Wednesday, December 23, 2009

Catching up - economy

Updated This is the last of my "catching up" posts, which has come a good deal later than originally intended, but it's not like it's important or anything, just our economic futures and all.

That future doesn't look so good. I'm tired of reading economic news that insists on saying "the recession appears to be ending" (or even "has ended") or "the economy has turned a corner," or whatever, all of which begin to sound like William Westmoreland (or, as we called him, Waste-more-land) declaring we could see "the light at the end of the tunnel" in Vietnam. Because the fact is, until a turnaround starts to affect and improve the lives of a significant number of people, it ain't over no matter what the number-crunchers living in the Land of Economic Theory tell us.

And that won't happen for a while.
Unemployment is a lagging indicator, meaning it won't bounce back until well after the recovery is underway. But even then, the consensus is that joblessness will improve at a glacially slow pace - so woe unto all of us if the consensus is wrong and the outlook is even worse.
The official unemployment rate hit 10.2% in October before dropping a bit to 10.0% in November - which was still, except for October, the highest rate since July 1983 and 3.2 percentage points higher than a year before. (Monthly figures can be found by going to this link at the Bureau of Labor Statistics and changing the "From" year.)

And those "official" figures, of course, don't tell the whole story. Include those who are working part-time only because they can't find full-time work and those "marginally attached" to the labor force (defined as those who had not searched
for work in the preceding four weeks and including "discouraged workers" who had given up looking altogether), and the unemployment rate hits 17.5%.

And even that doesn't address the situation of temporary workers, the hiring of who has surged recently. That could be taken as a good sign, since after the last two recessions in the early 1990s and in 2001, such a surge was followed by employers bringing those temps on as permanent employees - but in those cases, that went on for just two or three months and the recent surge has lasted for four months -
and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again. ...

Last month 52,000 temps were added, greater than the number of new workers in any other category. Not even health care and government, stalwarts through the long recession, did better.
So does "temp" now indicate "in transit to permanent" or just "temporary," with all of the instability for such workers as the term indicates?

[t]he number of long-term unemployed (those jobless for 27 weeks and over) rose by 293,000 to 5.9 million. The percentage of unemployed persons jobless for 27 weeks or more increased by 2.7 percentage points to 38.3 percent.
Get that? Nearly 40% of the unemployed, the "officially" unemployed, have been out of work for over six months. That kind of deep and long-term unemployment has wreaked havoc on states' unemployment compensation funds.
Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. By 2011, according to Department of Labor estimates, 40 state funds will have been emptied by the jobless tsunami.
Necessary total loans, it is predicted, will reach $90 billion. And
with holiday workers soon to be laid off, analysts are forecasting that the nation's unemployment rate will rise to 10.5% next summer before beginning to decline.
If it does. If everything goes right. John Mauldin, president of Millennium Wave Investments, and Michael Shedlock, an advisor representative at SitkaPacific Capital Management
have been crunching the unemployment data. They conclude that the unemployment rate won't hit 5% (or so-called full employment) until - best-case scenario - 2020. ...

Meanwhile, the economy has shed about 8 million private-sector jobs in the last two years, even as the U.S. needs to add about 125,000 jobs a month just to absorb the new folks entering the workforce. Put the two together, and the economy would need to create about 15 million jobs over the next five years just to get back to where we started at the inception of the Great Recession, Mauldin calculates. ...

What Maudlin is saying is that the U.S. needs to add 250,000 jobs a month every month for five years. That's an unprecedented level of job creation. Over the last decade we've experienced just one year when the economy gained more than 250,000 jobs a month every month, Mauldin says, and that was 1999: the height of the tech bubble. ...

[That is, the] model assumes some very optimistic (if long-range) outcomes - namely, no recessions for the following 10 years and 2 million jobs added each year after 2011. "Of course, we've never done that, but let's be optimistic," Mauldin writes.
Which I suppose is appropriate for a "best-case" scenario, but considering what it requires, even "best" seems to be understating it; "miraculous" seems more appropriate.

And the worst case scenario? That assumes a quick double-dip recession in 2011.
Throw in the very real possibility of higher taxes and we get unemployment peaking at just below 13% in 2011 and 2012, and then remaining above 10% for the next eight years. (David Rosenberg, chief economist at Canada's Gluskin Sheff and formerly of Merrill Lynch, says unemployment could hit 13%, too.)
What's really worrying is that this worst-case scenario looks clearly more likely than the best-case one:
Meredith Whitney, who is about as famous as a bank analyst can get, said Monday that we're in for a double-dip recession, by the way.
And economist Joseph Stiglitz thinks that there is "a significant chance" of one.

Just how bad is it? Consider that the GDP needs to grow 2.5% a year just to absorb the people newly entering the job market every month. Compare that the the average prediction of economists of 2.9% growth in 2010, and the picture doesn't look good. Especially when it turns out that according to the Commerce Department's revised figures, the economy didn't grow at a 2.8% annual rate in the third quarter of 2009, but at a 2.2% rate.

In fact, the figure was even more disappointing, as the initial projection was for a 3.5% annual growth rate. What's more, a significant part of that 2.2% was due to the Cash for Clunkers program:
Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.
Take away from the third quarter that net 1.26 percentage point gain over the second quarter and growth outside the federal program shrinks to an anemic annual growth rate of 0.94%.

Just how bad is it? The good news was that in November, the economy lost the fewest jobs in a month (11,000) that it had since December 2007. Not gained any, just lost the fewest.

And even as leading economic indicators continued to tick up,
[s]ome analysts cautioned that the [gain] was overstating the economy's underlying strength.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, noted that the index did not adequately reflect smaller companies.

"The index takes no account of the dire state of the small business sector, which ... remains in deep recession," he said.
Ultimately, just how bad is it?
“Depression has been forestalled only because major government borrowing and spending is filling the gap,” Albert M. Wojnilower, a Wall Street economist and consultant at Craig Drill Capital, said in a newsletter last week.
And a good hunk of that spending - the stimulus - won't be there next year.

Even the Fed admits that unemployment will remain at or near record post-WW2 highs for some time; in fact, Fed policymakers say it could take "five or six years" for the economy and the labor market to be consistently healthy.

Besides the deep and persistent unemployment and its effects of individuals and states, there are other danger signs, some of them partially hidden. For one,
U.S. mortgage delinquency rates and the percentage of loans that entered the foreclosure process jumped in the third quarter, with both reaching record highs, the Mortgage Bankers Association said on Thursday. [Record-keeping began in 1972.]

The percentage of loans on which foreclosure actions were started rose to 1.42 percent in the third quarter, an all-time high....

"It is all about unemployment, everything else is secondary," MBA's chief economist Jay Brinkmann said in an interview. ...

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter and up 265 basis points from one year ago, the MBA said in its National Delinquency Survey.

The delinquency rate broke the record set last quarter.
That increase in the delinquency rate is undoubtedly tied to another revealing statistic about the "shadow inventory" of houses headed for sale because of foreclosure or delinquency but which are not yet on the market: The number of such homes has risen by 55% over the last year, from 1.1 million to 1.7 million. Banks have resisted putting these houses up for sale for fear of further depressing a housing market that is just showing the first signs of recovery, a recovery that may be souring and is at least uncertain. But if government efforts to help homeowners keep their houses can't keep up with the number of defaults, that will only go on so long. And on that front, things are moving very slowly: Of the over 700,000 temporary mortgage modifications made under the federal program, less than 5% have become permanent.

For another, despite everything from massive bailouts to mortgage renegotiation programs, banks remain reluctant to loan.
[An] Associated Press story notes that "according to the Federal Reserve, loans by the nation's 8,000 banks fell 8 percent to $6.7 trillion in the past year, and some analysts expect them to keep falling at least through next year."
More particularly, October was the ninth consecutive month during which lending by the 22 top recipients of federal bailout money declined even though their profits are increasing. Why? Pat Choate at Huffington Post says the reason is "White House politicking and old-fashioned banker greed," with the profits going to pay off federal loans so Obama can kill the bailout as a political issue and the banks can get out from under the restrictions they were under.

But economist Michael Munger has a more subtle and darker explanation. He maintains that the Fed has been "POURING money into the system" (emphasis in original), increasing the money supply by 10% a month, by buying long-term Treasury bonds. That leaves banks with plenty of cash. They also are selling off some of their collateralized debt obligations - the sort of toxic "assets" that brought us to the brink of ruin in the first place. So the wholesale credit market is flush with cash but it's not turning into loans in the retail market. Why?

Munger says that banks "are still trying to avoid risk" - a strange attitude for institutions whose blithe gambling almost brought on a catastrophe, but never mind - so they are pursuing a different course:
[B]anks are borrowing money from the government, at 0%, and then buying NEW federal debt[, that is, the Treasury bonds], which pays 3%. That's a guaranteed 3% real return, with no risk. So the Fed buys up debt to increase the money supply, to get the banks to lend. But the banks just buy more government debt, lending to the government instead of lending to small businesses or even large businesses.

And the government is having to borrow more and more to finance the deficit being used to bail out the banks. But the banks are just using the bail-out money to buy more of the debt being used to finance the bail-out! From the taxpayer's perspective, you'd be better off playing the "3-card monte" games in Times Square.
In short, the banks are taking federal (public, taxpayer) money and loaning it back to the government at a profit. We're paying the bill and getting precisely zilch for it, not even an easing of credit.

It's impossible to believe that this disgraceful shell game is going on without the knowledge of Fed chair and golden boy Ben Bernanke, cruising toward confirmation for a second seven-year term even as he utterly failed to see the looming crisis and continues to stonewall about details of the Fed's rescue of AIG.

He has certainly made his interests clear: He intends to crush inflation into a black hole such that even a 3% per year inflation rate is dangerously high because it "could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation." That is, a 3% inflation annual inflation rate could cause we consumers to panic. If that plan means 10% or more unemployment and allowing the big banks to continue their suck-money-from-the-public shell game, then so be it.

But don't let it be said that Ben Bernanke is unconcerned about deficits. Oh, no, not Ben Bernanke! Shoveling trillions into the coffers of Wall Street is one thing, but after all, there have to be limits somewhere! So in testimoney before the Senate Banking Committee earlier this month,
Bernanke called for cutbacks in Medicare and Social Security even as unemployment rises and the middle class is endangered.
Why there? Because, he said, "That's where the money is." He even hinted that Congress should repeal Social Security and Medicare, stating "it's only mandatory until Congress says it's not mandatory."

Well, I have my own suggestions about where a good hunk of money could be found, but that is likely a topic for a different post, so I'll just note here that when asked if he would take taxes on the rich off the table, Bernanke suddenly turned diffident, saying that was up to Congress and he tried to stay out of such discussions, a consideration that apparently does not apply to slashing benefits that go mostly to the middle and lower-middle classes in the name of reducing deficits, the better to fight - again - the demon or more accurately the specter of inflation.

(It's worth noting at this point that low inflation helps banks and other lenders and somewhat higher inflation helps creditors because both expect the inflation to pay part of the real cost of loans, which are paid out in today's dollars but repaid in tomorrow's - inflated - dollars. And also worth noting who, in that light, Bernanke's policies help.)

That same devotion to the golden idol that is Wall Street, with the same paranoia about its evil enemy inflation, has infected the White House. A few weeks ago Paul Krugman wrote that
[i]n December 2008 Lawrence Summers, soon to become the administration’s highest-ranking economist, called for decisive action. “Many experts,” he warned, “believe that unemployment could reach 10 percent by the end of next year.” In the face of that prospect, he continued, “doing too little poses a greater threat than doing too much.”

Ten months later unemployment reached 10.2 percent, suggesting that despite his warning the administration hadn’t done enough to create jobs. You might have expected, then, a determination to do more.

But in a recent interview with Fox News, the president sounded diffident and nervous about his economic policy. ... “[I]t is important though to recognize ... that if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.” ...

[A] report on suggests that deficit reduction, not job creation, will be the centerpiece of his first State of the Union address.
That is, the same claptrap that Bernanke was spewing, living in the same world. Ten percent unemployment? The worst long-term unemployment ever? Over 17% of the workforce either unemployed or underemployed? Businesses and individuals unable to obtain credit? Foreclosures? None of that affects confidence in this world. Only the deficit does. Why? Because businesses (especially small businesses) and individuals are not those whose concerns matter in this world. The only ones who matter are "the investors" - the banks, the investment houses. They are the ones who must be placated, must be pleased, must be given their offerings, must have their devotions.
Ever since the Great Recession began economic analysts at some (not all) major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils. In particular, they say, never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates - any day now, budget deficits will lead to a collapse in investor confidence, and rates will soar.
It is a "phantom menace," Krugman says, "a threat that exists only in their minds" - while the real danger, the danger that Summers recognized a year ago, the danger of a government effort too small, too short, while the conditions it was meant to address persist, goes unattended.

While businesses go without credit. And while we go without jobs. And while we go without homes. And while we can't afford health care. And while we can't afford to retire. And while we can't afford a future for our children. And while we are expected to see our and their futures contract further for the sake of protecting the interests and private jets and summer homes of a handful of robber barons. And while we are expected to live as the peasants of old, as the "huddled masses" of a century ago, to leave the elite to their mansions while we keep our places, live lives of servitude without complaint, and then die without making a fuss.

Because, you know, the alternative is for the investors to lose confidence - and that prospect is just too horrifying to contemplate.

Foonote the First: In some cases, the reluctance of banks, particularly smaller banks, to lend is not their fault. In late November, the FDIC reported on some information about its secret list of troubled banks.
The number of banks on the regulator's confidential watch list increased by 33% in the third quarter, to 552, the highest level in almost 16 years....

Tough credit conditions persisted, with charge-offs and past-due loans reaching record highs, "and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend," said Chairman Sheila Bair....

The troubled bank list represents 6.8% of all banks covered by the FDIC's deposit insurance fund....

[M]ore than 1,000 banks could ultimately face seizure by authorities before the financial industry's woes subside, according to research and consulting firm Institutional Risk Analytics, which provides data on lenders to clients ranging from private investors to the Securities and Exchange Commission.
The closing of Colonial Bank, with its $25 billion in assets taken over by BB&T in August, was among the biggest banks failures in US history. Just a couple of days ago, the FDIC took over seven more banks, bringing the total for the year to 140.
The high number of bank failures has pushed the FDIC insurance fund into the red and has cost $30 billion. The FDIC expects the cost of the crisis to its insurance fund to reach $100 billion over the next four years.
Footnote the Second: Bernie Sanders has introduced the "Too Big to Fail, Too Big to Exist Act," which would require the Secretary of the Treasury to submit to Congress "a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes are too big to fail" and then to break them up into units small enough that their failure "would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout."

An editorial in the December 15 New York Times, while not citing the bill, certainly endorsed the concept:
If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.
Sounds like a plan, or at least a start of one.

Footnote the Third: Not all the news was black, some of it was merely gray, even maybe light gray. For one, consumer sentiment increased some, but less than expected, while still remaining at "quite negative levels," in the words of Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers.

[p]ersonal incomes rose in November at the fastest pace in six months while spending posted a second straight increase, raising hopes that that the recovery from the nation's deep recession might be gaining momentum.
According to the Commerce Department, personal incomes were up 0.4 percent in November and spending rose 0.5 percent in November. Both, however, were slightly less than economists' predictions.

Updated to include several additional bits: the information about state unemployment funds, the three paragraphs following the mention of the 2.2% growth rate in the third quarter, the mention of the possible souring of the housing market, and the third footnote.

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