TrimTabs: +100,000 jobs in October

- by New Deal democrat

Last week I discussed Withholding Tax receipts at length, noting that the professional service which uses them to estimate job growth has had a much better record reporting gains and losses in the job market during the Great Recession than the BLS's initial nonfarm payroll figures. I said I'd update when they reported on October.

Well, they have. Earlier this morning TrimTabs' spokesperson, Madeline Schnapp, said their figures show that 100,000 private sector jobs were added to payrolls during the month of October.

Please note that this isn't a prediction of what the BLS will say on Friday. It is its own independent estimate, and if anything is a prediction of what the BLS's ultimate report will say in a year and a half when the final 2010 revisions are done.

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Will QEII Work?

As the Federal Reserve starts its two day meeting today, the general consensus is they will agree to another round of qualitative easing. However, there is a fair amount of misunderstanding about this policy. As I noted in this article on September 22, QEI was not a huge success. Simply put, the Fed purchased a large amount of bonds from financial institutions, increasing their reserves. However, that increase in reserves did not lead to a huge increase in money supply, and hence inflation. Mark Thoma makes the same observation:

As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:

More On Friedman/Japan, by Paul Krugman: ...So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted it as meaning that Friedman would favor quantitative easing now. I think that’s right. And just to be clear, I also favor QE — largely because it might help some, and seems to be just about the only policy lever still available in the face of political reality.

But I think it’s also important to note that Friedman was all wrong about Japan — and that you can argue that he was also wrong about the Great Depression, for the same reason.

For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more — push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.

But the Bank of Japan tried that — and found that pushing more reserves into the banks didn’t even lead to rapid growth in the money supply, let alone end the problem of deflation. Here’s a chart of growth rates of the monetary base and of M2, Friedman’s preferred monetary aggregate:

Bank of Japan

So, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn’t even translate into a surge in the money supply! This is why I’m so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth — in liquidity trap conditions, the Fed doesn’t even control money, so how can you blithely assume that it controls GDP?

And this also calls very much into question Friedman’s famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?

Again, that doesn’t mean that I oppose having the Fed engage in unconventional asset purchases. I’m just trying to be realistic about the likely results. We really, really need expansionary fiscal policy along with Fed policy; and we’re not going to get it.

I have no problem with the policy idea or implementation. The bottom line is the economy needs some type of jump start. However, I don't think this will be a huge success, largely because people are de-leveraging right now and business can get a great deal from financing their debt on the open market.

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ISM Manufacturing Increases

From the ISM

The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."

As I noted when I looked at the Beige Book's manufacturing numbers, the auto industry is making a comeback.

Let's take a look at some of the other parts of the report.

Of the 18 manufacturing industries, 14 are reporting growth in October, in the following order: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Machinery; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Paper Products; Printing & Related Support Activities; Transportation Equipment; Computer & Electronic Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.

14 of 18 industries are showing growth. That's a good number and indicates more strength than thought.

• "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (Transportation Equipment)
• "Business slowing down but still double digit over last year." (Chemical Products)
• "Currency continues to wreak havoc with commodity pricing." (Food, Beverage & Tobacco Products)
• "Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (Machinery)
• "Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products)

First, several comments note the lower dollar is having a negative impact on commodities -- which is pretty obvious but important to keep in mind. Again, there is a mention of the auto sector making a contribution. Finally, it appears there still isn't alot of confidence in the overall environment, as people are making orders at the last minute.

ISM's New Orders Index registered 58.9 percent in October, which is an increase of 7.8 percentage points when compared to the 51.1 percent reported in September. This is the 16th consecutive month of growth in the New Orders Index and the largest month-over-month improvement since January 2009. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

.....

ISM's Production Index registered 62.7 percent in October, which is an increase of 6.2 percentage points from the September reading of 56.5 percent. This is the largest month-over-month improvement since January 2010. An index above 51 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the 17th consecutive month the Production Index has registered above 50 percent.

Both of these numbers are good news for the economy. First, new orders increased sharply, indicating the lull over the summer may be over. In addition, production increased, which is also obviously a good sign.

Overall, this is a very encouraging report.

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The Stench of Putrefaction

Despite some signs that the economy is beginning to grow again, all in the garden is not yet rosy and there is a decidedly strong whiff of putrefaction in the air.

Aside from the survey by the Chartered Institute of Personnel and Development (CIPD) that predicts a total loss of 1.6M public and private sector jobs by 2015 (resulting from government cuts), there is also the danger of the spread of the disease of "zombie households".

A "zombie household" is where a household is trapped in its property because the mortgage exceeds the value, the home owner is barely able to pay the interest payments at today's record near zero rates and the bank has not written down the value of the loan to its "true market value".

In the event that rates rise, as they most certainly will do so in the future, the debtor defaults and the banks are unable to recover the full value of the debt; ie everyone suffers.

Fathom Consulting have recommended that the Bank of England uses a new tranche of quantitative easing to buy lenders' worst mortgages, and place them in a specially created "bad bank".

Until the banks are rid of the fear of a collapse of the value of their current loans, the lending market (needed to power the economy) and the economy will stagnate.

Like it or not, another bailout is required.

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Yesterdays Market

Equity prices opened higher (a), rallied (b) but couldn't hold momentum, so they fell to just below the open and consolidated (c). Prices fell through support (d), consolidated into the EMA (e) and moved lower still (f) before rebounding at the end of trading (g).


Notice how the arc of prices is stalling (a).



Treasury prices dropped hard after the open (a), but consolidated their losses for the remainder of the day.


Copper is still in an uptrend (A). However, we've seen prices dip to the trend line over the last week or so and the 10 day EMA is starting to move lower (B). Also note that momentum is decreasing (C). This could be a simple correction -- and, as long as prices remain above the EMA, that is the correct interpretation. However, a move below the trend line would signal a change worth noting.


Gold prices are still in an uptrend as well (A). Recently prices have spiked above the trend (B) fallen back and moved a bit higher (C). However, momentum has clearly decreased (D). As with copper, it's important to keep an eye on the price/trend line relationship.

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More Evidence of Increased Food Inflation

From Bloomberg:

Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.

Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says.

“China’s economy is growing and there’s no reason why the country will take any less food next week, next month, or next year,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. “We’ve been able to produce more food in the past 2,000 years, but can we do it fast enough to meet the demand from China and other emerging economies to stave off a crisis?”

Increasing wealth in Brazil, India and China is boosting demand for grains, dairy, meat and cooking oils. While Sime Darby Bhd., the world’s biggest listed palm-oil producer, is benefiting from rising prices, governments from Beijing to New Delhi are trying to curb food inflation by raising imports, limiting exports or selling stockpiles. Per-capita use of vegetable oils in China has more than doubled in a decade, said Bill Nelson, a senior economist at Doane Advisory Services Co., an agricultural research and advisory company in St. Louis.

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Economic Coiled Spring Number One: Consumer Spending

Last week, I noted there are several possible scenarios that could lead to further, or increased growth in the economy. Over the next week, I'm going to develop these ideas in more detail.

The first of these areas is consumer spending. As I noted in last week's GDP report, PCEs have been increasing in the 1.5% - 2.6% range for the last five quarters. While this indicates consumers have been buying more and more goods and services, this pace is below that of previous expansions. This leads to the question, what is holding consumers back from increasing their buying?

The primary reason is the jobs market, which is contributing to lower consumer sentiment:


Lower sentiment means depressed consumer activity. As such, the lower PCEs should not be considered abnormal.

In addition, we've seen a slow growth in real disposable personal income, largely as a result of high unemployment (high unemployment means lower bargaining power for employees, which lowers upward wage pressure in the market):



Lower DPI growth also leads to lower PCEs.

So, we have a depressed consumer who's real pay is not growing. As such, he's been spending but is very price sensitive and is always looking for deals.

However, we also have a consumer who is saving a lot more:


This means there is a pool of cash consumers could bring into the market from the sidelines in the right situation. In addition, the consumer has been paying down debt:


The decreasing financial obligations ratio indicates consumers will be able to borrow more if they have a reason. I believe that reason is an improved jobs markets -- one where the consumer sees the possibility of real and sustained job gains. That means we need to see at least 3-5 months of meaningful job growth -- say, in the 150,000-200,000 month range.

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A look ahead at Payrolls

- by New Deal democrat

While the election results from tomorrow will wind up having a great impact on the economy in the next two years (so please make sure you vote!), economic news this week will be dominated by the jobs report on Friday.

The advance GDP report allows me to update my YoY graph of real retail sales (blue), real GDP (green), and nonfarm payrolls (red):



Real GDP is up about 3.1%. Since you don't get job creation unless GDP is up over 2%, in the graph above 2% is subtracted from YoY GDP growth. GDP leads jobs, and real retail sales leads both. For the last 6 months, real retail sales have been up an average of about 4%. That should eventually result in 2% job growth, or 2,5000,000 jobs. Even if stimulus money has created jobs in Asia in response to retail spending here, nonetheless real GDP growth suggests eventual job growth of about 1,500,000 YoY. The questions are, how fast and how soon?

The two most important sectors to watch on Friday are the two for which stimulus lapsed: construction and state/local government. As I have pointed out a number of times, this "reset the clock" back one year in both areas. Normally, construction jobs would have been growing for almost a year, and state/local layoffs, which depend on tax returns and thus lag about a year, would be tailing off. Not so this time.

Here is a graph showing construction employment for the last 5 years:



This leveled off at the beginning of this year. On Friday a positive number would be as good as can be hoped for, and at very least a loss of less than 20,000, which keeps this series in its range for the year, would at least mean that the bottoming out process is intact.

While I can't show you a nice graph of government jobs, because of the Census distortion, it is clear that we are going to continue to lose jobs here. Last month we lost 47,000. Some of that was probably seasonal due to the school year vs. education layoffs. We probably won't see a positive number here, but a substantial decline in jobs lost compared with last month would be a start.

P.S.: Last week I highlighted TrimTabs' use of daily tax withholding receipts to estimate job gains or losses. So far, they have not made any public statements about October's jobs number.

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Yesterday's Markets

The Treasury market opened higher on Thursday (a), consolidated in a triangle pattern (b) and the sold off to the 50 minute EMA (c) before rallying and consolidating until the end of the day (d). Prices gapped higher on Friday (e) and then moved higher pretty gently (f) -- there was no strong rally/


Treasury prices moved through the 50 day EMA last week, but rallied back at the end of the week.


Stock prices were stuck in a clear sideways pattern for all of Friday (a).



It's looking more and more like the dollar is forming a temporary bottom in and around current levels. Notice the increased volume possibly indicating a selling climax. Also note the 10 day EMA has been moving sideways for a bit.


Oil is still hitting resistance in the 82-84 area (A). Also note that for the last week prices have been printing some very small bars (B), indicating there has really been movement one way or the other. Finally, the MACD indicates momentum is decreasing, which makes the current market look more and more like a consolidation below key levels. But fundamentally, there is still a ton of supply, which does not bode well for future increases.


After gapping higher (A), corn prices found support at the 10 day EMA (B) and have since moved higher (C), although they are printing pretty small bars indicating a lack of strength for either bulls or bears. The EMA picture (D) is still incredibly strong with all moving higher and the shorter above the longer. Momentum is fair (E), although the MACD is near to giving a decent sell signal.

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Growth Detected

Financial "experts" have been pleasantly surprised by the Purchasing Managers Index (PMI), which shows that the UK manufacturing sector experienced an accelerated pace of growth from a level of 53.52 in September to 54.93 in October.

To add to the positive news, the PMI survey also showed that the "sub-index" of jobs rose from 48.97 to 54.97 during the same period; ie employment in the manufacturing sector has increased.

However, before the champagne is cracked open, several caveats need to be made:

1 The UK is hauling itself out of a deep and prolonged recession, it is not unexpected that initial figures will show a strong bounce back (as they are coming from a low level).

2 The government's plans for reducing the public sector debt (ie government cuts) may well dampen down future growth prospect.

3 The better than expected figures may, perversely, negatively impact the economy by putting the "brakes on" plans by the Bank of England for further quantitative easing.

Time will tell as to whether these figures are merely a "dead cat bounce".

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