3 Sep 2010 by Jim Fickett.

Looking at current trends in jobs (non-farm payrolls), as well as in two key leading indicators (initial claims and temporary jobs) suggests (1) continued improvement in the rate of jobs growth towards the neutral growth level of 1%/year, but (2) decelerating improvements and perhaps several years' time required to regain the previous peak employment level. This scenario is consistent with the history of previous financial crises and with the current forecast of Jan Hatzius, who has called many recent developments correctly.

This is a long entry, but it is mostly pictures. The main point is to look at several sources of evidence about where the recovery in jobs, i.e. non-farm payrolls, is going, and how long it might take to get back to a normal jobs market.

The first point is that the recovery has really only just begun. 6% of all jobs were lost in this recession, and we are only back up to a point about 5.5% below the peak:

(That bump centered at month 29 was due to the temporary Census hiring, now mostly wound down.)

Looked at another way, the jobs recovery has not even begun. The population is growing at about 1 percent per year, so we need jobs growth at that level just to keep a fixed fraction of the population employed. But the year-over-year (YOY) jobs growth just turned positive for the first time this month (again, corrected for the temporary Census hiring), and is not yet anywhere near 1%:

The same point is usually made with the month-to-month numbers. An increase of about 115,000 jobs per month is needed just to keep pace with population growth. So far this year we have seen an average, corrected for the Census hiring, of about 80,000 net new jobs per month. The last row of the table below shows monthly growth, corrected for the Census distortion. There is no encouraging trend.

So, we are very far from pre-recession employment, and jobs have been growing more slowly than population. What indications are there for future growth?

First, the trend in the second graph above is, thankfully, strongly upwards. So there is reason to hope that YOY jobs growth will continue to move upwards, hopefully to reach at least the neutral 1%/year level.

There are two main leading indicators for jobs growth. The first is the “temporary help services” count – the number of employees of temp agencies. The YOY change in temporary help services has typically lead the YOY change in non-farm payrolls be a few months. Here are the two series plotted together:

Since the YOY change in temporary help services is still rising, that gives some hope that the YOY change in non-farm payrolls will also keep rising for at least a few more months. One might hope to make a more quantitative statement, but it is clear that, whereas the levels of the two series (scaled as shown) have always been fairly close, that is not currently the case. It looks to me as if the relationship is not breaking down, but is being stretched. Here is a scatter plot of the two YOY series, with the last 12 months highlighted in red.

The current trajectory is clearly covering some space that has not been covered before, but it is still, apparently, following the regression line. I would guess that the trajectory will stray yet a little further from the regression line, but that the relationship will not break down. That is, I expect the YOY change in non-farm payrolls to keep rising for at least the next few months.

(Note: with recent data, the optimum lag has increased from four months to five months. This is actually a very small change – there never was much difference between evidence for 4 months and evidence for 5 months. See the bottom of the reference page US temporary jobs for the details.)

The second main leading indicator for jobs growth is initial unemployment claims. The YOY change in initial claims leads the YOY change in non-farm payrolls by about 5 months. Here are the two series plotted together.

Here the YOY change in initial claims is on an inverted scale, so the recent trough, in March 2010, shows as the black peak at the right of the graph. Such an event in initial claims is always followed by a deceleration in the YOY change in non-farm payrolls within a few months. That is just what we observe here – the YOY increases in non-farm payrolls seem to be slowing down. This, to me, is the worst news in recent employment-related data. The YOY jobs growth, still well below the neutral level, is decelerating.

Since the YOY change peaks in non-farm payrolls have been in a decreasing trend for 30 years, we can probably take the previous recession as precedent that is not too pessimistic, and may even be optimistic. In the previous recession, once the deceleration began, the YOY change in non-farm payrolls took about 3 years to reach a peak of 2%. Just as a rough guide to what might be in store, then, assume YOY growth in non-farm payrolls of 0.5%, 1.0%, and 1.5% for each of the next three years. That would imply total growth of about 3% over the next three years.

A great deal could change in the next three years, and this is a baseline scenario to think about, not a forecast. But current indicators and the precedent of the previous recession suggest it is not unreasonable that, starting from 5.5% below the previous peak, we could see only 3% growth in the next three years. In other words, a long, long road back to a healthy job market.

This is not the only line of reasoning suggesting a very slow and discouraging recovery. According to the studies of Reinhart and Rogoff on past financial crises, on average unemployment rises for 4.8 years, by 7 percentage points. If this episode were to follow the average, unemployment would peak sometime in 2011, at over 11%. Jan Hatzius, chief US economist at Goldman Sachs, and so far a very accurate forecaster of conditions in the recent recession and its aftermath, foresees 9.7% unemployment at the end of 2011. In other words, no real improvement in the next year.

For data source and further background on all the above topics, see the Reference section page US employment and its subsidiary pages.

2 Sep 2010 by Jim Fickett.

Personal bankruptcies, after appearing to level off in earlier quarters, rose again in Q2. With continuing high job losses and coming price falls in housing, it is hard to see this situation improving soon. Business bankruptcies continued to fall, after peaking in Q2 2009. This might or might not indicate a decrease in overall business failures.

The American Bankruptcy Institute now has data on bankruptcies through the second quarter. Here is the long-term view:

(All data from the Administrative Office of the US Courts, through the American Bankruptcy Institute. Click for larger image.)

Business bankruptcies continued to fall, from a peak on Q2 of 2009. It is not clear whether this is good news. First, many failures may have just been delayed by a flood of cheap financing in the (overenthusiastic) bond markets. Second, many failed businesses are simply liquidated, rather than filing for bankruptcy. And the fraction of liquidations has been higher than usual in the last year due to a scarcity of banks willing to lend for debtor-in-possession financing (used to carry the business through the bankruptcy period). Overall, it is unclear from these data whether the number of businesses failing, or on the edge, is increasing, decreasing, or stable. In this area, perhaps the best we can do is to follow initial unemployment claims as a proxy.

Personal bankruptcies, which looked in the previous few quarters as if they might be leveling out, continued to rise. Given that home prices are almost certain to drop, raising the number of discouraged people owing more than their homes are worth, and given the continuing high level of initial claims, showing job losses, it is hard to see this improving any time soon. The grim good news (perhaps that should be a new category of news) is that bankruptcies do force the recognition of losses and clear the way for starting fresh.

See the Reference pages US business bankruptcies, US personal bankruptcies, and 2005 change in US bankruptcy law for further background.

2 Sep 2010 by Jim Fickett.

The July level of all factory orders was about equal to its level in February. This is consistent with a general deceleration in manufacturing. Orders for non-defense capital goods excluding aircraft, a proxy for business investment, were down sharply in July. The drop is only one month's data in a noisy series, but still a worrying sign.

Census reported on July factory orders today:

New orders for manufactured goods in July, up following two consecutive monthly decreases, increased $0.6 billion or 0.1 percent to $409.5 billion, the U.S. Census Bureau reported today. This followed a 0.6 percent June decrease. Excluding transportation, new orders decreased 1.5 percent.

Although there was a tiny increase in July, a longer-term graph suggests that strong growth has stopped for now (all data are seasonally adjusted):

There was relatively little comment on this report today. Most news sources jump on the advance report that comes out a week earlier. This report is more comprehensive and reliable and, from the perspective of the long-term investor, having better information a week later is a good trade-off. It is much better to spend one's limited time on a broader array of good information, than on the daily noise in the news.

Factory orders are now approximately even with their level in February. This slowdown is consistent with many other signs of a deceleration in manufacturing.

Note that orders for non-defense capital goods excluding aircraft, a proxy for business investment, were down sharply. Many economists are putting considerable hope on continued strength in business investment. For example, Bernanke, in a speech last week, was reported as saying that

a handoff from fiscal stimulus and inventory re-stocking to consumer spending and business investment “appears to be under way.”

We have only seen a one-month drop in a noisy series, so it should not carry too much weight. However it is a worrying sign.

1 Sep 2010 by Jim Fickett.

There is no correlation between forward P/E and actual returns over the following 12 months.

There has been much comment suggesting that forward earnings, that is, earnings estimated for the coming year by stock analysts, are too optimistic, or are just an extrapolation of past trends. And both of these criticisms are correct. But the real question is whether, despite any objections, forward earnings tell you something important. Certainly many current articles feature the argument that stocks are underpriced, given the earnings that are expected.

The Financial Times reports that Lombard Odier, a private bank, did the analysis, and they pass on the original client report.

Lombard Odier measured the correlation between (1) forward P/E (that is, the price to earnings ratio, calculated using forward earnings), and (2) real total return over the following 12 months. If the forward P/E had any value, you would expect a negative correlation – an expensive P/E would result in low returns, and a cheap P/E would result in high returns.

There is no meaningful correlation.

For the emerging markets MSCI index, the correlation is 0.0 and the scatter plot appears to be completely random. For the S&P 500 there is a very small, but not practically useful, correlation (R² = 0.1).

1 Sep 2010 by Jim Fickett.

The ISM manufacturing index rose slightly in August, suggesting acceleration in manufacturing. However the average of the regional survey still shows deceleration, which is more likely the trend.

Today the Institute for Supply Management released the PMI, their manufacturing index, for August. It rose from 55.5 in July to 56.3 in August. The major news sources, and the stock market, got quite excited. Here is Bloomberg:

Manufacturing in the U.S. expanded at a faster pace than forecast in August as factories added workers and cranked up production.

The Institute for Supply Management’s factory index rose to a three-month high of 56.3 from 55.5 in July, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth, and the figure was projected to drop to 52.8, according to the median forecast in a Bloomberg News survey.

Stocks rallied as U.S. and China manufacturing figures tempered concern the global economic recovery will wane without more government stimulus. Production gains may partially compensate for a slowdown in consumer spending and sluggish housing market that are causing the world’s largest economy to cool in the second half of the year.

Manufacturing is “one of the bright spots,” said Hugh Johnson, chief investment officer at Hugh Johnson Advisors LLC in Albany, New York, the only analyst surveyed to predict the index would rise.

This one data point is not enough to reverse the very general picture of decelerating growth. For manufacturing in particular, the regional surveys, some of which I've covered, make it fairly clear that the trend is deceleration. Calculated Risk has gone to the trouble to average the results of all the regional surveys and graph this average in relationship to the ISM PMI:

Two things are clear. The trend in the regional surveys is not only down, but unbroken. And the break in the ISM PMI is a small one. You never know, but this looks very much like a random blip. Probably manufacturing continues to decelerate.

1 Sep 2010 by Jim Fickett.

Salon has a good 5 minute summary. They also link to some of the primary longer reports (by the Congressional Research Service, the Government Accountability Office, and the Institute for the Analysis of Global Security), if you want to really understand the area.

Rare earths have been a hot topic for quite a while now, and any obvious bets have received considerable discussion (for a couple of random examples, see here and here). But China's cornering of the market could well have wide repercussions, so even if you don't invest directly in the area, it is worth knowing something about it.

31 Aug 2010 by Jim Fickett.

Today Eurostat released unemployment rate figures for July. The euro zone unemployment rate has held steady at 10% since March. It seems growth, at least as of Q2, is balanced by growing effects of austerity.

(Chart and data courtesy of Eurostat. Click for larger image.)

The situation across Europe varies widely. The Financial Times provides some perspective:

Germany’s seasonally adjusted unemployment rate, as measured by the European Commission’s statistical arm, remained flat at 6.9 per cent in July, below its own pre-crisis levels, though its national figures point to a small decline in joblessness.

By contrast, Spain’s unemployment rate nudged up to 20.3 per cent, the highest figure ever seen in a eurozone country since the single currency was introduced in 1999. In Spain, 41.5 per cent of young people are now looking for work, compared to 19.6 per cent across Europe.