Sunday, November 08, 2009

The Economy and Unemployment: A discussion of current times.

I thought a discussion was in order since the release of the 10.2% Unemployment rate data on Friday. It is difficult for most Americans to really see the impact of these numbers but I am going to share some observations with you on how America is slowly changing like a faucet dripping water or the boiling of a pot of water, it takes time to really notice the change.

Let me start with a quote from Haver Analytics which was published on Saturday.

"The official unemployment rate continues to pale in comparison to the rate which includes "marginally attached workers" and those who are working part-time for economic reasons. It rose to a record 17.5%. Another tally of joblessness indicates that with "discouraged workers" the unemployment rate rose last month to 10.7%. Not only are more individuals unemployed or have stopped looking for work, but the median duration of unemployment jumped last month to a record high of 18.7 weeks. The ranks of those unemployed for 27 weeks or more rose to 5.594 million (145.9% y/y), also an historic high."

Here are some historical facts. The unemployment rate for the years 1923-29 was 3.3 percent. In 1931 it jumped to 15.9, in 1933 it was 24.9 percent. It then steadily decreased until 1941 when it stood at 9.9%. In 1942, after U.S. entry into World War II, the rate dropped to 4.7%.
(Source: US LABOR STATISTICS.) Looking at the data announced on Friday, October's unemployment rate jumped a whopping 0.4%, one of the highest jumps in over 5 months according to the chart above. You see we may be starting a higher monthly rate increase than the previous 5 monthly increases.

Let me put a face on the above quote by using an example. Last time I walked around the famous Newbury Street area in Boston, a prized Chic upscale shopping area, I noticed how many small shops and sizable buildings had "For Lease" signs plastered over windows of empty store fronts. Some advertised whole Floors in the multistoried buildings For Lease. The streets were full of people and bustling from one place to another, but not many carried bags of purchased goods. I grew up in Boston and in all my years I have never seen so many empty store fronts in this neighborhood. You see it isn't just the lower class areas being affected by this economy, it is the upscale enterprises as well. This is a change in American's behavior of seismic proportions. With more Small businesses going out of business, it will mean more layoffs, more foreclosures, more vacant apartments and more suffering for far too many people. I am afraid this is going to be commonplace in the next year. I saw the same thing in an Francisco neighborhoods as well.

The importance of this isn't just in the Retail Sector, it is affecting all Small Businesses because credit has dreid up for most or their savings and cash reserves for a rainy day are spent trying to hang on until the economy turns around. But wait, you say the experts have said the economy has begun to turn around and the stock market is up, The Fed has proclaimed the recession is over and we will be coming out of this eventually. Call me a skeptic, but I do not see things getting better any time soon. The next big shoe to drop is Commercial Real Estate. And with all the small shops closing you can see the ripple about to happen to the buildings too. There will not be buyers of these properties until the prices drop more. And so it goes on and on.

Think about the airlines now for a moment. With much business being curtailed for small business and the number of layoffs in large companies still continuing, the airlines will be standing next in line for a bailout. I purchased 2 tickets to go from the East Coast to San Francisco one way and non stop. Can you guess what the price was for the combined tickets? It was less than $270 total! That's less than what it costs to pay for gas to drive across the country. This can't be good for the airlines. They are selling tickets across the country for about $135 a piece. This is amazing and can;t be profitable when you consider the costs of airplanes, the salaries and benefits for pilots, flight attendants, mechanics, ticket handlers, baggage handlers and all the corporate office functions needed to run a company like IT, accounting etc.

The American Consumer is going through a fundamental seismic change in sending habits that will be permanent for this generation. We are not at the end of this economic downturn. If it were a baseball game I would say we are in the 5th inning with still more baseball to come. Cash is KING and will be for some time to come as well. It has been the American Consumer who has spurred our economy the past 30 plus years. They have been responsible for 70% of our economic growth and for now and for years to come, they are going to be restrained. A good test of this hypothesis is to ask yourself about your planned spending for the holidays. My guess is that it will be about as restrained as it was for last year.

You can try and fight this tend or you can go with the flow and accept it for what it is. Some are calling this period, The Great Recession. Does it remind you of another similar phrase? It does me and for good reason! No wonder Consumer Confidence is way down. And the differences between Wall St. and Main St. need to be reconciled.

For another commentary on the unemployment data read this article from Seeking Alpha titled, "And Bernanke Didn't Think Unemployment Would Reach 10%."

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Anonymous Mac Carter said...


I won't disagree with your point of view, but I will again point out that there are two fundamentally different ways to interpret what is happening in our economy. Yours is based on the premise that unemployment is going to create a such a strong drag on the economy that a second DIP is inevitable. You've held this view since very early this year. As a result, someone following your advice would have missed out on the 39% upsurge in the market since mid-March.

A very different view is offered by a variety of analysts and economists. Here is a report by Jon D. Markman yesterday:

"Stock Market Investors Needn’t Fear a Double-Dip Economic Recession
Stock-Markets / Financial Markets 2009 Nov 09, 2009 - 05:56 AM.

Jon D. Markman writes: A new report contains some very good news for investors: Double-dip recessions are very rare.

That means that a drop back into recessionary conditions looks less and less likely even as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.

After reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. And that’s out of 33 recessions that have taken place since 1854.

Indeed, when these double-dip downturns do occur, they happen under circumstances quite different from today’s situation.

Two of the three double-dips happened in the years prior to World War II – in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.

U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession but dealt a death blow to inflation.

With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn’t in the cards, as the Fed is set to keep rates at very low levels until the end of 2010.

Tom McClellan of the McClellan Market Report has some more potentially good news. As you can see in the chart above, the level of employment tends to follow stocks on a 12-month lag. It’s not a perfect match: The red numbers show the actual lags of important turning points over the last forty years. But the correlation is strong enough to provide one more piece of evidence that the “turn” in employment is perhaps four months or so in the future.

So while the public will continue to be preoccupied by a still rising unemployment rate and political chatter over the perceived failure of the Obama administration’s stimulus package – the market will continue to anticipate the improvement just over the horizon."

Read the rest at:

Personally, I prefer to follow the advice of people like Markman.


9:48 AM  

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