Unemployment, GDp & Inflation reality Check
This week was a double shot of data release: unemployment & GDP. And things look ok:
unemployment is flattening or down, depending on your choice of metric
GDP is still positive
Except each one of these data points as reported is so warped as to be wrong. In fact, we started the recession but the data is hiding it. Let’s do a deep dive.
Either unemployment improved and dropped from 5.1% to 5% or job losses decelerated from 240,000 jobs down January-March to only 20,000 jobs lost in April.
Construction jobs: -61K jobs
Manufacturing jobs: -46K jobs
Retail: -27K jobs
Movies: +3K jobs (basically the end of the writers strike)
Finance & Insurance: +5K jobs
Real estate: +1.4K
Accounting & Bookkeeping: +9K jobs (tax season)
Accommodation and food: +20K
It seems the only areas of growth are tax driven: government, healthcare and education. (Yes, I call healthcare tax driven not just because of Medicare/Medicaid but because of forced payroll healthcare spending.)
But…wait. Finance and Real estate added jobs? Bars, hotels & restaurants adding people when spending is down and hotels are laying off people (MGM fired 400, for example). The National Restaurant Associationreported that 54% of restaurants had dramatically fewer sales.
Is it possible that these numbers are wrong? In fact, not just possible but absolutely true. The BLS (Bureau of Labor Statistics) uses a flawed methodology. Not a problem if it is always flawed the same way, but it isn’t. The BLS massages the data by extrapolating using trend-based estimates. So if the financial sector is doing well this year, the statistics will be massaged to show growth this year. And vice versa: a bad year last year becomes a bad year this year.
So when the economy is changing – up or down – the jobs data gets it wrong. It happened when the economy began raging in 2003/4 – the BLS missed 800,000 jobs.
Other problems with methodology include ignoring self-employed workers. Real estate agents (500K+ according to the BLS, 1.2M according to NAR) are self-employed. It’s a tax thing (so the companies can avoid paying payroll taxes). And with sales down 40%, a lot of them aren’t working.
Need additional evidence that the BLS methodology is lowballing unemployment? Consider California.
The trend at the State and Federal level is the same: rising unemployment. But California’s is spiking higher and faster.
The point isn’t about data accuracy. Who cares whether the BLS includes real estate agents that haven't made a sale in a year. The point is whether or not folks have money to spend or whether they are belt-tightening. Because belt-tightening leads to a rash of corporate earnings misses, and that’s the definition of falling stock prices.
And the fact is - times are tight and folks are not just spending less, inflation gives them less disposable income to spend.
GDP for Q4 2007 was 0.6%. It was the same for Q1 2008: 0.6%. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Great news, right? No recession. Not exactly
* Federal government spending rose 4.6% mainly due to raises. Yep, of that 0.6%, 0.3% came from raises
* Consumer spending was flat at 1%. In fact, durable good spending was down sharply: -6%. That’s consistent with GE and with the unemployment figures that showed a slowdown in hiring in manufacturing of durable goods (we are short consumer goods, consumer services, MGM, ZLC, NKE and HOG)
* Nonresidential construction fell 6% (we are short VMC)
* Residential investment dropped 27%
* Inventories rose $1.8B. This point got a lot of play partly because inventories dropped $18B in Q4 2007 and mostly because companies build inventories in response to sales expectations. Except that this is misleading – again. It’s just holiday seasonality. In Q3 2007, inventory shot up $30B as stores stocked up for the holidays. Then it dropped $18B as stores unloaded their crap and didn’t restock because demand was so light. Now they have added a little bit of inventory.
In essence, without the government giving itself a raise, the GDP was 0.3%. Not quite negative but not flat either. And a slight revision down puts us in recession territory.
It’s 10 days until we see another inflation report. The Fed is playing a game of chicken where they are lowering dollar value and inevitably increasing inflation while they are waiting for inflation to blink as the economy slows and demand softens. Got that?
Just like unemployment, it all depends on the methodology.
First, they exclude oil and food. Food and energy represent ~25% of disposable income and it is inflation at 4%~7% per month!
Second, the remaining inflation is calculated as a bundle of products. Sure some things are increasing in price, but others are dropping, like cars and washing machines. Except the problem with that methodology is that folks are cutting back severely on these durable goods and they can’t cut back on the food and oil they use. What about rising medical and mortgages?
Again, ignore the actual inflation figure. It is used primarily to slow down government payments that are forced to keep up with inflation. Pay attention, rather, to the basic trend: folks are not buying as many things. They can't until/unless they see significant drops in housing, medical, food and energy.
The fact is that inflation is quite high and it is forcing the US consumer to cut back on spending. Less eating out, more home cooking. Reductions in cell phone and cable. Less vacation travel. In short, consumers are cutting back on spending.
We are told to expect a splurge of spending thanks to the stimulus checks that started rolling out, but I don’t think folks are feeling that ready to spend. Most will sock it away, not blow it away.
All signs point to a reduction in spending, which in and of itself will lead to more unemployment and more business contraction.
The market is not reflecting bad news because it will respond only to facts as they emerge. Which means when the bad news finally hits the figures, the market will react very badly.
Many short opportunities remain. Luxuries like botox treatments will be put aside (we are short AGN).
No matter how much nitro the Fed wants to add to the gas tank, the gas tank itself is starting to run on empty. You can’t turbo charge what isn’t there.