Signs of the Economic Apocalypse 5-9-05

From Signs of the Times 5-9-05:

A stronger than expected U.S. jobless report for April lifted U.S. stocks last week. The Dow Jones Industrial Average closed Friday at 10,345.40 up 1.5% from the previous week’s close of 10,192.51. The NASDAQ closed at 1967.35 up 2.4% from the previous week’s 1921.65. The yield on the ten-year U.S. Treasury bond closed at 4.26%, up from last week’s 4.20%. The euro closed at 1.2824 dollars, or .7791 euros to a dollar, up 0.3% against dollar from the previous week’s 1.2866 or .7772 euros/dollar. Gold closed at $426.80 an ounce (332.81 euros/ounce) Friday, down 2% from the previous Friday’s close of $435.50 (338.49 euros/ounce), down 1.7% in euros. Oil closed at $50.96 a barrel, up 2.5% from the previous week’s close of $49.72. That would put oil in euros at 39.74 a barrel up 2.8% from the previous Friday’s close of 38.64. At Friday’s close, an ounce of gold would buy 8.43 barrels of oil, down 3.9% from the previous Friday’s close of 8.76.

Let’s take a look at the good news the U.S. analysts were trumpeting, the “strong” jobs numbers:

Payrolls grow more than expected in April
By Glenn Somerville

Sat May 7, 6:45 AM ET
The addition of a surprisingly strong 274,000 U.S. jobs in April plus upward revisions for hiring numbers in two prior months showed the economy rebounding from a first-quarter slowdown.

The April jobs total, reported by the Labor Department on Friday, eclipsed analysts' expectations of 170,000 new jobs. It implied that interest rates are likely to keep rising since lofty energy prices have not sapped the durability of the three-year old economic expansion.

Further underlining the surge, the government said 93,000 more jobs were created in February and March than it previously reported -- 146,000 in March instead of 110,000 and a whopping 300,000 in February instead of 243,000.

"So much for soft spots, unless you think it is possible to create 700,000 jobs in the past three months and not have a solid economy," said economist Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

The unemployment rate, which is calculated from a separate survey, was unchanged at 5.2 percent in April.

The jobs data sent U.S. Treasury debt prices skidding lower on a conviction that a strong economy will keep the Federal Reserve pushing interest rates higher to curb inflation.

INFLATION BARRIERS

U.S. central bank policy-makers on Tuesday raised the bellwether federal funds rate, charged on overnight loans between banks, for an eighth straight time since last June to 3 percent and analysts see it going higher as a bulwark against price pressures.

A Reuters poll of 20 big banks that deal directly with the Fed found they unanimously expect another quarter percentage point rate hike after their next policy session on June 29-30. Almost all foresee a further quarter point hike on Aug. 9.

"The risk is that unless the Fed puts a speed-bump in the way of the economy that we will see a rise in end-user inflation," said Stuart Schweitzer, global investment strategist with J.P. Morgan Asset Management in New York.

Schweitzer said the Fed is "well along but not nearly finished" with its rate-rising campaign and predicted the fed funds rate will move up to 4 percent by the end of the year.

April job gains were broad-based with manufacturing the only major sector to shed positions. Construction employment snapped back after a soft March, adding 47,000 to payrolls for the strongest hiring since March 2004.

BUSH OFFICIALS JUBILANT

Treasury Secretary John Snow, in a blitz of television appearances after the jobs report was issued, said the economy was well poised for steady expansion. "I think we can continue to have good strong, noninflationary growth that creates lots of jobs going forward," Snow said on CNBC television.

So far in 2005, about 210,000 jobs a month have been created, ahead of the roughly 150,000 that economists estimate are needed just to absorb new entrants to the
workforce.

Economist Gary Thayer of A.G. Edwards and Sons Inc. of St. Louis, Missouri, said the first-quarter softening in the pace of economic growth now appears to have been temporary rather than a portent of a broader slowdown, judging by corporations' willingness to bet on the future by adding to payrolls.

"It suggests that the cooling off we've seen is not a significant problem. High energy prices are hurting confidence, but don't appear to be hurting job creation," he added.

The strong data were a balm for financial markets after recent nervousness that recent data might point to a spreading economic soft spot. Major stock indexes rose after the report but the gains were checked by heightened concern over prospective interest-rate rises. The major indexes closed on Friday virtually unchanged.

"Not only is the April report strong, but it's stronger than what the summary suggests," said economist Richard DeKaser of National City Corp. in Cleveland. "We have huge upward revisions. We see hours worked rising sharply in the month of April, which indicates how the workforce is being utilized."

Average hourly earnings in private industry climbed five cents to a record $16 in the month, while the average workweek increased to 33.9 hours from 33.7 in March.

The zeal with which the Bush-allied officials and analysts seized on these numbers could be an indication of their desperation earlier this week when most of the news was bad.

The dollar has been holding its own against the euro as well, lately, with the European economy looking shaky at the moment. From a survey of the world economy by Nick Beams:

According to a report issued by the European Commission, economic confidence is falling across the region. The commission said the decline in its “economic sentiment” index to the lowest level since October 2003 indicated “a considerable slowing of output growth in the first half of 2005”.

Amelia Torres, the EU spokeswoman for the economy and finance commented that “the situation is not exactly rosy at the moment”. Growth-oriented policy changes in countries like Germany, she said, were “taking time to bear fruit”. This is a reference to new regulations which bring in severe cuts to unemployment benefits and have helped push unemployment rates to over 5 million.

Ken Wattret, an economist with BNP Paribas in London, told the International Herald Tribune that the numbers showed a European economy in trouble. “We thought services would rebound in anticipation of better prospects in industry, and so pessimism really is the order of the day.”

The commission said the biggest decreases in its economic sentiment index, which covers industrial, retail, construction, services and consumer confidence, had been in the UK, followed by France. French unemployment has risen to a five-year high of 10.2 percent with a report showing that business confidence in April was at an 18-month low. The business leaders interviewed for the survey were particularly downbeat about the prospects for exports.

While the German unemployment rate declined slightly last month, revised data issued last week show that the economy is in a technical recession, with two consecutive quarters of negative growth in the second half of 2004. The governments of Germany and Italy have both revised downward their estimates of economic growth from 1.6 percent to 1 percent and from 2.1 percent to 1.2 percent respectively.

German business confidence is down to its lowest level since September 2003, after three months of successive declines. Consumer confidence is also reported to be falling.

Asia is looking shaky as well, as the whole world looks in trepidation at the ability of consumers in the United States to keep buying as while being paid less and while falling deeper in debt. Again from Nick Beams:

Despite the continuing boom in the Chinese economy, the overall situation in Asia is little better. Last week, the Bank of Japan acknowledged that the economy, the world’s second largest, is still stuck in deflation in spite of three years of stop-start growth. While the fall in prices of 0.2 percent in the year to March was less than the 0.8 percent declines experienced in each of the previous two years, the bank does not expect prices to start rising until 2007.

The latest result means that Japan has experienced eight years of deflation since the collapse of the real estate and share market bubble in the early 1990s. With interest rates at zero and plenty of liquidity there is little financial authorities can do to boost the economy. Increased government spending is also ruled out because previous measures, which failed to provide any long-term revival, have left Japan with a public debt equivalent to 160 percent of gross domestic product.

Japan’s domestic economy is virtually stagnant, with real domestic demand only averaging an annual increase of 0.9 percent over the past years. What growth there has been is largely the result of exports, especially to China, which have increased at a rate of 7.4 percent over the same period. But even this source of growth could dry up if China’s growth rate begins to fall as a result of a slowdown in the US.

The dependence of the Chinese economy on the US and other foreign markets is reflected in the share of exports as a percentage of GDP: up from 20 percent in 1999 to 35 percent in 2004. Of these exports, one third goes to the US. The picture is the same throughout Asia.

According to calculations by Morgan Stanley economists, over the past five years exports from non-Japan Asia have increased at an annual rate of 15.3 percent; more than triple the 4.9 percent annual increase in domestic consumption spending over the same period.

These figures underscore the growing reliance of China and the rest of Asia on the expansion of the American market and signify that any sustained slowdown in the US economy, not to speak of a recession, will have far-reaching consequences.

Notice how long Japan has had to spend burning off all the bad debt from the collapse of their real-estate bubble. Will the United States be next to hear the bubble pop? If it does, say goodbye to overvalued stock prices. Will the United States have the luxury Japan has had, selling goods to the United States and still investing abroad while trying to sweat out all the bad loans?

How will the United States ever get out of debt? The government is now doing little more than funneling tax money to corporations via procurement contracts and various privatization schemes. The tax cuts on the wealthy are being made permanent. The people are being impoverished with falling wages, fewer benefits and more resposibility for their own catastrophic losses with the systematic dismantling of social insurance. The people can only default on the debts they have incurred out of their optimistic nature: the belief that they will be earning more in the future. After the default, when Americans lose everything and the dollar crashes, workers in the United States can provide cheap labor for other countries, kept in line by Patriot Act laws.

Without a radical redirection of economic policy, what else can happen at this point? What does the United States as a whole produce? Raw materials, of course, like any continental nation. But supplying raw materials to the world market is a recipe for poverty. The United States grows food in abundance (if in a heavily petroleum-using way). The United States also jointly controls with Canada (with whom it is trying to merge) a large percentage of the world’s surface fresh water in the Great Lakes.

The United States produces culture, but, as Peter Jackson’s new film complex in New Zealand shows, culture can move quickly and historically has moved quickly, following the money. The film industry is the one part of the culture industry which has the largest infrastructure of fixed assets and its center of gravity could shift to Hong Kong, Bombay (Bollywood), or Wellington.

The United States produces knowledge, but has always done so by attracting scholars from all over the world to supplement its native born talent, but that era is ending. Patriot Act laws and visa restrictions make it harder to bring in foreign students and scholars, and the obnoxious foreign policy of the Bush administration is making it so no one who has other choices wants to come here. We may even see a brain drain of native talent leaving for other shores.

But what high-end, high value-added commodities? Where is the heavy adding of value done? One of the only type of advanced manufacturing done completely in the United States is advanced weaponry (don’t want to outsource THAT to China or India!). The U.S. is also turning out lots of people trained to operate these weapon-systems and are spending a lot of money and effort trying to recruit U.S. children to do just that. The bet, then, is on advanced weapons keeping the ruling classes of the United States in place as the hegemonic world power. No wonder the rest of the world sees the United States as the greatest threat to world peace.

The former members of the American middle class will not be helped by that hegemony, though. They will have the choice of serving in the war machine or in the civilian work camps.