Rosenberg on this recession

David Rosenberg :

Has a recession ever ended with U.S. payrolls sliding 1.3 million over a three-month span? The answer would be “no”. The June U.S. employment report had deflation thumbprints all over it. You don’t have to take my word for it, have a read of San Francisco Fed President Janet Yellen’s speech on June 30 when she dared to utter the “D” word (see below). And that was before the release of the payroll data, which contained disturbing signs of weakness on many fronts.
The headline U.S. nonfarm figure came in at -467k compared with -350k consensus forecast and the back revisions were negligible (+8k). Also keep in mind that the Birth-Death adjustment showed that miraculously, 185,000 jobs were created by new business formation, which was 20,000 more than a year ago – you really cannot make this stuff up. Be that as it may, at no time in the 1980, 1982, 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure as we did on Friday, not even at the depths of those downturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived.
We saw a market commentator on the front page of today’s NYT stating “It looks shockingly bad compared to last month, but it is better than April when the economy shed 504,000 jobs. The trend is much better than when we started the year”. We can understand the human need to be optimistic at all times, but in the money management business, it is vital to constantly do reality checks. With the global economy coming out of the abyss at the turn of the year, and with credit conditions far better than the total freeze-up back then, why should we still be seeing job declines of between 700k and 800k? Is that the new benchmark for the economy? The reality is that the Lehman collapse was nine months ago and the peak of the fallout was five months ago. Think about that, the economy was in recession for over a year by the time the markets really began to fall apart at the turn of this year, and since the peak of the angst, the economy has still shed over 2½ million jobs, which is more than what was lost in the entire 2001 tech-wreck-downturn.
So while we are no longer experiencing an earthquake, what we are enduring are the aftershocks, not green shoots. There is still up to $5 trillion of consumer and mortgage-related debt that has to come out of the system based on the new and lower level of assets and net worth on the household balance sheet, and companies are adjusting their order books, output schedules and staging requirements to this new paradigm of credit contraction. It should not be lost on anyone that this is the first time since the 1930s depression that the private sector job losses posted in the economic downturn more than wiped out all the gains from the prior expansion.

This is a totally new experience for analysts, economists and strategists, which may be one reason why so many pundits missed calling this cycle for what it is, or perhaps for what it is not, a garden-variety recession, where little rules-of-thumb like the ISM or ECRI can be relied upon to call the turn. This time around, the signpost will come from more esoteric indicators such as home inventories, the savings rate, debt-service ratios, household balance sheet growth, and liquid assets relative to non-liquid assets on commercial bank balance sheets. That is the big picture.

Back to the smaller picture (the data). As always, the devil was in the details in Thursday’s report. In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31.0, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs. The Household Survey showed a 374k job decline, and all centered in full-time jobs. In fact, we have lost a record 9 million full-time jobs this cycle, more than triple what is normal in the context of a post-WWII recession, and the over 2 million pushed onto part-time work (and the number of people now working part-time because they have no other choice due to the weak economy has more than doubled).
This in turn has taken the total hours worked in the private sector down to a new record low of 33.0 hours in June from 33.1 hours in May. In fact, aggregate hours fell so much in June that the decline was equivalent to over an 800k job slice! Just to put the entire labor market picture into a certain perspective; aggregate hours worked, which closely tracks real GDP growth, fell 0.8% in June (that is a 9.2% plunge at an annual rate), which was the steepest decline since March, and not once did a recession ever end with this metric as weak as it was last month.

When we say that deflation has gripped the labor market, we are not exaggerating. Average weekly earnings – the proxy for wage-based income – fell 0.3% in June and have been flat or down in three of the last four months. During this interval, they have deflated at a 1.6% annual rate – versus a +1.8% trend a year ago and +5.2% two years ago.
Moreover, judging by the lingering – indeed, accelerating – weakness in labour demand, these deflationary pressures in the labour market in general and wages in particular can be expected to persist. In addition, the implications for consumer spending once the fiscal stimulus subsides in the second half of the year are clearly negative, with similar implications for corporate profits and the equity market, which are de facto priced in a V-shaped earnings recovery. The average duration of unemployment gapped up by two weeks to 24.5 weeks – both the monthly increase and the level reached new record highs. The number of unemployed people that have been looking for a job with futility for the past six months rose 433k to a new all-time high of 4.4 million. Almost one-in-three of the ranks of the unemployed have been looking for work now for the past six months and still can’t find one. It is remarkable that anyone can be serious about ‘green shoots’ in this labour market backdrop.

When recovery does come, the record number of people that have been pushed into part-time work are going to see their hours go back up, which will be good for them, but not so good for the 100,00 - 150,000 folks that will be entering the labour force looking for work with futility. The unemployment rate is probably going to rise through 2010, which is going to pose a challenge for incumbents seeking re-election in the mid-term voting season. It may also prove to be a challenge for Ben Bernanke’s re-appointment chances this coming February. As we said above, companies have permanently reduced the size of their operations with a knowledge of how much credit is going to be available to them in the future to survive because the financial sector is going to be operating under more supervision and regulation and leverage ratios, which means the funds available to support a given level of GDP is going to be measurably smaller than what we had become accustomed to during the secular credit expansion that really began in the mid-1980s, only to turn parabolic during the ‘ownership society’ era of 2002 to 2007.

What makes this cycle “different” is the permanency of the job losses – many are not coming back. For example, the number of people unemployed who are not on “temporary layoff” rose 172k in June and the tally is 1.2 million over the past three months to total a record 7.9 million. Three-in-every-four workers who were fired over the past year were let go on a permanent, not a temporary, basis. A record 53% of the unemployed today are workers who were displaced permanently – not just temporarily because of the vagaries of the traditional business cycle. That means that these jobs are not going to be coming back that quickly if at all when the economy does in fact begin to make the transition to the next expansion phase. This, in turn, means that any expansion phase is going to be extremely fragile and susceptible to periodic setbacks.
There may well be job growth in the future in health care, infrastructure, energy technology and the like, but we can say with a reasonable amount of certainty that there are a whole lot of jobs in a whole lot sectors where jobs lost this recession are not going to come back. For example, the 580k jobs lost in financial services, the 320k jobs lost in residential construction, the 1.7 million jobs lost in durable goods manufacturing, the 1.1 million jobs lost in the wholesale/retail sector, and the 380k jobs that were lost in the leisure/hospitality industry. That is over four million jobs right there that were shed this cycle that are not likely to stage a comeback even after the recession is over. To show you how big a number four million is, we didn’t create that many jobs in the prior expansion until it reached its fourth birthday towards the tail end of 2005.
The employment-to-population ratio just fell to a 15-year low of 59.5%. For it to go back to where it was at the peak of the last expansion, when there were legitimate cyclical inflation concerns, the economy would have to generate roughly 10 million jobs from where we are today. So watching for inflation in coming years, and we say this with all deference to the Fed’s bloated balance sheet, which two years into this easing cycle has yet to reignite the credit cycle, is going to be akin to watching grass grow. Have fun.

The degree of slack in the labour market is without precedence, and this widening gap between the demand and supply for labour, as we have seen in Japan, is very likely to continue exerting downward pressure on wage rates. With the fiscal deficit at 13% of GDP and public support for continued deficits waning, it is doubtful that the government, which now contributes a record 18% to personal income, can fill the void indefinitely. Did you know that the White House said in January that an $800 billion fiscal package would be enough to bring the unemployment rate down to 7% and that without the stimulus the rate would be 9%. Here we have the ballyhooed stimulus and the official jobless rate is 9.5%. Maybe, just maybe, the government isn’t the answer and today’s WSJ editorial (Tilting at Windmill Jobs) hits the nail on the head on this issue. Fully nine months after the election, this is hardly W’s recession any longer – even if the pace of economic activity is very likely going to look like a continuum of W’s even after the recession part of this post-bubble credit collapse runs its course.

We shudder to think what the consumer spending landscape would look like if the savings rate was still rising to 15-year highs at a time when incomes were falling faster than they already are. After all, here we are, into the 19th month of recession, and consumer spending in the quarter that just finished looked to have contracted fractionally even in the face of massive help from Uncle Sam. The U-6 unemployment rate, which includes all measures of excess capacity in the jobs market, rose again to a new lifetime high in June to 16.5% from 16.4%. Imagine that 1 in 6 Americans are either unemployed or underemployed, to go along with the 1 in 8 Americans that are either in arrears or already in the foreclosure process and the 1 in 10 homes that are still on the market but not selling. Green shoots, indeed.

Source: Gluskin Sheff