James Pethokoukis

The November jobs report may not be the only piece of good statistical news on the way. Wait until all those census workers start making their way into the data. But a drill down reveals deep, deep problems in the US labor market where unemployment averaged just 5.5 percent from 1989 through 2008:

1. Add in long-term discouraged workers and the unemployment rate is 22 percent. (via Shadow Government Statistics)

2. The ISM non-manufacturing employment index in November pointed to a 192,000 drop in service sector jobs vs. the increase of 58,000 the Labor Department reported. (via David Rosenberg of Gluskin Sheff)

3. On a rolling 12 month basis, individual taxes withheld have dropped by nearly percent, from $1.42 trillion to $1.31 trillion. (via  Zero hedge)

4. If not for discouraged workers leaving the workforce, the unemployment rate would have only ticked down to 10.1 percent. And that is after a surge to 10.2 percent in October from 9.8 percent in September. Sounds like a bit of reversion to the mean.

5. Single month dips are common. The unemployment rate bottomed at 3.8 percent in April 2000 and peaked at 6.3% in June 2003. During that time, the jobless rate fell five times. In the early 1990s unemployment cycle, the unemployment rate actually fell no fewer than six times. Just last July, the rate dipped by a tenth of a percent. (via David Rosenberg of Gluskin Sheff.)

6. The JOLTS survey showed that job openings fell back by 80,000 in October and new hires plunged 95,000. (via David Rosenberg of Gluskin Sheff.)

7. Both the median and average duration of unemployment hit record highs.

8. The annual survey from the ISM found that just 32% of manufacturers intend to boost their staff requirements in 2010 and a mere 15% of non-manufacturers intend to do so (vai David Rosenberg of Gluskin Sheff)

9. The Business Roundtable survey showed just 19 percent of companies intend to boost employment.

10. Payroll processor ADP, America’s largest processor of payroll information, publishes an independent survey of employment based on its own data reported a loss of 169,000 jobs. Asblogger and bond guru David Goldman notes, the correlation between the ADP and BLS is 95 percent, so the discrepency “lies at the extreme range of error for the two series.”

11. According to the Conference Board’s monthly survey of consumer confidence. those “claiming jobs are ‘hard to get’ increased to 49.8% from 49.4%, while those claiming jobs are ‘plentiful’ decreased to 3.2% from 3.5%.”

12. It is tough to top Goldman’s analysis:

The level of un- and underemployment is so huge by historical standards as to make the usual sort of measurement questionable. With nearly 20% of the population unable to find proper work, there is a different sort of workforce. The vast majority of job creation in the US during the past two generations came from small businesses, which display only vaguely on the radar of government agencies as well as the bigger private surveys. The financial crisis killed small entrepreneurs as surely as Joseph Stalin killed the kulaks, and the roots of the economy are dead and dry.

It ain’t so hot, says David Rosenberg of Gluskin Sheff:

Things are so good in the U.S.A. that President Obama’s approval rating just sank to a new low for any president at this post-election juncture and Treasury Secretary Geithner is now seeking to have the $700 billion TARP extended to October. In fact, Obama wants to tap $200 billion from the program to fund a jobs initiative — let’s hope it turns out to be more effective than the last package that was supposed to cap the unemployment rate at 8%. It is rather amazing that here we are, 30 months after the onset of the credit crunch, and we see this as a headline on the front page of the FT: Obama to Boost Jobs With Bank Rescue Cash.

Arnold Kling sums things up perfectly:

I believe that America’s health care system should be reformed. Medicare is unsustainable. Employer-provided health insurance should never have been instituted in the first place, and it is becoming more dysfunctional every year. I would like to deal with the structural issues that bias our system in favor of specialists, fragmented care, and credentialism. Americans need to learn how to make reasonable judgments about medical procedures that have high costs and low benefits.

None of these problems is addressed by the bills in Congress. This year’s health care debate is proof that top-down reform is not going to work. The more the system is politicized, the less likely it is that it will change. The only direction for reform is market-oriented policy that by today’s standards seems radical and unacceptable. In contrast, the politicians are struggling mightily to do what amounts to minor tinkering and tampering.

Mike Darda of MKM Partners gives it his best shot:

If there were ever a crowded trade, long gold and shor the dollar certainly fits the bill (no pun intended). Indeed, zero percent short rates and huge deficits as far as the eye can see have been important tailwinds for the yellow metal. And they remain in place. However, gold appears expensive relative to industrial commodities and has risen much more than bond market inflation expectations or the money stock over the course of the last year (the monetary base has exploded higher, but M2 growth has been more modest).

If the U.S. recovery is stronger than expected and the labor market turns in a material fashion, gold could begin to underperform industrial commodities and the dollar may catch a bid, at least against G7 currencies. The tight inverse correlation between the dollar and the stock market observed over the last 17 months may unhitch under such a scenario, as the long-term correlation between the DXY Index and the S&P 500 is zero. While a sustained gold correction may appear to be a low-probability event, if the 2008-2009 experience has taught us anything, it is to question the conventional wisdom in a repeated and rigorous fashion.

Keith Hennessey:

This looks like a smaller version of the original stimulus law.  Its origins are more political and fulfilling a legislative need, than policy-driven. I’m OK with the UI extension and extending the health insurance subsidy, although I wish both were better designed. I generally support tax relief, but I am concerned the targeted capital gains reduction will give some cover to let the broader capital tax rates jump at the end of 2010.  That would be very bad. The spending programs will have little near-term GDP effect, and so should be evaluated in how they meet other policy goals.  They’re largely ineffective as immediate stimulus, because government spending is slow. The $250 check to seniors was pandering the first time Congress passed it (on a broadly bipartisan vote).  It’s still pandering.  Why are seniors more deserving of aid than, say, a low-income working family? The “using TARP dollars to help Main Street” is a transparent gimmick.  If you’re going to increase the deficit, it’s better just to stand up and say the deficit increase is worth the short-term economic benefit you think will result from the other policies. I suggest they do a targeted bill that contains only the UI and COBRA provisions, because I think the large deficit impact of the other provisions, relative to their small macroeconomic benefit, isn’t worth it.

Larry Kudlow has a strange but oh-so wonderful thought:

The president’s jobs proposal includes a zero capital-gains tax-rate for small-business investors, and full cash-expensing for small-business investment in plant and equipment. These are potentially powerful incentives for the job-creating small-biz sector. They may only last for a year or so, depending on the mark-up. But they are good things in and of themselves, and they suggest that Obama is aware of incentive effects on economic growth.

Sure, the new spending is all wrong. That won’t create jobs, and will only bloat the deficit. But Obama’s language was on the supply-side, even in addition to the tax-cut proposals. He said growth will bring in revenues to cut deficits.

And there’s more. CNBC is reporting that the administration will dedicate $175 billion of TARP money to deficit reduction. This will leave about $140 billion of unused TARP money for spending — or for incentive tax cuts.

Now just think what would happen if a zero capital-gains tax rate were applied economy-wide for all investors. Or if Obama’s new supply-side thinking leads him to leave the cap-gains tax rate right where it is at 15 percent. Are the markets sniffing out a more centrist, pro-growth Obama? The dollar is rising, and gold is falling, so that might be the case. Growth solves inflation, and it can restore King Dollar to its throne. Growth can absorb Ben Bernanke’s free-money balance-sheet cash creation.

Is it possible that we are looking at a supply-side solution to the economy and the deficit?

Henry Blodget explains how to prevent TARP 2.0 when the next financial crisis hits, which the WH embrace of TBTF makes more likely:

What’s the solution?

Debt that automatically converts to equity when a bank’s capital ratio falls below the required level.  What does that mean? It means that equity holders will still get hit first if the bank makes dumb-ass loans. But it also means that if the bank makes so many dumb-ass loans that its equity gets wiped out, bondholders, not taxpayers, will pick up the rest of the tab.

How does it work?  When the bank’s equity falls too far, some of the convertible bonds convert to equity, thus restoring the bank’s capital ratio. This happens automatically, without bankruptcy or fuss. It happens without surprise. It happens without threatening to bring the whole economy to its knees. It happens without Congressional moaning and hand-wringing and without Treasury secretaries dropping to their knees to beg and plead.

Bondholders who buy these bonds–now called CoCo’s, or “contingent convertibles”–know full well what they are buying, and the bonds are priced to reflect the equity conversion risk. Lloyds just sold a bunch of these in the UK, and there was a market for them.

To fix the banking system, all regulators would have to do would be to require banks to issue enough CoCos that they could withstand financial Armageddon without the taxpayer getting involved. The banks’ ability to make huge bets (and huge bonuses) with small amounts of equity would be preserved, so perhaps the bank lobbyists would agree to stand down for a while. The world could rest assured that SOMETHING had been done to prevent the same mess from happening all over again. And we could all return to peace, happiness, and prosperity.

The oversight panel led by television funnywoman Elizabeth Warren has concluded that TARP has been asset for the economy. Except for this part (in the panel’s own words):

1) It is apparent that after fourteen months the TARP’s programs have not been able to solve many of the ongoing problems Congress identified. Credit availability, the lifeblood of the economy, remains low.

2) In light of the weak economy, banks are reluctant to lend, while small businesses and consumers are reluctant to borrow.

3) In addition, questions remain about the capitalization of many banks, and whether they are focusing on repairing their balance sheets at the expense of lending.

4) The FDIC, facing red ink for the first time in 17 years, must step in to repay depositors at a growing number of failed banks. This problem may well worsen, as deep-seated problems in the commercial real estate sector are poised to inflict further damage on small and mid-sized banks.

5) Large banks have problems of their own. Some of them, waiting for a rebound in asset values that may still be years away, continue to hold the toxic mortgage-related securities that contributed to the crisis. Consequently, the United States continues to face the prospect of banks too big to fail and too weak to play their role adequately in keeping credit flowing throughout the economy.

6) The foreclosure crisis continues to grow.

7) Furthermore, the market stability that has emerged since last fall’s crisis has been in part the result of an extraordinary mix of government actions, some of which will likely be scaled back relatively soon, and few of which are likely to continue indefinitely. The removal of this support too quickly could undermine the economy’s nascent stability.

8) While strong government action helped prevent a worse crisis, it may have done so at a significant long run cost to the performance of our market economy. Implicit government guarantees pose the most difficult long-term problem to emerge from the crisis. Looking ahead, there is no consensus among experts or policymakers as to how to prevent financial institutions from taking risks that are so large as to threaten the functioning of the nation’s economy. Congress is currently grappling with this issue as it considers how to respond legislatively to the financial crisis. It is clear that a failure to address the moral hazard issue will only lead to more severe crises in the future.

Me: Oh, and then you have the devolution of TARP into a slush fund to bail out AIG, union auto workers and congressional Democrats worried about how the high unemployment rate will hurt their 2010 chances. Thus the new jobs bill. But it did stop the panic, unless you believe John Taylor that it really made the panic worse through uncertainty.

If you listen to the National Federal of Independent Business, the anemic recovery and weak consumer spending are its biggest concerns. But there is something else:

But the other major concern is the level of uncertainty being created by government, the usually source of uncertainty for the economy. The “turbulence” created when Congress is in session is often debilitating, this year being one of the worst. Themes including “tax more,” “tax the rich even more,” “VAT taxes,” higher energy costs due to Cap and Trade, mandates and taxes for health care, threats of “stimulus II,” incomprehensible deficits, and a huge pool of liquidity created by the Federal Reserve Bank that threatens price stability and higher interest rates. The list goes on and on. There is not much to look forward to here and good reason to “keep your powder dry.” Uncertainly is the enemy of the real economy as well as financial markets. …

But there are still many uncertainties ahead (most in Congress) that need to be resolved and plenty of “income redistribution” yet to come as we continue to clean up our financial system – all which creates major headwinds for the economy.