|
November 6, 2009
Today is a strange day in a strange time.
The Fed has begun gradually to withdraw support for the mortgage market, but mortgage rates are improving (back toward 5.00%) versus the 10-year Treasury. The unemployment rate spiked to 10.2%, but “non-farm payrolls” in October net of prior-months’ revisions contracted far less than expected, only by 97,000 jobs.
The recovery versus no-recovery debaters are still at it, but the dominant and growing group is uncertain. Not just about growth versus not, but unsure about economic structure going forward, distrusting more an more of the old models and indicators. Best evidence: the bad case of whiplash in stocks, volatility rising again.
As always, one piece at a time: rates first, then jobs, then measure-the-economy.
The 10-year T-note has held 3.50% (again), despite massive new Treasury borrowing coming next week -- $40 billion in 3s, $25 billion in 10s, and $16 billion in 30s. The best shot at lower rates will come near the end of that binge at mid-week. The good performance of mortgages may flow from something simple: a net-to-investor yield at 4.50% looks pretty good compared to alternatives (cash, stocks). Also, the economic optimists arguing for a rate hike look more mistaken by the hour.
The “10.2%” was a 26-year-record shocker offset by positive revisions in the payroll survey taken among larger employers, which are doing better than smaller ones. However, the small ones and startups are the engines of job growth, still in bad trouble. Under-employment -- people wanting more work but unable to find it -- spiked to 17.5% in October. The sunshine-blowers were thrilled at a 9.3% leap in productivity, which traditionally would be good news, a precursor to business expansion. However, productivity is production divided by people at work, and the “improvement” this time just reflects fewer people in that ratio, also shown in a 5.2% drop in unit labor costs.
The cause of poor American job creation (about the same number of people at work as ten years ago) is another huge argument, from math scores to parenting to unions to capital, regulation, deregulation, innovation, automation, motivation... on and on. However, sez here the most powerful force is China exporting low wages along with sneakers. Desperate to soak up its own excess labor, it runs its export engine hot by undervaluing the yuan and forcing down internal wages. As we try to devalue the dollar to mitigate the undermining, China devalues just as fast. American joblessness aside, “competitive devaluation” is unstable, and in this form is heavily deflationary.
One last employment note: healthcare jobs last month rose by 29,000, up 597,000 during the recession. If ever there were a sector impervious to market forces....
Until we agree on how to measure “recovery,” we can’t begin to resolve the discussions about whether we’re having one or how to get one. Traditionally, once any growth at all begins at recession-bottom, it compounds rapidly and we blaze off to full recovery. All post-WWII recessions have had similar experience, so the optimists and the fancy econometric software today assume that any growth indicator means a rocket ahead. However, the agnostics, skeptics and grumps are worried about levels of activity, unsatisfied by positive slope.
This week we got the ISM survey of manufacturing for October, at 55.7 in pink-of-health. The recession trough was 32.9 last December, broke 40 in April, and crossed 50 breakeven to growth in August. However, the ISM measures change, not level. The Fed measures industrial production -- the level -- by index, 2002 = 100. At the peak of the last expansion in September 2007, IP reached 114.4; at the pit in June this year, it hit 95.8, since rising only to 98.5.
Both ISM and IP are correct. We do have some shift to growth, but the level of activity is 15.9% below peak, lower than ten years ago and rising very slowly. No chance of inflation, and no recovery worthy of the name.
The Fed is fully justified in keeping rates “exceptionally low for an extended period.” |
