Signs of the Economic Apocalypse, 4-9-07

From Signs of the Times:

Gold closed at 679.40 dollars an ounce on Friday, up 1.6% from $669.00 at the close of the previous Friday. The dollar closed at 0.7475 euros Friday, down 0.2% from 0.7487 at the previous week’s close. That put the euro at 1.3378 dollars compared to 1.3357 at the end of the week before. Gold in euros would be 507.85 euros an ounce, up 1.4% from 500.86 for the week. Oil closed at 64.25 dollars a barrel Friday, down 2.5% from 65.87 at the end of the week before. Oil in euros would be 48.03 euros a barrel, down 2.7% from 49.31 for the week. The gold/oil ratio closed at 10.57 Friday, up 4.0% from 10.16 at the close of the previous Friday. In U.S. stocks, the Dow closed at 12,560.20 Thursday (markets were closed for Good Friday), up 1.7% from 12,354.35 for the week. The NASDAQ closed at 2,471.34 Thursday, up 0.6% from 2,456.18 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.75%, up 11 basis points from 4.64 for the week.

Analysts pointed to a good March jobs report for the U.S. (180,000 jobs created, supposedly) to explain the rise in stocks and the dollar (at the end of the week, the dollar was down a bit for the week as a whole). I say ‘supposedly’ because, as George Ure reminds us, these monthly figures count, in addition to jobs actually created, jobs that may have been created by new, small companies that may exist: the so-called CES Birth-Death Model. In March the Birth-Death model accounted for 128,000 out of the 180,000 jobs created:

The Job Numbers

This would be a fine day to report horrible job numbers because of the markets being semi closed. But, it almost goes without saying that the numbers are good - because that's the only kind of numbers that can be released. Even when they fail to hit expectations by a tiny bit, they are still presented as good/unchanged.

Today is no exception as we read about the March Employment report out from the Bureau of Labor Statistics, the same people who never ask Elaine and I about real-world inflation when it comes to their Cost of Living statistics:

"Nonfarm payroll employment rose by 180,000 in March, and the unemployment rate was essentially unchanged at 4.4 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment increased in construction, retail trade, and health care. The number of manufacturing jobs continued to trend down. Average hourly earnings rose by 6 cents, or 0.3 per- cent, over the month.

Unemployment (Household Survey Data)

In March, the number of unemployed persons (6.7 million) and the unemployment rate (4.4 percent) were essentially unchanged. The jobless rate has remained within a narrow range--4.4 to 4.6 percent--since September 2006. Over the month, the unemployment rate for most major worker groups--adult men (4.0 percent), adult women (3.8 percent), teenagers (14.5 percent), blacks (8.3 percent), and Hispanics (5.1 percent)--showed little or no change. The jobless rate for whites decreased to 3.8 percent. The unemployment rate for Asians was 3.0 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)

In March, the number of unemployed job losers and persons who had completed temporary jobs declined by 215,000. The number of unemployed persons who had been jobless for less than 5 weeks also fell, by 273,000. (See tables A-8 and A-9.)

Total Employment and the Labor Force (Household Survey Data)
Both total employment, at 146.3 million, and the employment-population ratio, at 63.3 percent, were essentially unchanged in March. Over the month, the labor force participation rate held steady at 66.2 percent, about the same as a year earlier. (See table A-1.)

Persons Not in the Labor Force (Household Survey Data)

About 1.4 million persons (not seasonally adjusted) were marginally attached to the labor force in March--essentially unchanged from a year earlier. These individuals wanted and were available for work and had looked for a job sometime during the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 381,000 discouraged workers in March, down slightly from a year earlier. Discouraged workers were not currently looking for work specifically because they believed no jobs were available for them. The remaining 1.0 million persons marginally attached to the labor force in March had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities. "

Being natural-born skeptics, we immediately pop over to the CES Birth-Death model to see how many of the 180,000 "new jobs" were 'created' by an estimate (a wild-ass guess with statistical theory behind it) of new businesses which aren't counted by traditional methods. We see this time around, that of the 180,000 jobs 'created; 128-thousand were from the CES Birth-Death Model.

Now think about this for a moment: If we have 2,000 illegals a day wandering in from Mexico over the still-too-porous border, that doesn't break us even. And the figure bandied about is more likely in the range of 5,000 a day!

Then there's underemployment - which is your engineers flipping burgers, or IT people working convenience store jobs because they have been outsourced. That's officially at 8.3% (Table U6, alternative measures of labor under-utilization). Again, a change which is in the statistical "noise" error rate on the surveys.

…What amazes me is that manufacturing employment is only 14.1 million out of a labor force of 152-million. Which means huge amounts of everything are coming in from overseas as jobs like business and professional services lost another 7-thousand for the month.

Another curious (read: incredible number) was that construction jobs were up 56-thousand for the month. Hard to believe in the midst of the housing collapse, huh? Well, like the old joke does, "Is the word gullible in the dictionary?"

Actually, I can believe that contruction jobs were up, just because new buildings still are going up this Spring. Someone will be left holding the bag soon, but until then they keep building houses, condos, and office buildings.

But the underlying weakness of the U.S. economy is clear to most people. Consumer confidence was down in March as gasoline prices rose, housing prices dropped and large companies continued to off-shore good jobs and reduce pay and benefits for those jobs that remained.

On the other hand, Europe seems to be doing very well lately. Industrial output rose in Germany:

German February Industrial Output Unexpectedly Rises

By Simone Meier

April 5 (Bloomberg) -- Industrial production in Germany, Europe's largest economy, unexpectedly rose for a fourth month in February as manufacturers boosted output of goods such as factory machinery and equipment.

Production increased a seasonally adjusted 0.9 percent from January, when it also rose 0.9 percent, the Economy and Technology Ministry in Berlin said today. Economists expected a 0.5 percent decline, according to the median of 39 forecasts in a Bloomberg News survey. In the year, output rose 7.7 percent.

The German economy is showing few signs of cooling from the fastest pace since 2000 last year as companies boost spending and hiring to meet demand. Factory orders increased the most in more than two years in February, and executives, investors and consumers became more optimistic about growth last month.

"German manufacturers are still doing very well," said Lutz Karpowitz, an economist at Bayerische Landesbank in Munich, who forecast a 1 percent gain. "Even if the U.S. economy continues to cool, other regions such as in Asia and Eastern Europe will help counter the impact" on exports.

The German economy may expand "a good" 2 percent this year after growing 2.7 percent in 2006, Bundesbank President Axel Weber forecast March 28. The European Central Bank expects the economy of the 13 euro nations to grow about 2.5 percent this year and around 2.4 percent in 2008.

China, Japan

The U.S. economy, the world's largest, may become a drag on global expansion this year. U.S. manufacturing growth slowed more than forecast last month and orders for durable goods excluding transportation dropped for a second month in February.

Demand in markets outside the U.S. is shoring up the economy. China, the world's fastest-growing economy, may expand 9.6 percent this year after 10.7 percent in 2006, the World Bank said today. East Asia, which excludes Japan and the Indian subcontinent, may grow 7.3 percent this year after expanding 8.1 percent in 2006, the most in a decade, the Washington-based lender said.

Orders for German manufactured goods rose 3.9 percent in February after declining in the previous month, the Economy and Technology Ministry said yesterday. Manufacturing accounts for about a quarter of German gross domestic product.

Output of goods needed to make other products rose 0.7 percent in February from the previous month and production of investment goods increased 1.1 percent, today's report showed. Construction output rose 0.9 percent in February, helped by faster economic growth and mild weather," the ministry said.

…"All signs continue to suggest that an economic recovery in Europe will continue on a broad basis," said Bernd Scheifele, chief executive officer at HeidelbergCement AG, Germany's largest maker of building materials, in a March 22 interview. "Germany is clearly benefiting from booming markets in China and India."

'Healthy Slowdown'

Companies have increased spending and hiring to meet orders, helping the economy overcome the government's value-added tax increase to 19 percent from 16 percent on Jan. 1. Unemployment dropped to 9.2 percent in March, the lowest since May 2001.

Output of consumer goods rose 0.4 percent in February from the previous month, when it dropped 2.2 percent, today's report showed. Gains were led by demand for durable consumer goods.

"The comparatively soft VAT impact took everyone by surprise," said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. "The German economy will weaken slightly this year, but it's more of a healthy slowdown toward a more sustainable growth path."

The ECB has signaled it's ready to raise interest rates further if needed to keep stronger growth from pushing up inflation. ECB council member Nout Wellink said today in the annual report of the Dutch central bank that the euro-region economy "is at full steam" with the key rate still below a 2001 peak after seven increases to 3.75 percent since late 2005.

European strength may indicate nothing more than that EU countries are on a different part of the business cycle than the U.S. having started their recovery somewhat later. But, last week a major historical milestone was reached. For the first time for nearly a hundred years, the total value of European stocks is greater than the total value of U.S. stocks. From a lead editorial in the Chicago Tribune:

Europe rising

April 7, 2007

The Financial Times noted in its U.S. edition that if you added up the value of all the stock on all the stock markets in Europe at the end of last week, it topped that of the U.S. stock market. This hasn’t happened since before World War I, near as anyone can tell, and is yet another sign of the decline in America’s dominance in global markets, the newspaper declared.

European stock market capitalization totaled $15.72 trillion compared with $15.64 trillion for the U.S. The Financial Times attributed this to the euro's strength against the dollar and the faster growth and better market performance across the pond, particularly in Eastern Europe. (It's probably also due to the private equity boom in the U.S., which has resulted in a record number of U.S. companies exiting the public stock market.)

Lest Americans obsess about this apparent evidence of the loss of U.S. primacy in commerce, know there's a caveat. The "Europe" referred to in the Financial Times stretches from the Atlantic to the Pacific and from the Arctic Ocean to the Mediterranean. It includes Russia and Turkey, two dozen stock markets in all.

It could be argued that only an apples-to-apples comparison is fair. That would mean comparing stock market cap for this far-flung Europe, with its population two and a half times that of the U.S., to all of North America. Adding Canadian and Mexican markets to the U.S. total would tip the balance back to the New World.

There is a glimpse of the future in this -- but it is not something for Americans to fear. Rather, it reflects a more balanced world with more opportunities for investors…

Fair enough, but would the editors of the Chicago Tribune also call for a more balanced world militarily? How long can the United States spend as much on the military as the rest of the world combined, given the increasing balance of economic power, not to mention the United States’ Middle Eastern quagmire? It seems that the answer may be in months rather than years.