Jobs Plunge; Key Variables Washington's Steps, Mortgage Rates

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					                                                                                  David Malpass
                                                                                     212-876-4400
                                                                        dmalpass@encimaglobal.com

                                                                              December 5, 2008


    Jobs Plunge; Key Variables Washington’s Steps,
         Mortgage Rates, Business Confidence

The November jobs report confirmed the sharpness of the slowdown. The U.S. economy hit a
brick wall after the Lehman bankruptcy, and looks set to shrink at a 5-7% annual rate in the
fourth quarter (having grown an average 0.8% in the previous four quarters.) Most of the world
will sink into recession in the fourth quarter or early in 2009, with reduced production and
profits and rising unemployment.

We expect the recent government actions to provide a stopgap for the Lehman damage,
gradually stabilizing financial markets and contributing to an economic recovery sometime in
2009. In particular, the mortgage rate cuts, outright guarantees of many bank assets and
debts, Fed intervention in commercial paper markets, additional Fed balance sheet expansion,
and rapid rate cuts by the ECB, BOE and Fed should slow the deterioration.

Key Variables

 Further mortgage rate cuts by Washington. With the federal government in full ownership and
control of the conforming mortgage market and enjoying a very low cost of funds, we expect
Washington to push mortgage rates well below 5%. The further decline will have substantial
benefits. Mortgage rate cuts act fast as a stimulus. They increase housing affordability and
transaction volume, and bring new buyers. As new mortgages replace old ones, it should help
resolve some of the pricing problems in mortgage pools and CDOs, replenishing bank capital.
And due to the wide spread between Treasuries and government-guaranteed mortgage debt,
Fed purchases of mortgage debt is profitable to taxpayers.

Washington action to stop the harmful interplay between the opaque CDS market, bond raters,
regulatory capital and the mark-to-market process. The pending CDS clearinghouse will help
by bringing a degree of transparency, but that change is probably not, by itself, sufficient to
stop the pro-cyclical non-cash accounting drain on capital that is impeding bank risk-taking.

Washington action to lengthen the maturity of the national debt. The average maturity has
rapidly declined due to the buildup in the government's short-term liabilities. Lengthening the
maturity would lock in low borrowing costs, reduce credit spreads, and show the government's
ability to provide long-term stability (rather than the current maturity mismatch) as it considers
additional spending.




        Encima Global LLC | 1440 Broadway 23rd Floor New York, NY 10018 | EncimaGlobal.com
Average Maturity of Marketable Debt through Q3 2008; estimate for Q4 2008
includes Fed’s liability for excess bank reserves
              75

              70


              65
    months




              60

              55


              50

              45
               Mar-85   Mar-88    Mar-91   Mar-94   Mar-97    Mar-00   Mar-03   Mar-06

Source: Haver; Encima Global


Business sector confidence and its impact on employment and capital expenditures.
Confidence was hard-hit by the post-Lehman credit market freeze, by official warnings about
depression, and by the stock market crash. These froze the business side of the economy in
October and November, paralleling the shut-down in consumption. Initial jobless claims
remain above 500,000 per week, suggesting a continued rapid deterioration in labor
conditions. Stabilization and then improvement in this indicator will be a necessary step in
stopping the economic contraction; it’s closely tied to business confidence, which we think will
benefit from recent government repair actions.

Initial Jobless Claims (last obs. November 2008)
              700

              600

              500
  thousands




              400

              300

              200

              100

                0
                Jan-67 Jan-71 Jan-75 Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07

Source: Haver; Encima Global



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Rapid Labor Deterioration

•    In November, U.S. employment fell 533,000, with weak average hours worked (33.5 per
     week) and stronger-than-expected growth in hourly earnings (0.4%). Employment in
     September and October was also downwardly revised a combined 199,000.
•    The household survey showed 6.7% unemployment, up from 6.5% in October, with a
     decline in November jobs of 673,000 versus a labor force decline of 422,000. The labor
     force had grown sharply in previous months, so we think a smoothing of recent readings on
     the labor force and the unemployment rate would be appropriate.
•    On a year-over-year basis, the establishment survey shows job losses of -1,870,000 while
     the household survey shows job losses of -2,362,000. The latter is the fastest one-year
     deterioration since at least the 1960s.

Annual Changes in Employment (last obs. November 2008)
                              6000                                               household survey, red
                              5000
    y/y change in thousands




                              4000
                              3000
                              2000
                              1000
                                 0
                              -1000
                              -2000
                              -3000                      establishment, blue
                              Ja 67
                              Ja 69
                              Ja 71
                              Ja 73
                              Ja 75
                              Ja 77
                              Ja 79
                              Ja 81
                              Ja 83
                              Ja 85
                              Ja 87
                              Ja 89
                              Ja 91
                              Ja 93
                              Ja 95
                              Ja 97
                              Ja 99
                              Ja 01
                              Ja 03
                              Ja 05
                                    07
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                                 n-
                              Ja




Source: Haver; Encima Global


•    Goods producing industries lost 163,000 jobs, almost evenly split between construction and
     manufacturing. Within service-providing industries, 370,000 jobs were lost, the bulk of
     which were in professional and business services (136,000). Retail trade lost a net 91,000
     jobs, leisure and hospitality another 76,000.
•    Employment in the finance industry declined 32,000 of which 16,000 occurred in credit
     intermediation and related activities. Finance-related employment has lost 142,000 since
     last December, with large additional losses likely.

Notes

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