An article today titled ‘Jobs Report: A Blow to Optimism‘ “A dismal June jobs report offers few, if any, “green shoots.” Will a soft labor market slow a recovery?”

Yesterday’s U.S. June job loss report was – according to many reports – reflected in Wall Street (and hence Bay Street) responding negatively to the higher than expected job losses that were reported by the U.S. Labor Department.  The Dow dropped 224 points (2.6%) and the S&P/TSX Index dropped 130 points (1.2%).  I have the following reactions to this:

•    what is going on?  Are those writers who report on changes in stock market indices simply ‘making it up’ as to the reasons for increases or decreases, or is the efficient market theory simply ‘out the window’?  I think market gurus and analysts would say that the market was pricing in further job losses prior to yesterday’s report but the larger than expected number of June job losses was a ‘negative surprise’ which contributed to a market decline yesterday – hence the efficient market theory is alive and well.  On the surface there seems to be logic to this.  However, the statistics that have been issues over the past several months often have been subsequently restated.  Surely the efficient market theory would dictate that the risk of ‘estimation errors’ on both the upside and downside should have been priced into the market before the Job loss announcements - in which case the markets ought to have dropped yesterday for other reasons;

•    I am not an economist.  I have said that many times on this blog.  I am simply a 67 year old accountant who has spent his adult business life advising people on the value of their businesses.  How is it I have been decrying the likelihood of ‘green shoots’ since the phrase was first used a few months ago when with only a few exceptions the Wall street analysts, commentators, and pundits – as well as the U.S. Fed and other U.S. Government officials – have been promoting the view of a U.S. economic recovery by late 2009.  Yesterday even President Obama in a Press Conference expressed concern with the reported June job losses and what they – if they persist going forward – may mean to U.S. economic recovery; and,

•    unless things turn around quickly in the U.S. I can’t see how America will not be forced to become more and more ‘trade protectionist’ to the detriment of Canada and other countries.  That said, I see globalization as a juggernaut that – like the Queen Mary – will be hard to turn around in a short time span, and may prove impossible to turn around in a meaningful way in the long term.  Is America in a ‘too little, too late’ position.  I am becoming increasingly concerned that it is.

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Data just released (see article titled ‘467K jobs cut in June; jobless rate at 9.5 percent’ by the U.S. Labor Department reports 467,000 U.S. jobs were lost in June, and that the unemployment rate is now 9.5% (a reported 14.7 million people) and ‘could hit double digits’.  Other important data includes:

•    if laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.5%;

•    approximately 46% of the unemployed have lost their jobs in the last 18 months; and,

•    the average work week in June fell to 33 hours, the lowest on records dating to 1964.

The article says “June’s payroll reductions were deeper than the 363,000 that economists expected and average weekly earnings dropped to the lowest level in nearly a year.  However, the rise in the unemployment rate from 9.4 percent in May wasn’t as sharp as the expected 9.6 percent”.  Query:  How can this make sense?  If the job losses were greater than expected how can the unemployment rate by less than expected?

The article seems to suggest that it is encouraging news that reported January, 2009 job losses were 741,000 (the most since 1949) and that the June reported number of 467,000 U.S. job losses indicates that the worst of the layoffs have passed.  First, for what it is worth in 1949 the U.S. population was just less than 50% of what it is today, so 750,000 jobs would have represented a larger % of the employable population then than it did in January, 2009.  Second and more importantly, how can anyone draw a conclusion from the reported June data that the ‘worst of the layoffs has passed’.  Any such conclusion, to be kind, strikes me as ‘just plain silly’.  June’s reported job losses are higher than those reported in May.  In my view investors need to increasingly spend more and more time thinking and worrying about the U.S. and world economies in the context of their investments and rely less and less on the conclusions reached by article writers, analysts and pundits.  Not to do that in my opinion is folly – at least one makes one’s own mistakes that way.

I continue not to see how U.S. consumers are going to begin seriously spending again until they gain confidence – and I can’t see how they can gain confidence as they see and experience continued job losses.  Following from this, I don’t see how the U.S. economy can begin recovery until the U.S. consumer again starts to seriously spend as they previously did.  None of this doesn’t strike me as being complex or ‘rocket-science’ – so what am I missing?

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Two articles this morning titled ‘U.S. private sector sheds 473,000 jobs in June’ and ‘U.S. jobless rate seen highest since 1983’ report U.S. June Job Loss Estimates at 473,000 and 355,000 respectively.  The first article says that 485,000 jobs were lost in May, which is consistent with what the reporting group (ADP Employer Services) said in early June, but about 150,000 job losses more than the U.S. Government reported for May.  The second reported estimate, 355,000 job losses, based on a median forecast of 62 economists as is the first report – obviously different economists were surveyed.  It won’t be long before the ‘official’ U.S. Labor Department number is released this morning.  I have posted the estimates reported this morning simply because I am beginning to wonder about the veracity of any of the numbers posted.  Again, some commentators are reported as saying (in essence) ‘this is bad news, but it really is good news because monthly job losses are less than they previously were so the trend is in the right direction’.  For reasons I frequently comment about on this blog I consider this thinking wrong-headed as an indicator of the timing of U.S. economic recovery.  I will be writing a more complete post this morning after the U.S. Labor Department reports its numbers.

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A friend of my wife forwarded the following ‘Joke’ to her today.  I am sure it is ‘getting around’ and that you may have seen it, but if you haven’t here it is.

It is a slow day in the East Texas town of Woodville.  It is raining, and the little town looks totally deserted.  Times are tough, everybody is in debt and everybody lives on credit.  On this particular day a rich tourist from the East is driving through town.  He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.

As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.  The butcher takes the $100 and runs down the street to pay his debt to the pig farmer.  The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.  The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her “services” on credit.  The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rented when she brought clients to that establishment.  The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.

At that moment the traveler from the East walks back down the stairs, after inspecting the rooms.  He picks up the $100 bill and states that the rooms are not satisfactory……  Pockets the money and walks out the door and leaves town.  No one earned anything.  However the whole town is now out of debt, and looks to the future with a lot of optimism.  The joke ends with the statement “That, ladies and gentlemen, is how the United States Government has been conducting business for the past year” and “If that doesn’t scare the heck out of you, then I don’t know what will”.

It is broadly believed that $1 earned results in about $7 of GDP by the time that dollar changes hands multiple times.  If that is true, the foregoing joke could have been extended by two further transactions.  I assume that the author of the joke in his/her conclusion is expressing a concern as to ‘what happens if the rich tourist (aka the U.S. Government) doesn’t show up in town’.  That would be a greater concern if the U.S. government didn’t have a theoretically limitless capacity to print $100 fiat currency ‘Ben Franklins’.  The real concern is assuming the $100 bills are printed and circulated, how much purchasing power will they have going forward - and what will that mean to the standard of living of those accepting and spending them?

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An article yesterday titled ‘Stocks turn to jobs as first half draws to close’ says an ‘economist poll’ is predicting that a further 325,000 U.S. jobs will be reported lost in June when statistics are released later this week – resulting in an unemployment rate of 9.6%.  As those of you who follow my Blog posts know, I consider the monthly job figures of paramount importance to the timing of U.S. economic recovery.  Last month early ‘job loss poll reports’ suggested a much higher number of May job losses (over 500,000) than ultimately was reported (around 350,000).  Many of these statistics subsequently get adjusted from ‘those first reported’ so who really knows what the correct numbers are?  That said, continuing job losses at over 300,000 per month does not in my view auger well for U.S. economic recovery any time soon.

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A New York TImes article today titled ‘French Minister Says Retirement Age Will Rise’ comments on a French Government plan to raise the retirement age in one-year increments to ‘help offset growing pension obligations’, and says that “Until recently, altering the retirement age had been taboo for a government wary of stirring up unions …”.

Whether or not the French Government successfully pursues this course of action, as job losses are experienced in the U.S. and elsewhere and the elderly see their assets and retirement plans plans deteriorate inevitably older people nearing what is thought to be ‘normal retirement age’ will look to extend their working years, and those who are already ‘retired’ will look to find full time or part-time jobs. These are people who have had many years of on the job training, and assuming adequate health and energy, often are much easier for employers to integrate into their business with less training time required. To me, this again emphasizes the issue of the need for Governments to focus on ensuring youth and new graduate employment as a high priority item on their respective agendas. The problem is a circular one, and one not easily addressed or resolved. That said young people are the future. Without ensuring a business climate where they can gain meaningful and productive employment, economies face obvious and large problems going forward. From my point of view, I am not seeing enough written and debated on this issue.

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An article titled ‘World Bank cuts 2009 global growth forecast’ says the World Bank has cut its 2009 global growth forecast and now says the world economy will shrink 2.9% (an increase of 1.3% from its March forecast) this year as “The global recession has deepened”, that global trade is expected to drop by 9.7%, GDP now is expected to drop by 4.2% for high-income countries, and that economic growth in developing countries should slow to 1.2% percent - but excluding relatively strong China and India, developing economies will contract by 1.6%.

The article reports The World Bank also said in a report released yesterday that:

• economic damage to developing countries “has been much deeper and broader than previous crises”;

• unemployment is on the rise, and poverty is set to increase in developing economies. In this regard foreign direct investment in developing countries is projected to drop year/year in 2009 by 30% to U.S.$385 billion in 2009 (U.S.$707 billion in 2008, U.S.$1,159 billion in 2007);

• the global economy should start to grow again in late 2009, but “the expected recovery is projected to be much less vigorous than normal”;

• the ability of banks to finance investment and consumer spending would be hampered by the overhang of unpaid loans and devalued assets; and,

• “To break the cycle and revive lending and growth, bold policy measures, along with substantial international coordination, are needed”.

These new forecasts come as no great surprise to me as there is really nothing new here. The last bulleted point in my view is a broad statement that means nothing without detailed strategy and a ‘coordinator’ given the power to coordinate such an effort – I can’t see that happening any time soon. Accordingly, I will be surprised if the global economy starts to grow again in late 2009.

Early estimates of U.S. job losses for June ought to be reported in the next few days and I continue to believe that all of the talk about ‘green shoots’ will be for naught until the U.S. population ‘gets back to work’ and U.S. consumers again spend. If that happens I think the result may be short-term economic revival in the U.S. That said, I don’t believe that will solve the longer-term underlying U.S. economic issues of loss of manufacturing base (which will in a time of recovery lead to U.S. trade deficits increasing from current levels), continually escalating National Debt, and what must be a serious erosion in U.S. income tax revenues on all levels. While I sincerely hope I am wrong, I think the logical upshot of all of this going forward is reduced economic growth from prior levels and importantly, a reduced standard of living for U.S. residents from what they enjoyed up to mid-2008.

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A Wall Street Journal article titled ‘Belt-Tightening by States Squeezes Cities and Towns’ says that in a recent survey 18 U.S. States reported cutting local aid.  The Executive Director of the National Association of State Budget Officers is quoted as saying “we think that’s going to grow”.  The article also says U.S. “cities and towns are bracing for more big reductions in local aid and revenue-sharing from their state governments”, that “the cuts are forcing belt-tightening moves that are very visible to voters”, and in my view importantly that “for many cities, state-aid cuts come on top of falling local revenue” – all this at a time when States are running record budget gaps as their tax revenue plunges while expenses increase.

In the past I have commented frequently on this Blog about what I have said ‘Must be reducing revenues at all U.S. Government levels’, and continually address macro-issues at the U.S. Federal Government level.  At Federal and State levels it seems to me some of the more important things that need to be considered are infrastructure deterioration (particularly roads and bridges), and health/school/prison systems.  At the municipal level important ‘maintenance-type’ issues have to include municipal services including sanitary systems and waste disposal, policing, water purification, delivery systems, and so on.  If the current recession does not turn around in the near term it seems to me these and similar services will have to be reduced from prior levels and then maintained at those reduced levels – all of which will result in possible (or in some cases likely) reductions in safety, education, and - importantly - the general standard of living of the average citizen.  Since typically you can’t take things away from people and leave them happy, if these things occur it seems to me unhappy consequences may be a reduction in youth employment (since ‘family providers’ sensibly would be employed first) and a general increase in crime rates.

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An article today titled ‘Business Outlook: Why Consumer Spending Won’t Drive a Recovery’ says in its sub-title “(U.S.) Households are paying down debt and rebuilding their nest eggs, so they’re not spending. Still, that’s unlikely to thwart a modest economic upturn”.  The article says:

•    wealth losses since early 2007 totaling $13.9 trillion Q1 2009, and in April U.S. consumers saved 5.7% of their earnings, the most in 14 years.

•    (U.S. consumer) liabilities have declined to 131.1% of after-tax income in Q1 from 138.6% in Q4 2007, in circumstances where based on 1990’s trends the ratio would be about 110% implying U.S. households still have about $2.2 trillion in excessive debt they need to eliminate;

•    households have been deleveraging for more than a year, and the saving rate may be close to topping out resulting in a conclusion that ongoing deleveraging is unlikely to prevent at least a modest upturn in the economy Q3 and Q4 2009;

•    (U.S. consumer) wealth losses seem likely to slow as well, with household net worth—assets minus liabilities—falling $1.3 trillion in Q1, 50% of the average 2008 quarterly decline;

•    given the stock market rebound in Q2, economists at UBS estimate net worth is on track to increase by some $3 trillion this quarter, the first gain in two years;

•    plunging U.S. household wealth is the chief reason households are saving more of their income, and if the decline in net worth is bottoming then the increase in the saving rate may be about over, too. The ratio of wealth to income, which tends to track the saving rate, is now about where it was in the mid-1990s, when the rate was about 5%;

•    (U.S.) consumer spending has stabilized this year despite the ongoing realignment in household finances; and,

•    much will depend on the labor markets. The slower they heal, the more drawn out the process will be, and the less (U.S.) consumers will be able to contribute to the recovery.

From my perspective this article sets out a lot of facts and surmises that don’t gel to a conclusion that ‘Consumer Spending Won’t Drive a Recovery’.  First, Q2 isn’t yet over and I see no assurance that, depending on statistics released over the next few months that  U.S. and world equity markets will hold the gains made in Q2 to date over the next several months.  Second, I believe – and have been repeatedly saying on this blog – that job loss and gain statistics are the principal ‘go-forward driver’ of U.S. consumer spending.  Deleveraging ultimately ought to look after itself, but if the total amount of U.S. consumer spending dollars derived from employment income continues to drop so too must the total number of dollars spend by U.S. consumers.  I would not be taking the headline or what I see as the optimism reflected in this article ‘to the bank’, but suggest you read it in its entirety by clicking here.

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An article today titled ‘Youth unemployment fans social ills of crime, unrest and extremism’ says that “While all forms of unemployment are bad, youth unemployment is probably the most searing because of its corrosive effects throughout society” as (presumably among other things) unemployment adds to the risk of drug abuse, criminality and, ultimately, incarceration.  The article quotes youth (ages 15 – 24) current unemployment statistics in Britain (16.5%), France (20.4%). Qatar and Saudi Arabia (each almost 25%).

Some months ago I wrote a blog on this issue.  As I have said in other posts I believe ‘old sayings are old sayings because they have stood the test of time’.  One old saying is ‘idle hands are the devil’s workshop’, and I think that is particularly true in the case of young  people whose value system and living habits are ‘a work in progress’.  The young people who in the recent past have rioted in Paris may be a precursor for what may happen in other cities and towns if there is not productive work available for them.  In the current economic environment I consider this worrisome – and think youth employment should be an extremely high priority with the governments of all countries.

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