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					Northern Trust             While Pundits Play “Gotcha,” the Unemployment Situation Improves
Global Economic Research
50 South LaSalle           November 25, 2009
Chicago, Illinois 60603
northerntrust.com          The best measure of the current condition of the labor market is the state unemployment
                           insurance data. These data are not samples or surveys with guesstimates of how many new jobs
                           were created by new businesses, but the head count of actual people standing in actual
  Paul L. Kasriel          unemployment insurance lines. Too be sure, because a government entity is doing the counting,
  plk1@ntrs.com
                           the first count is not always the most accurate count. But after four weeks of counting and
                           recounting, the number that emerges is the one that remains for all times. The monthly labor
                           reports from the Establishment and Household surveys get revised over and over, literally, for
                           years.

                           Weekly data, which the state unemployment insurance data are, are inherently “noisy.” So, in
                           order to more accurately measure the signal rather than the noise, it is prudent to average the state
                           unemployment insurance data over rolling four-week periods. So, what are the state
                           unemployment data signaling? They are indicating that the rate of firing has slowed significantly
                           and that hiring could commence soon, if it already has not. As
                           Chart 1 shows, the number of first-time claimants for state unemployment insurance on a four-
                           week moving average basis has come down from a cycle peak of 659,000 in the four weeks ended
                           April 4 to 497,000 in the four weeks ended November 21. Now, 497,000 new firings per week is
                           nothing to brag about, but we can be thankful that it is coming down after the worst recession in
                           the post-war era, a recession that started well before the stimulus program was instituted.

                           Although fewer people are now being fired, are any of those that have previously been fired being
                           re-employed? Probably not yet, according to the continuing unemployment claims data, but the
                           outlook for re-employment is improving. Because the past recession, which commenced in
                           January 2008, well before the current stimulus program was initiated, was the longest recession in
                           the post-war era, many of the people who have lost their jobs have been out of work so long that
                           their regular unemployment insurance benefits expired. The current Congress and administration
                           have implemented programs to extend unemployment insurance benefits to those who have
                           exhausted their regular benefits. If we add these extended benefit claimants, which are not
                           seasonally adjusted and need not be because there is unlikely to be any regular seasonal pattern to
                           them, to seasonally-adjusted benefit claimants under the regular program, we see in Chart 1 that
                           the four-week average of combined continuing unemployment claims appears to have peaked at
                           about 9.9 million people and in the four weeks ended November 7 had moved ever so slightly
                           lower to 9.8 million. Again, nothing to brag about but something to be thankful for. The
                           combination of a decline in the number of firings per week and a slight drop in the total number
                           of unemployment insurance beneficiaries suggests either that hiring has commenced in a small
                           way or that it is about to.




                           The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust
                           Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein,
                           such information is subject to change and is not intended to influence your investment decisions.
                                                       Chart 1

                     Unemployment Insur ance: Initial Claims, State Pr ogr ams
                                        4-week MovingAver age         SA, Thous

 Unemployment Insur ance: Continued Claims: Sum of Regular , Extended & Emer gency
                                          4-week MovingAver age       (millions)
       675                                                                                                  10



       600

                                                                                                            8

       525



       450                                                                                                  6



       375

                                                                                                            4

       300



       225                                                                                                  2
                    00      01       02        03      04        05       06       07      08       09
             Sour ce: Haver Analytics



How much of the improving labor market conditions can be directly attributed to the current
stimulus program is impossible to say. For the current administration to make any claims along
these lines opens it up to legitimate criticism. But what is possible to say is that about three
months after the stimulus program was initiated, the overall economy began to emerge from the
deepest and longest recession in the post-war era and now, about nine months after the initiation
of the stimulus program, the labor market is showing incontrovertible signs of improving. Two of
the biggest critics of the stimulus program with regard to job creation are two former chairs of the
president’s Council of Economic Advisers (CEA), Michael Boskin from the Bush Sr.
administration and Eddie Lazear from the Bush Jr. administration. Both of these presidential
advisers appear to have gained policy wisdom after leaving their presidential advisory posts. For
you see, during both Bush presidential terms, Senior and Junior, and under the tutelage of Messrs.
Boskin and Lazear, the U.S. experienced the slowest job growth in the post-war era. If these guys
are so smart with regard to job creation, why was job creation so weak when they were advising
presidents?




The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust
Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein,
such information is subject to change and is not intended to influence your investment decisions.

                                                                                                                         2
Thanksgiving Turkey? – George Melloan’s WSJ Op-Ed

George Melloan is a former member of The Wall Street Journal’s editorial page and it shows in
his WSJ op-ed piece of November 24 entitled “Government Deficits and Private Growth.” He
starts with a political bias and believes that he has found the facts to support this bias. But there
are other apolitical explanations of the facts. Melloan claims that commercial banks recent
increased purchases of U.S. Treasury and Agency (Fannie and Freddie) securities is a direct result
of federal government/Federal Reserve interference with the private sector. According to
Melloan, federal bank regulators are encouraging banks to take less risk and are threatening to
rein in executive salaries if banks take on more risk. And of course, all of this is to force banks to
finance the mushrooming federal deficit.

Let’s review a little post-war economic history in Chart 2. The shaded areas in the chart are
periods of economic recession. The red bars are the year-over-year percentage changes in
commercial bank holdings of U.S. Treasury and Agency securities. The blue line is the year-over-
year percentage changes in commercial bank holdings of loans and securities made to or issued by
the private sector. Do you see any patterns here? Do you see that commercial bank holdings of
Treasury and Agency securities typically shoot up during and right after recessions end – not just
this one, but all post-war recessions? In the first and second quarters of this year, the year-over-
year increases in bank holdings of Treasury and Agency securities were 15.4% and 13.4%,
respectively. These percentage increases are relatively muted compared to some previous cycles.
For example, in each of the three quarters ended Q2:1992, the year-over-year increases in bank
holdings of Treasury and Agency securities were about 24%. Also notice that the change in bank
holdings of privately-issued debt tends to slow or contract in the latter quarters of recessions. And
while the current slowdown in bank credit issued to the private sector is severe, the severity was
greater after the 1973-75 and 1990-91 recessions. It appears, therefore, that there might be an
alternative explanation for current bank portfolio behavior than Mr. Melloan’s government
interference hypothesis.




The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust
Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein,
such information is subject to change and is not intended to influence your investment decisions.

                                                                                                                         3
                                                       Chart 2

              Commer cial Banks: U. S. Tr easur y and Agency Secur ities Holdings
                                               % Change - Year to Year

          Commer cial Banks: Bank Cr edit ex U. S. Tr easur y and Agency Secur ities
                                            % Change - Year to Year
        40                                                                                                  40



        30                                                                                                  30



        20                                                                                                  20



        10                                                                                                  10



         0                                                                                                  0



       -10                                                                                                  -10



       -20                                                                                                  -20
                  55      60      65      70      75      80     85      90      95      00      05
             Sour ce: Haver Analytics



Is Mr. Melloan aware that banks need capital to expand their balance sheets, i.e., to create net new
credit? Is Mr. Melloan aware that a loan to him or any other private sector entity incurs a charge
against a bank’s risk-based capital, capital in short supply these days because of losses from ill-
advised bank loans to the private sector in the last expansion, but a loan to the U.S. Treasury does
not incur such a charge? So, a bank’s purchase of a Treasury security requires less capital than a
bank’s loan to Mr. Melloan. Is Mr. Melloan aware that there is another wave of losses generally
expected to crash over the financial system in the not- too-distant future because of the excessive
risk taking of some financial institutions in the past non-government interfered-with credit orgy?
If and when this new wave of losses hits, the banking system will lose more capital? No, Mr.
Melloan, current bank portfolio behavior is better explained by regular cyclical factors than your
government-interference hypothesis. And by the way, Mr. Melloan, do you want the banking
system to once again take on excessive risk that would likely result in another taxpayer bailout,
which would push up the federal deficit that you so vociferously rail against?

And, while we are on the subject of federal deficits, let’s again look at some facts. In October, the
year-over-year change in total federal outlays contracted 2.7% while total federal revenues
contracted 17.9%. Likewise in August, total federal outlays contracted. So, in recent months, the
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust
Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein,
such information is subject to change and is not intended to influence your investment decisions.

                                                                                                                         4
federal deficit is being driven up primarily by declines in federal revenues, not increases in
federal expenditures. Mr. Melloan, given your concern about the federal deficit and given that
year-over-year changes in federal spending are contracting, can I surmise that you are in favor of
increasing tax rates?

                                                       Chart 3



                                                Feder al Receipts
                                         % Change - Year to Year           Mil. $

                                                Feder al Outlays
                                         % Change - Year to Year           Mil. $
        60                                                                                                  60




        40                                                                                                  40




        20                                                                                                  20




         0                                                                                                  0




       -20                                                                                                  -20




       -40                                                                                                  -40

                                  08                                                09
             Sour ce: U. S. Tr easur y /Haver Analytics




The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust
Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein,
such information is subject to change and is not intended to influence your investment decisions.

                                                                                                                         5

				
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