Friday, April 8, 2011

How can the U.S. recovery be strong when job Openings/Hirings are weakening?

Regarding my contrarian “We will see another QE soon” point of view:

A lot of people say that the recovery depends on job growth.
And indeed, the NFP has been trending higher, levels not yet consistent with ‘escape velocity’, but sequential data coming in better each month pointing to better NFPs going forward.

JOLTS data was only released for January and the Feb data comes out next week. Employment = Lagging indicator, OK. So people say.

Below: monthly change in non-seasonally-adjusted of JOLTS Openings and Hires (to avoid S.A. modeling distortions):

Openings vs previous year’s same period (oct-jan, 4 months change):
Oct2009-Jan2010 = +255k openings
Oct2010-Jan2011 = +-42k openings

Momentum: -297k openings

Now same numbers for Hires:
Oct2009-Jan2010 = -669k hires
Oct2010-Jan2011 = -778k hires

Momentum: -86k hires

And the Seasonally-Adjusted Charts for both (because NSA charts tough to compare):

JOLTS – Openings SA

JOLTS – Hires SA

Notice that the changes in HIRES and OPENINGS have been to the negative side AND absolute levels for Hires look really close to the lows set in 2009 (around 3.6m).
So, lower job openings and hiring even though growth is picking up.
Hmmm. I find that quite interesting for an improving economy with wages already low and companies full of cash in their hands after a great run of profits.

Of course my logic can be completely wrong if we do get solid numbers for February and March JOLTS Openings+Hires, which now seem likely after 2 decent good NFP numbers, etc, BUT…

Then I compare the current path of economic numbers and of risk-asset prices to 2010’s 1H2010.
Then the fact that Oct 2009-Apr10:

- the last months of QE1 + extended jobless benefits (later extended) + etc,
- housing tax rebates,
- cash for clunkers,
- until April the S&P and other markets were making new highs,
- among many other positive tail winds.

Currently we have about the same background (strong risk-markets, weaker USD, better activity numbers on the margin, robust ISMs, ongoing extended unemployment benefits) and the payroll tax cut which has supposedly injected USD 50bln+ in the economy.

QE2 is ending later in this year than QE1 did (June x April/May) in 2010 and, as you expect and so do I, the Fed is likely to keep the size of its balance sheet unchanged, re-investing the proceeds from maturing MBS/Treasuries. The Fed won’t make the same mistake of 2H2010.

Since I now believe that QE doesn’t feed into the economy through much lower rates, but rather through the wealth effect since the Fed clogs the investment opportunities … (think of investors’ USD 600bln that instead of buying Treasuries due to too-low rates go into corporate bonds or equities or anything else. No demand for credit = low rates have timid impact)

Right now:
A) Real Estate prices are again on a downtrend (and that’s a lot more wealth for the average american consumer than stocks and bonds),
B) Does the wealth effect, for consumers and companies, feed into the economy through level of risk-assets prices or the marginal-change in risk-assets prices?,
C) Consumer confidence has collapsed back to really low levels
D) Number of foreclosures not helping housing or confidence…
E) Durable goods recent data suggests the corporations are not really believing we have a strong recovery in hands. CapEx is still too low.

From LPS’ First Look/Mortgage Monitor:

    Total U.S. loan delinquency rate: 8.8%
    Total U.S. foreclosure inventory rate: 4.15%
    Total U.S. non-current inventory: 6,856,000
    States with most non-current loans: Florida, Nevada, Mississippi, New Jersey, Georgia
    States with fewest non-current loans: Montana, Wyoming, Alaska, South Dakota, North Dakota

The LPS report also noted that “February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached.”

Add higher core inflation across the world (visible in Brazil where real estate prices, rent and services have risen considerably in the past 2 years)
Add EMs tighter monetary stance since 2010 and on a path to even tighter rates forward.
Add the ECB tightening its policy rate.
Add higher food prices + crude
Add to that AAA reported gasoline prices now 32% higher than the same period of 2010, 22% higher since 1-Jan-2011 (3AGSREG Index on Bloomberg)

After QE2 is done with… will the US economy surprise to the UPSIDE considering Q1 2011 is likely below 3%?

If you consider the amount of monetary and fiscal stimulus impacting the US in the past 3 years and the recovery in our hands…. Are we able to say that growth is really sustainable without all the stimulus? Is the US going to give us 3-4% growth year in/year out AFTER we’ve exhausted already-in-place options?

That is why I believe the “steady balance sheet” policy we’re likely to see after June will not be able to support 3/4% GDP-economic activity and the Fed (or the government)will be pushed  into doing more QE (or fiscal stimulus).

What would you correct/suggest considering the variables we currently have in hand?

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