Market Talk

Raymond, one of our regular readers, had a comment to a post about Friday’s jobs report that’s stuck in my head. “Welcome to the ‘New Normal’ – it’s repulsive,” he wrote. “The middle class of America is getting destroyed. If we do not see real policies that work from government and the private sector, America will be a very different place in a couple of decades.”

If only anybody had been thinking that way a couple of decades ago, we might not be where we are now. There are developments in the global economy that are frankly beyond our control, to be sure, but we could’ve done more to provide for the working classes, rather than just telling them to become “knowledge workers,” shipping their jobs to Asia and papering over the whole thing with borrowed money.

We have been hollowing out the working class for going on 30 years, and that is the great, unappreciated story of our times. Cities like Cleveland, Newark, Detroit have become shells of themselves, and it’s hard to see them coming back. How many Rock-n-Roll halls of fame can you have? The United States today does not create enough of the kinds of jobs that will provide a safe, secure living for the working class. We’ve carefully hidden this fact by replacing living wages with credit, and it worked for a while, but that game has exploded rather messily all over the globe.

Which brings me to Andy Grove’s piece in Bloomberg, as highlighted by Yves Smith over at naked capitalism. Grove, former CEO at Intel, explains why we don’t make jobs here in America anymore, the ramifications of that, and suggests some solutions that will make the Kudlows of the world recoil in horror.

The start-up companies that get all the venture capital, he notes quite plainly, and which the business and political classes lavish praise upon as the great creators of jobs, aren’t creating jobs. A mythology has risen around companies like Intel and Apple; but Apple employs ten times as many people in Asia as it does here. Well, that’s a problem:

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work — and much of the profits — remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?

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Stagnant wages didn’t stop consumers from opening up the purse strings a bit last month.

Consumer spending rose 0.3% in February, better than the 0.1% increase economists were expecting. But personal income remained flat compared to the prior month, according to the Commerce Department.

And the saving rate slowed to 3.1%, the lowest its been since October 2008.

“A nearly unprecedented pullback in consumption during the recession generated a significant degree of pent-up demand, which is now being gradually unleashed,” RBS economist Michelle Girard says.

Unfortunately, rising spending without income growth creates a bit of a disconcerting situation. As Calculated Risk points out, spending will likely come in around a 3.0% annual rate in 1Q, which would mark the highest growth rate since 1Q07.

“However this being driven by less saving and transfer payments – not growth in income,” blog notes. “This is a decent report for personal consumption expenditures, but PCE growth is not sustainable without income growth.”

Economist’s Free Exchange blog looks back at income and consumption on a historical basis, noting income grew about as much or more than consumption throughout most of the 20th century. From blog:

But during the most recent decade, consumption grew significantly more than income. This was the product of stagnant income growth and easy borrowing, and it corresponds to the great period of increase in household indebtedness.

But that’s all over now, right?

Possibly not, especially as blog notes monthly spending has increased for five straight months, while the savings rate keeps dropping and income remains flat.

Blog still expects the savings rate to increase in the future. “But sustained higher saving will be difficult to achieve absent income growth, just as increases in consumption are unsustainable absent income growth,” Free Exchange notes. “And there is little sign that growth in incomes is looking any more robust than it was over the past decade.”

Let's slap some lipstick on this pig.

So today, purportedly, the market’s up because used-home sales came in less bad than the market expected. That’s pretty typical Wall Street logic, but it’s all the more curious because stocks rose yesterday as well, after that Marxist, anti-business healthcare package passed the House.

I’m not exactly sure what’s going on here either, but it’s clear that the green signals are all aligned on Wall Street, and the buying is on. How long it stays on is another question. You know what they say, the trend is your friend, until the bend at the end.

Now, while the Street was pleased with the home-sales report, it’s hard to get too excited about the fact that sales fell for the third month in a row. The NAR reported sales in February fell 0.6%, while the Street was expecting a fall of 2%. Somehow this signals that the housing market is improving.

But what’s going on here is what’s been going on: a variety of government supports have made the housing market look stronger than it is. But those supports are slowly expiring, and a truer picture of the housing market is going to emerge this spring. It may not be pretty.

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There’s been a lot of hopefulness surrounding the February jobs report. “Only” 36,000 jobs lost when about 75,000 losses were expected. And the optimists say the economy probably would’ve added jobs if it weren’t for the violent snowstorms.

On the flip side, 36,000 jobs lost marks yet another month of job losses. That’s 25 of the last 26 months that the economy’s shed jobs, totaling about 8.4 million jobs that have been wiped away since the recession began in December 2007. And for all the chatter about the snow’s impact, the Labor Department blatantly said it’s impossible to quantify the weather’s effect on the data.

All of this is a long-winded way of pointing to another troubling aspect of the labor markets that helps set this recession apart from previous downturns – the long-term jobless rate.

Calculated Risk posts a chart detailing long-term unemployment throughout the last 40 years. More than 30 years ago, folks out of work 27 weeks or more accounted for a little more than 20% of unemployment. Now, 40% of jobless folks are long-term unemployed, and getting them back to work is no easy task.

“That means putting back to work a lot of relatively low-skilled workers who were previously employed in construction, in manufacturing, and in retail and service industries,” Economist’s Free Exchange blog says. “In an economic climate in which construction and personal consumption are likely to contribute very little to output growth for the next few years.

“That’s a tall order. Not since the Depression has the American economy had to pull off anything like it.”

Consumer spending grew at a 0.5% rate in January, faster than economists were expecting, but weak personal income data put a damper on the data as the savings rate dropped to its lowest level since 2008.

Savings rate drops to 3.3%, well off the high of 5.4% reached in last year’s second quarter, although it’s still above the 1.2% trough set during the boom. Whether the savings rate has peaked for this cycle is up for debate. Calculated Risk says an 8% savings rate could be reached sometime in the next few years.

But, as Kelly Evans pointed out in her Ahead of the Tape column this morning, some economists believe the stock market rebound has given consumers some optimism about the economic recovery and reason to increase spending, which could prevent the savings rate from going much higher.

Ultimately, all the talk about the American consumer undertaking a permanent shift to frugality may have been a bit premature.

Time will tell, but if history is a guide and the recovery continues, don’t discount the American consumer, Stephen Gandel writes at Time’s Curious Capitalist blog.

I think anyone who has lived in America for some time knows that we love to spend. So without some kind of government intervention — more incentives to save, some real financial reform that cuts back aggressive lending practices — it is unlikely that we will dramatically shift to a nation of savers. And this unfortunately is a bad thing. And that could be the best argument for some government action either in the form of more stimulus and job creation spending. Americas can only stop spending for so long. Savings seems to be a virtue again. But if incomes continue to stagnate or drop, Americans will again get used to spending more than they make. And if that happens, we can wave good-bye to another one of those Great Recession opportunities. Oh well.

C'mon, bears, 5.7%! 5.7%!

Don’t get too jazzed about this morning’s GDP report. The better-than-expected reading, fueled by slower inventory liquidation rather than consumer spending, likely isn’t sustainable.

The headline 5.7% jump looks good on paper. But there are reasons for concern. For all of 2009 GDP fell 2.4%, marking the biggest drop for an entire year since the 10.9% slide in 1946.

And as Calculated Risk points out, residential investment and personal consumption expenditures, the leading sectors for GDP, both slowed in 4Q. The declines aren’t surprising, especially since the personal savings rate rose and will likely continue increasing in next year or two, blog says. Also don’t expect residential investment to start rising until excess housing inventory is absorbed.

“The transitory boost from inventory changes is frequently a great kick start to the economy at the beginning of a recovery – as long as the leading sectors (PCE and RI) are also picking up,” Calculated Risk says. But this report is concerning as “underlying growth remained weak.”

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You're not the only one worrying, buddy.

So much for all the uncertainty surrounding Ben Bernanke’s re-confirmation.

The White House went on an all-out blitz over the weekend, endorsing the Fed chairman for a second term and pushing for the necessary 60 votes needed in the Senate.

Confirmation, of course, isn’t a certainty. But a recent Dow Jones Newswires survey shows 31 senators were publicly committed to Bernanke whereas 17 were opposed. WSJ has the details:

“He’s going to have bipartisan support in the Senate and I would anticipate he’d be confirmed,” Sen. Mitch McConnell of Kentucky, the Republican leader, said Sunday on NBC’s “Meet the Press.” But he wouldn’t say which way he would vote. The No. 2 Senate Democrat, Dick Durbin of Illinois, also predicted that Mr. Bernanke would prevail.

The debate over a second term for the 56-year-old Mr. Bernanke is eclipsing party affiliations in the Senate, drawing liberals and conservatives into unusual alliances. It has also reinforced the Fed’s weakened standing with the public and Congress, and the threat to its long-cherished posture as independent from elected politicians.

Even though Bernanke likely has enough support for another term, a fresh debate’s brewing in the blogosphere over whether he’s the best man for the job. “I’m agonizing – which isn’t a place I ever expected to be,” Princeton economist Paul Krugman writes at Conscience of a Liberal.

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This market's looking better every day.

New home construction in December fell 4% to a seasonally adjusted 557,000 annual rate from a month earlier, far more than economists had expected.

The sharp decline shows there was less residential investment in 4Q than analysts had previously estimated.

Starts are now up 16% from their all-time low hit in April. But they have essentially been moving sideways for seven months, according to Calculated Risk.

“This is both good news and bad news. The good news is the low level of starts means the excess housing inventory is being absorbed – a necessary step for housing (and the economy) to recover,” blog says. “The bad news is economic growth will probably be sluggish – and unemployment elevated – until residential investment picks up.”

Nevertheless, even as housing starts fall more than expected, new building permits jumped 8.3%. And there’s “a fresh glimmer of hope” that the housing market may be bouncing along the bottom, James Picerno writes at The Capital Spectator.

“It’s starting to look like the end of the great housing collapse has arrived,” he says.

To be sure, just because the worst is over doesn’t mean a powerful rebound is expected, he adds, as the housing market could stumble along the bottom for a significant period of time.

“Echoing the trend in the labor market and the economy overall, a aperiod of treading water may be in store, and for an unusually lengthy run relative to post-recession revivals in the past,” Picerno says.

It's okay Ben, just don't tell us you had nothing to do with it.

Ben Bernanke’s speech yesterday is getting a lot of press not for what he said, but for what wasn’t said.

Piggybacking off of Paul’s earlier post, Bernanke was adamant that lax regulation, and not low interest rates, was the main cause of the housing bubble. The comments aren’t surprising, especially coming from a Fed chairman. Still, Princeton economist Paul Krugman says it was a “somewhat odd” speech, as Bernanke should’ve been more forthright about the Fed’s “undoubted failures.”

Bernanke would’ve been better focusing on the Fed’s inability to acknowledge subprime lending risks, Krugman says, as well as recognizing the housing bubble as it was happening in real time.

“And I would add that focusing on unconventional mortgages is awfully 2007,” Krugman notes. “We now know that many perfectly conventional mortgages went bust; we know that commercial real estate was at least as overblown as housing.”

It’s clear the housing bubble was about much more than subprime mortgages, he adds. “Where regulation really needs to focus is on making the financial system less fragile.”

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Trying to predict what’s going to happen in 2010 is like throwing darts with a blindfold. There’s absolutely no way of knowing what’s going to occur over the next 12 months. It’s no different than playing the ponies, really. Both are fun, but both involve guesswork and faith.

A more profitable use of your time is looking at probabilities, and looking for potentialities, and positioning yourself against the risks and for the upside. And there are still, despite an historic stock market rally, significant risks out there.

“We have to get through the next 5-6 months, which is where we will at least begin to see the extent to which ‘second wave’ credit risks materialize,” John Hussman of Hussman Funds writes. “We emphatically don’t need to work through all of the economy’s problems. What we do need, however, is for the latent problems to hatch, so we can have more clarity about what we’re dealing with.”

“We don’t have to deal with and correct all of these problems, but until it is clear that the markets are more aware of them, the range of potential market outcomes will be extremely wide – and in my estimation, tilted toward the downside.”

One downside risk is that the general thesis for growth — government stimulus spurring demand, which sparks an inventory rebound, which sparks a hiring spree, which sparks wage growth, which drives the economy forward — may get shot to pieces by midyear.

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