April 24, 2012

After further review, employment remains unhealthy

Posted in Economic Growth, Economy, Federal Reserve, Finance, investment advisor, investment banking, investments, recession, Uncategorized, Unemployment tagged , , , , , , , , , , , , , , , , , , , , at 3:40 PM by Robert Barone

 Most of the business media is content to rehash headline data, simply passing on what the large wire services report with no further analysis. The headline, then, becomes the “conventional wisdom.”

Such was the case on the first Friday of April with the reporting of the unemployment rate. The conventional wisdoom was that there was some disappointment in that, using the Establishment Survey of the Bureau of Labor Statistics (BLS), the nation only created 120,000 new jobs. But the unemployment rate itself sank to 8.2 percent. For that we should be grateful, at least according to the conventional wisdom.
 
The accompanying chart tells quite a different story. It is a long-term chart. The period measured (horizontal axis) begins in 1988, so it covers about a quarter of a century. The right hand vertical axis measures the “headline” unemployment rate. That’s the headline rate most often reported. In government jargon, it is known as the U-3.
 
The scale is inverted, so a rising line means the unemployment rate is falling. This unemployment rate is supposed to measure the number of people looking for work who can’t find it as a percentage of all people with and without jobs. The left hand scale is a measure of the employment rate in its most basic form. Most readers won’t recognize this, as it is seldom reported, but it measures the number of people employed as a percentage of the population. As such, it is a better measure of the job market in that, unlike the unemployment rate, its definition can’t be changed (more on that later).
 
Looking at the chart, note that in the late 1980s, 63 percent of the population was employed. This rose to nearly 65 percent at the turn of the century. After falling to 62 percent in the 2001-02 recession, it rose back to 63 percent in 2007. Since the Great Recession, this measure of employment has been bottom bouncing just above 58 percent.
 
But what is really noticeable is the huge divergence between the two since 2010. The question to be asked is, “How can the ’employment rate’ show little to no improvement, while the ‘unemployment rate’ would lead one to conclude something altogether different?” The answer lies in how things are defined.
 
In 1994, BLS redefined the term ‘discouraged worker.’ This person was counted as unemployed only if he or she had been ‘discouraged’ for less than a year. After that, he or she was longer counted as ‘looking for work.’ Today, with jobs so hard to find, we clearly have many people who have been out of work for more than a year but are still actively seeking employment. Our social safety net even recognizes jobs are hard to find – unemployment insurance payments are available for 99 weeks. But our measurement of “unemployment” stops counting people as unemployed or even looking for work after 52 weeks. They are simply defined away! This goes a long way toward explaining the increasing discrepancy between the two series.
 
This past weekend, I made an off-the-cuff observation to my wife as we visited a fast food establishment with the grandchildren in tow. I noted employees seemed to be a lot older than what I remembered from a few years back. In recent blogs, both David Rosenberg (Gluskin Sheff) and John Hussman (Hussman Funds) wrote about the changes in the distribution of job creation since the end of the recession in June 2009. According to the Federal Reserve Bank of St. Louis, total employment in non-agricultural industries (seasonally adjusted) has grown 2.15 million since that time. For workers 55 and older, employment has grown by 2.98 million.
 
That means that employment has continued to contract for those under 55 years of age since the recession’s so-called end! How can that be healthy?
 
There is a term business media uses called “financial repression.” Essentially, it refers to the zero interest rate environment in which savers and retirees are no longer able to live off the interest on assets they accumulated prior to retirement. So they re-enter the labor force, working for minimum wages to supplement now inadequate retirement incomes.
 
The employment picture, then, when viewed from this lens, is much worse than the headline data and conventional wisdom would have you believe. I don’t think this is a surprise to most Americans, but it would certainly help if the business media stopped pretending.
 
Robert Barone and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment Advisor.   Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
 
Universal Value Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.
 
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, an SEC Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.
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November 10, 2009

Is the Recession Really Over?

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , at 9:41 PM by Robert Barone

News pundits are hailing the end of the Great Recession.  The numbers have come out, and the American economy has grown again.  What does this mean for our friends and our families?

The metric the Government uses to measure the economy is called Gross Domestic Product, or GDP for short.  GDP is defined as the market value of all final goods and services that a country makes in a given year.  By tracking this number, Government statisticians can figure out whether or not the economy grew in any given period. 

There are a few basic problems with GDP that should preclude us from taking the number at face value. 

First, it is a complex calculation, and is most often revised after it is originally released to the press. What may be a positive number, upon release, may be a negative number three months later.

Second, the inputs of the GDP

(Consumption + Investment + Government Spending + Net Exports = GDP)

make it a number that is easy to manipulate.  Retail sales and investment (excellent measures of “business”) may fall off a cliff, but GDP may go up. By taking on debt and spending money, the Government can easily manipulate the number higher.  For example, the most recent GDP number would have been much lower if it hadn’t been for the new home buyer subsidies and cash for clunkers program.  Keep in mind, both of these stimulus programs were funded with debt (and/or printed money), and will have to be repaid in the future through higher taxes and/or inflation. 

Third, I can’t pay my bills with GDP growth.  As stated above, GDP may reflect the Government taking on debt and handing out money, as opposed to real business activity.  The cost of this debt will be a future drag on profits, incomes, and growth.  It is important to remember that the Government does not make and sell things for a profit.  The Government’s income is derived by taxing business, taxing incomes, and taxing transactions (i.e. capital gains, sales tax). Therefore, a bigger GDP number obtained by increased Government spending may mean less income for you and me in the future. 

Since most of us get our paychecks by working at or owning a business, why don’t we look at measures of business activity instead of GDP?  If business does well, people are hired and paid.  Tax collection goes up as well, as profits are taxed and people have more money to spend on goods and services.  If business declines, people make less money and get laid off.  Obviously, tax collection also suffers under these circumstances.

For a quick and dirty look at business activity, we decided to review the sales results of a handful of companies in the shipping industry.  Most of us buy and consume products that are made somewhere else.  Whether we buy things at a store, or online, shipping is involved in the process of bringing producers and buyers together.  If business is up, then sales of a diverse group of shippers should rise as well. 

We chose to look at the following companies’ sales growth in 2009, as reported in their SEC filings and/or press releases:

Overseas Shipholding Group:  – 35.11 %   

Expeditors International:  – 34.23 %

UPS:  -15.22 %

Burlington Northern:  – 24.26 %

Using our quick and dirty shipment method, we can see that sales are down significantly from 2008 levels.  This means that business activity is down, and therefore incomes must be down. 

Now lets look at GDP growth for the first nine months of 2009, and compare it to the first nine months of 2008, using numbers from www.bea.gov:

GDP Growth: 2009 (through third quarter):  -2.38%

What we can tell from our little exercise is that movement of things has slowed down a lot more than GDP. Since most incomes (personal and Government) ultimately come from business revenues, and not GDP, we can see that things are quite a bit worse than they were a year ago.  Given that businesses are still announcing significant job cuts, I’d expect that spending won’t come rocketing back in the near term.  We will ultimately reach a bottom in the Great Recession, but as investors, we need to focus on the fundamentals, not Government hype.

Matt Marcewicz

November 6, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.