environment, one company will try to price his goods to a point of maximizing profits and market share. How far they can reduce profits to increase share changes when you change the variables. Over a short amount of time, all competitive forces will rise their prices as they can get away with it. The companies that are already operating on real shallow profits may now not be able to invest in new developments. Then they will fail, increasing the unemployment numbers as well.
Of course, that's an example that can happen, there are other things also. In the end though, money is taken out of the free market. This reduces the GNP. Throughout history, the Federal governments revenue averages about 18% of GNP, and in the long run, that revenues end up being reduced. The longer money freely circulates in the free market, the more revenue the government makes.
07-09-2009
Wild Cobra
Re: Nouriel Roubini: Brown manure, not green shoots
I say let the things fail that should fail. The quicker we let nature take it's course, the quicker we will recover from this mess.
07-09-2009
MannyIsGod
Re: Nouriel Roubini: Brown manure, not green shoots
You assume that if things fail they recover. Sure, what goes up must come down, but does what go down necessarily have to come up?
07-09-2009
SonOfAGun
Re: Nouriel Roubini: Brown manure, not green shoots
lolololol, it's almost too hard to concentrate on that guy when he has all kinds of objects tied to his fan spinning in front of him.
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
The only poster on ST who has been louder than me on normal route of default/receivership as the solution for insolvency, and deflation as a purging of malinvestment and investing attitudes -- is Yonivore.
It's weird. I kind of agree with WC's basic thought, even though it is not *natural* at all in my mind. There is more like, a custom we observed in the past, and might again. Bank receivership.
Declare default, purge bad debt and reorganize. The sooner we do, the sooner we'll all get through it; the more drawn out it is, the less effective it will be, and the more expensive. Even WC understands this.
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
The dark side of this idea is the n-word. Nationalization. (Receivership, if you like.)
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Remember the RTC!
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Que viva el FDIC!
07-09-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by SnakeBoy
Eh Dr. Doom, just another america hating conservative hoping for the worst.
Dr. Doom? Sure... but he's been pessimistic about the market even when it was up.
07-10-2009
LnGrrrR
Re: Nouriel Roubini: Brown manure, not green shoots
The whole theory behind the bailouts were to stabilize the economy before we lost all that accumulated wealth, right?
Assuming that's correct, it looks like we're going to lose that wealth anyways, and we should've just killed it off in the first place. I'm beginning to highly doubt our ability to fight our way through this recession without a great deal of wealth being destroyed.
07-10-2009
Yonivore
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by LnGrrrR
The whole theory behind the bailouts were to stabilize the economy before we lost all that accumulated wealth, right?
Assuming that's correct, it looks like we're going to lose that wealth anyways, and we should've just killed it off in the first place. I'm beginning to highly doubt our ability to fight our way through this recession without a great deal of wealth being destroyed.
That's what many of us said months ago.
07-10-2009
LnGrrrR
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Yonivore
That's what many of us said months ago.
I was skeptical about it as well. I stated that I could see why this plan was attempted, but also the moral hazard it involved.
07-10-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by MannyIsGod
You assume that if things fail they recover. Sure, what goes up must come down, but does what go down necessarily have to come up?
That. Good point, Manny.
Technical analysis isn't a good predictor in an upside down market. After prices adjust to the new deflationary mean, there's no obligatory schedule for the uptick.
We're in the middle of a crash.
07-10-2009
Viva Las Espuelas
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Winehole23
That. Good point, Manny.
Technical analysis isn't a good predictor in an upside down market. After prices adjust to the new deflationary mean, there's no obligatory schedule for the uptick.
We're in the middle of a crash.
ha. that's funny. personally i thought he was channeling The Sphinx
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Viva Las Espuelas
ha. that's funny. personally i thought he was channeling The Sphinx
All he was saying is that when prices crater, recovery is not always prompt.
07-11-2009
MannyIsGod
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Winehole23
All he was saying is that when prices crater, recovery is not always prompt.
No actually what I'm saying is there are crashes you don't recover from. People assume that if we had let everything unravel with no government intervention that we would have seen some kind of recovery. Why?
07-11-2009
Winehole23
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by MannyIsGod
No actually what I'm saying is there are crashes you don't recover from.
Don't recover from? Ever?
Quote:
Originally Posted by MannyIs God
]People assume that if we had let everything unravel with no government intervention that we would have seen some kind of recovery. Why?
Deflation leads to price discovery and purges bad debt and malinvestment more quickly, but the social pain that accompanies a deflation spiral seems to recommend the Keynesian medicine.
While you were correct in my view to point out that recovery from deflation is not automatic, I don't really see what prompts you to rule out a recovery in advance. IMO that is just as rigid and dogmatic as what WC said.
In the deflation spiral scenario bad debt is rapidly purged and malinvested capital seeks productivity. The purchasing power of money is restored, favoring savers and investors. Once the bottom is reached, the conditions are there for recovery, even if that recovery is not automatic.
The real reason deflation is not seriously considered is that it destroys the wealth and power of political donors. Amd we couldn't have that.
07-11-2009
SnakeBoy
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Winehole23
The real reason deflation is not seriously considered is that it destroys the wealth and power of political donors.
Inflation is a much better option for them. It only seriously affects those who can least afford it.
07-11-2009
Viva Las Espuelas
Re: Nouriel Roubini: Brown manure, not green shoots
oh i forgot. government solves all problems. i need to write that down.
07-11-2009
MannyIsGod
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Viva Las Espuelas
oh i forgot. government solves all problems. i need to write that down.
You could just send me another note to yourself, but I never said that.
Bitter Viva lives on!
07-11-2009
MannyIsGod
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by Winehole23
Don't recover from? Ever?
Deflation leads to price discovery and purges bad debt and malinvestment more quickly, but the social pain that accompanies a deflation spiral seems to recommend the Keynesian medicine.
While you were correct in my view to point out that recovery from deflation is not automatic, I don't really see what prompts you to rule out a recovery in advance. IMO that is just as rigid and dogmatic as what WC said.
In the deflation spiral scenario bad debt is rapidly purged and malinvested capital seeks productivity. The purchasing power of money is restored, favoring savers and investors. Once the bottom is reached, the conditions are there for recovery, even if that recovery is not automatic.
The real reason deflation is not seriously considered is that it destroys the wealth and power of political donors. Amd we couldn't have that.
But what happens in a world where the country who is on top lets things unravel "naturally" while other countries don't? What happens when that countries standard of living is artificially high? What happens when that country falls harder than the rest and takes a much harder fall due to lack of intervention and said standard of living?
I simply dispute the notion that allowing everything to fail without any intervention was anything other than another shitty option that hard far higher risk. Its justifiable to be cynical about government actions, of course. You can argue the case for intervention was made out of political fear but I can argue that the case against intervention now is made in the same way.
07-12-2009
Viva Las Espuelas
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by MannyIsGod
You could just send me another note to yourself, but I never said that.
Quote:
Originally Posted by MannyIsBlah
People assume that if we had let everything unravel with no government intervention that we would have seen some kind of recovery
hmmmmm. whatever you say..................
07-12-2009
MannyIsGod
Re: Nouriel Roubini: Brown manure, not green shoots
I'd be bitter too if my reading comprehension was so bad
07-13-2009
101A
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by LnGrrrR
Hurray!
Thank goodness we gave all that money to banks to distribute to assholes who got us into this mess in the first place!
On a side note: Why do raised taxes automatically mean that the price of the product must be raised, or, as it's frequently put, "passed along to the consumer"? Why not just less profit? I know that sounds ridiculous, but surely, some company heads could realize, "Hey, I could live off 500 million a year nearly as well as I could on 400 million a year"?
Because most company heads aren't pulling in that kind of dough - most are employees of their company, and receive a salary from that company - their compensation is not "profit". Profit is what is left AFTER all expenses (including paying the owner/manager) are made by the corporation. Most companies, btw, are small businesses. My business spends 5% of its revenue on ownership compensation. If we were to take a 10% reduction in salary, that would save the business 1/10 of 5%, or 1/2 of 1% of revenue. Insignificant. Even cutting our salaries completely only nets a 5% savings for the business.
For example, last year Texas implemented a new style Corporate Franchise tax - essentially without calling it one, Texas implemented a corporate income tax. With the new calculation, the tax increased (no shit) 3200%. Now, that corresponded to about 15% of ownership's annual salary. Our jobs didn't change - and we don't make a ridiculous income to begin with (in fact I have an employee that makes MORE than I do - and another that makes as much) - so why should I take a 15% pay cut? We raised our fees to our clients (who were also all in Texas, who ALSO had paid increased franchise taxes - so they passed our increase ALONG with their increased tax load along to THEIR clients - or if they are in an industry that has no room for increased fees; had to find other ways to cover the expense - lower salaries/fewer hours/layoffs, etc....
07-13-2009
LnGrrrR
Re: Nouriel Roubini: Brown manure, not green shoots
Quote:
Originally Posted by 101A
Because most company heads aren't pulling in that kind of dough - most are employees of their company, and receive a salary from that company - their compensation is not "profit". Profit is what is left AFTER all expenses (including paying the owner/manager) are made by the corporation. Most companies, btw, are small businesses. My business spends 5% of its revenue on ownership compensation. If we were to take a 10% reduction in salary, that would save the business 1/10 of 5%, or 1/2 of 1% of revenue. Insignificant. Even cutting our salaries completely only nets a 5% savings for the business.
For example, last year Texas implemented a new style Corporate Franchise tax - essentially without calling it one, Texas implemented a corporate income tax. With the new calculation, the tax increased (no shit) 3200%. Now, that corresponded to about 15% of ownership's annual salary. Our jobs didn't change - and we don't make a ridiculous income to begin with (in fact I have an employee that makes MORE than I do - and another that makes as much) - so why should I take a 15% pay cut? We raised our fees to our clients (who were also all in Texas, who ALSO had paid increased franchise taxes - so they passed our increase ALONG with their increased tax load along to THEIR clients - or if they are in an industry that has no room for increased fees; had to find other ways to cover the expense - lower salaries/fewer hours/layoffs, etc....
Thanks for the great points 101A. You are right that many times, small businesses just make enough to make it worthwhile. I appreciate your real-world experience and fair-mindedness on this board, as well as your ability to speak with logic and facts. :toast
