Monday, June 7, 2010

Economy Turns Lower

The Second Dip of the "Double-Dip Hyperinflationary Depression is now here.  Economic data, which had pointed to a weak recovery, is now showing renewed signs of falling off a cliff.

This downturn was not too difficult to anticipate.  We have reapeatedly pointed out how the unprecedented annual drop in money supply aggregate M3 would, with virtual certainty, lead to a more severe and aggressive downturn.  Despite all the stimulus and near ZERO interest rates, the horrendous worldwide debt levels are keeping consumers and business in check. 

The April retail sales report was the first sign of a sputtering economy. While sales showed a gain of 0.4%,  the pace of gain slowed from February and March.  The April weakness was naturally blamed on factors such as the weather and an early Easter, which had the effect of pulling sales into March.

The upcoming report for May is scheduled for release on Friday, June 11th.  Consensus data for May is indicating a gain of 0.2% versus an earlier estimate of 0.5%.  

Topping off the disappointment parade was Friday's jobs report, which had a headline number of 431,000 added to payrolls.  On the surface, a pretty good number.  Unfortunately, all but 20,000 of these were temporary census workers who will be laid off at the end of the month.

The household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs, showed a seasonally-adjusted monthly employment contraction of 35,000 in May, after adjusting for the census increase.

The Bureau of Labor Statitistics (BLS) has made a science of creating completely obfuscating employment data.  One of their assumptions is that jobs created by start-up companies in this downturn have more than offset jobs lost by companies closing down.  So, if a company fails to report its payrolls because it has gone out of business, the BLS assumes it still has its previously-reported employees and adjusts those numbers for the trend in the company’s industry.   Huh?

The additional jobs created by start-up firms, which get added on to the payroll estimates each month, were revised lower in the most-recent benchmark revision.  According to the econometric work of Dr. John Williams of ShadowStats (,  this monthly bias should be negative by approximately 200,000 on average.  Therefore, in Dr. Williams' estimation, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 200,000 jobs.

The one bright note is the recent jump in both new home sales and existing home sales.  Reported numbers showed some increase in activity in April relative to March.  Unfortunately, this appears to have been due primarily to the April 30th expiration of tax breaks for home buyers.  A similar, but larger spike, was evident for existing home sales with the November 2009 expiration of initial tax incentives.  To the extent this stimulus has pulled in sales from the future, monthly sales should fall off in the months ahead, starting with May 2010 reporting.

Of great concern, despite the blip in home sales, is foreclosure activity. The National Association of Realtors (NAR ) estimates that 33% of new home sales for April were in the "distressed" category.  With foreclosures on the rise, price pressure remains on the pricing of new and existing homes. 

The Obama Administration, despite their cheerleading of the April jobs gains, is busily preparing yet ANOTHER stimulus package.  Reportedly being pushed by economic adviser Larry Summers, the new package is expected to be $200 million.  The Federal Reserve has done all it can.  The only remaining weapon is more fiscal spending, which, given a deficit already in the $1.5 Trillion range, will have some very nasty side effects.

Marko's Take

The top Federal personal tax rate is scheduled to increase to 39.6% from 35% in early 2011.  For an interesting review of the consitutional issues regarding the income tax, we invite you to check out our You Tube video on "The Legality Of The Personal Income Tax" by clicking here

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