September 7, 2007
A DARK CLUE?
Is the bond market finally right? It's starting to look that way.
Yesterday we discussed the latest slide in the 10-year yield and presumed that it reflects rising pessimism in the fixed-income set that future economic growth will disappoint if not evaporate completely. This morning, the argument for that pessimism received another piece of supporting evidence in the August jobs report.
Nonfarm payroll employment slipped by 4,000 in August from July, the Labor Department reported. Statistically, that works out to a wash in a labor force numbering upwards of 138 million. Nonetheless, there are still several reasons to embrace the warning signal embedded in the report.
First, consider the chart below, which graphs the monthly percentage change in nonfarm payrolls. It's clear that the trend has changed this year and for the worse. Only the financial gods know for sure what comes next, but mortal observers will have no trouble drawing rather dark conclusions from the trend. An economy that had been creating jobs fairly steadily is now an economy that's treading water in minting employment opportunities. Is the next phase an economy that destroys jobs?
The trend looks better if you look at the pace of job growth on a year-over-year basis, as per our second chart below. By that definition, nonfarm employment rose 1.2% in August compared to a year ago. But the trend still doesn't inspire. An annual rise in jobs of 1.2% is the slowest in over three years and the downward momentum looks like it has a head of steam.
Then again, it's worth noting that last month's slippage in private-sector employment generally was exclusively due to job losses in construction and manufacturing/goods producing. By contrast, the other major areas of private employment posted gains, including the single biggest source of private jobs: services employment, which rose by 0.5% in August.
The great debate now is whether the pain in the goods-producing area spills over into the broader employment picture. Optimists think the answer is no, an outlook that jibes with the forecast that the real estate correction will remain an isolated problem without triggering a recession.
Hope isn't dead, although it took another blow this morning. Meanwhile, the case for dropping interest rates just got another bit of statistical support. This much, at least, is clear: each and every economic number dispatched will take on more import than the one that preceded it for swaying Mr. Market's sentiment.
Posted by jp at September 7, 2007 9:31 AM
We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade impalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still we cannot sustain a trade deficit of this magnitude. People must understand, when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on the dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) contiue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.
Posted by: Ames Tiedeman at September 22, 2007 8:33 AM