James Pethokoukis

Politics and policy from inside Washington

Ugh! 5 reasons why the Dec. jobs report was worse than it looked

Jan 10, 2010 19:32 UTC

Goldman Sachs thinks 4Q growth could be as a high as 6 percent. But don’t think the firm is as cheery about the labor market despite the “stable” 10 percent unemployment rate in December. Some bullet points:

1. The persistent underperformance of the household survey strongly suggests that the establishment survey’s “birth-death model” is too optimistic and future “benchmark” revisions to payrolls will be negative.

2. Since December 2008, participation has fallen 1.2 percentage points, the biggest drop of the postwar period. If participation had remained constant over the past year, unemployment would now be over 11½%.

3. The combination of inventory-driven GDP strength and employment weakness is not good news because it means that we have “used up” a larger-than-expected share of the inventory boost without having anything to show for it in terms of employment.

4. The ISM composite index (a weighted average of manufacturing and nonmanufacturing) remains barely above 50. This is historically consistent with only about 2% GDP growth, which would not be enough to create jobs on a scale sufficient to push down the unemployment rate.

5. The parallels with the early part of the recovery from the 2001 recession remain substantial. Back then, the initial GDP release for the first quarter of 2002 showed 5.8% growth with a massive contribution from inventories. Meanwhile, payrolls stubbornly refused to show significant growth, and the employment/population ratio continued to drop. The GDP strength ultimately proved unsustainable, the economy slowed to a below-trend growth pace later in the year, and the unemployment rate didn’t peak until more than a year later.

9 reasons why the Dec. jobs report is bad news for Dems

Jan 8, 2010 15:33 UTC

Talk about one last gasp from the horrible year that was 2009. On the political front, the December jobs numbers were terrible news for the White House and congressional Democrats in a midterm election year. Here’s how it plays out:

1. Remember this simple formula: Unemployment drives presidential approval numbers, and presidential approval numbers drive midterm election results.

2. President Barack Obama’s approval numbers are hovering just a tick below 50 percent. Since 1962, the average House midterm loss for the president’s party when his approval is sub-50 percent is 41 seats. The GOP needs 40 to take the House.

3. And make no mistake, the December unemployment numbers were bad both economically and politically. The 85,000 job loss was worse than expected and will be played that way the media. The continuation of double-digit unemployment also resonates with voters. And not a in a good way.

4. Then will come the second-take stories that will notice the shrinking labor force, which dropped by nearly 700,000 from November. Had it stayed stable from last month, the jobless rate would have been 10.4 percent. Had it stayed stable since August, the jobless rate would be 11 percent!

5. But wait, there’s more! The U-6 rate rate which combines the basic jobless rate, discouraged workers, part-timers-who-would-rather-be-full-timers climbed to 17.3 percent. And the average duration of unemployment rose to a record high 29.1 weeks.

6. Also, there is every indication that as the slowly growing economy eventually draws workers back into the labor force, the jobless rate will creep up to new highs. (Big companies remain cautious about hiring, and small biz remains under pressure due to tight capital markets.) The validity of the Obama recovery plan will seriously be cast in doubt.

7. The sickly labor market will also make it that much harder for the White House and Hill Dems to celebrate what is likely to be a brisk upcoming GDP report in the 4-5 percent range. That seems like an abstract number compared to the unemployment rate.

8. Combine a weak labor market – which may appear to be getting worse to voters – with the moribund housing market and rising gas prices, and you have a toxic triple threat that will be poisonous to Democratic incumbents and further drain Obama’s political capital.

9. Also, watch how these numbers play with Senate and House Dems thinking about resigning like Chris Dodd and Byron Dorgan.  A big improvement in the jobs numbers might have reassured any worriers that 2010 might not be as tough as some currently think. Now it looks a bit more like the worst fears of Democrats might be realized: losing the House and a half-dozen or more Senate seats.

COMMENT

I personally believe that corporate conservatives are purposely not hiring or layng off to make the Obama administration look as bad as possible to the American public before the 2010 election. It’s what you call “Disaster Capitalism” and it is manmade.

Posted by Betty | Report as abusive

What the December jobs report means

Jan 8, 2010 14:00 UTC

I think the “jobless recovery” meme stays firmly in place. Beyond the 85k jobs loss was the sharp drop in the labor force participation rate. If another 600k+ workers had not dropped out of workforce, unemployment rate would have been 10.4 percent. Here is what I have tweeting on the subject this AM:

tweets010810

Is Larry Summers on his way out?

Jan 5, 2010 17:55 UTC

The anti-Larry Summers buzz grow louder ( such as here, here and here.) There is a lot going on here. Liberals blogs have been all over him for pushing the $800 billion stimulus plan instead of the $1.2 trillion option presented to Obama by Christina Romer.  Liberals, including Paul Krugman, thought it was too small then and have double-downed on that opinion since.  (Alas, no high speed rail or modern-day WPA program for them.)

And the fact that the WH seems unwilling to propose some sort of massive second stimulus that focuses on jobs only makes matters worse — that even though their original unemployment forecast has proven far too optimistic. Then there was a quote from Summers who said the first stimulus wasn’t even supposed to boost jobs as opposed to output.

Not that liberals have ever loved Summers. He was part of Team Clinton which chucked the left-wing agenda in favor of deficit reduction. There was his stormy tenure at Harvard. And Summers worked at hedge fund DE Shaw, a  big no-no since the financial meltdown.

And all of this happens alongside healthcare reform, which liberals are angry about since deficit concerns helped deep-six the public option.

Unless the economy double-dips, I don’t seem a major shakeup on the WH econ team before the midterms. If the midterms go badly for Dems, though, Summers might depart. Maybe Geithner, too.  Though who would replace them if Wall Street folks and ex-Clintonites are off limits with an angry base?  Mark Zandi?  Jared Bernstein from the Veep’s office? Leo Hindery? I could see Rahmbo at Treasury, though.

COMMENT

Pretty smart guy, this Summers, much smarter than I. Failed, though, to connect the dots on derivatives and the monstrous distortions caused by the GSEs. Bit of a blind spot, it seems. Like so many at that level of power and intellect, probably too lost gazing at his own reflection to realize his worldview is a narrow as a country cracker like me. Too bad, really, having one’s name remembered as the voice of reason for encouraging an $878 billion stimulus to nowhere instead of one above the $1 trillion mark. But, whether he likes it or not, he is just a Keynesian now, part of our gang sending the dollar to the outhouse, industry to India, and kicking liberty to the curb. If he is on his way out, it just proves that intellect and common sense are mutually exclusive.

Or, maybe he is showing his handlers that he has got some serious buyers remorse with all the spending on political puffery? Nah, probably just too many egos in the room.

Lazy Jack

Black swans, good and bad, for 2010

Jan 4, 2010 19:40 UTC

A classic predictions piece from economic analyst Ed Yardeni crosses my desk. First, excerpts from his bullish Black Swans (70 percent probability, he says):

1. The Old Normal trumps the New Normal. The US economic recovery is par for the course.

2. Unemployment subsides faster than expected. The unemployment rate peaked at 10.2% during November 2009; it falls to 8% by the end of 2010.

3. Consumer spending leads the recovery in 2010.

4. The federal funds rate ends the year at 1%.

5. Inflation remains subdued, with the core CPI inflation rate remaining under 2%. While most commodity prices continue to move higher, the price of oil drops to $60 a barrel on ample supplies. The dollar continues to rally in 2010.

6. Stocks-and profits-are stronger than expected. Stock markets around the world (including the US) rise to record highs by the end of 2010.

7. The federal budget deficit starts to narrow, and stress on state and local budgets starts to lift, as a result of better-than-expected economic growth

8. The Obama administration turns more centrist after Congress passes a token health reform bill that alienates the left wing of the Democratic Party. Nevertheless, the Democrats lose their majorities in both chambers of Congress in November.

9. The Iranian government falls and is replaced by a more democratic regime.

10. The Bush tax cuts are extended, following the congressional elections and before year-end. (Fairy tales can come true and usually have happy endings.)

Now his bearish Black Swans (30 percent probability):

1. The US economic recovery is subpar. After rising 4% during Q4-2009, real GDP grows by only 1%-2% during the four quarters of 2010.

2. The unemployment rate rises to 11% by the end of 2010.

3. Consumer spending is very weak due to rising unemployment. Housing starts and home sales decline as mortgage rates and foreclosures rise. Home prices fall.

4. The Fed keeps the federal funds rate near zero through year-end, and is forced to continue buying Agencies to avert a complete housing collapse.

5. Inflation concerns give way to fears of deflation.

6. Stock markets around the world plummet again, led by bank stocks. Sovereign debt crises in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) spill over into Japan, the UK, and even the US.

7. More bailouts and stimulus programs expand the federal budget deficit on a cyclical basis to another record high.

8.The Obama administration turns more leftist after Congress passes a health reform bill–and pushes for even higher taxes on the rich. The Democrats narrowly hold onto their majorities in both chambers of Congress in November.

9. The Iranians crack down on the pro-democracy movement. Tensions in the Middle East intensify, particularly between Israel and Iran. The price of oil soars over $150 during the summer, but then tumbles.

10.  The Bush tax cuts expire. This sets the stage for another recession in 2011. Future historians describe this period as the “Second Great Depression.”

He also gives his “known unknowns”:

1. Will employers expand their payrolls as they normally do at this point in the business cycle? Or will we have a jobless recovery?

2. Will consumers save more? Or will near-zero interest rates discourage thrift? If consumers pour more money into stocks to get better returns, might the resulting positive wealth effect boost their spending on goods and services?

3. Will higher taxes depress consumer and business spending?

4. Is a second wave of foreclosures ahead? Might higher mortgage rates put a lid on the upturn in home sales?

5. Or, will a normal inventory-rebuilding cycle set the stage for self-sustaining economic growth? In the past, fiscal and monetary policy stimulus measures were no longer needed once self-sustaining growth kicked in. Is this time different?

6. If the private sector deleverages, will the government continue to leverage even more? Will mounting concerns about the creditworthiness of sovereign debt stymie the ability of governments to continue to prop up economic growth?

COMMENT

Neither the bull or bear scenario is likely.

Many of the scenarios contradict one another. Example an amazing recovery AND the GOP wins both House of congress. Very unlikely that BOTH those would happen.

Iranian regime will not fall, but that has nothing to do with the economic recovery, at least short term.

The economy can recover AND helicopter Ben will leave the Fed Funds Rate near 0%. With this Fed they can be exclusive.

Posted by ekaneti | Report as abusive

Why the Democrats will lose the House in 2010

Dec 30, 2009 02:40 UTC

The trend is not the Democrats’ friend. At least not in 2010. The party of the sitting president almost always suffers losses in midterm congressional elections. To that time-tested dynamic now add voter angst about high unemployment, big deficits and controversial legislation. Expect Senate majority leader Harry Reid to lose his effective 60-seat supermajority and Nancy Pelosi to hand the House back to the Republicans. Here’s why 2010 is looking like 1994 all over again:

1. Virginia and New Jersey. Big GOP wins in the gubernatorial races not only highlighted discontent with incumbents by recession-weary voters, they also greatly helped Republicans with candidate recruiting for 2010.

2. History. More big political change isn’t predicated on America rekindling its love for the Grand Old Party. A recent poll had the Republicans finishing a distant third in popularity behind a fictional Tea Party and the actual Democratic Party. Yet American politics has a regular ebb and flow. In 13 of the past 15 midterm elections going back to 1950, the party in control of the White House has lost an average of 22 seats in the House. In 10 of the past 15 midterms the party running the Senate has lost an average of three seats.

3. Mean Reversion. Democrats have a wide field to defend after huge victories in 2006 and 2008. Particularly in the House, there are lots of Democrats in places with a proven willingness to vote Republican. Currently 47 of them are in districts won by both John McCain in 2008 and George W. Bush in 2004. And voters in those districts may be especially unhappy with a Democratic legislative agenda that causes many Americans mixed feelings.

4. Obama-Reid-Pelosi Agenda. A RealClearPolitics aggregation of polling data shows Americans disapprove of healthcare reform by a 51-38 margin. And only a little more than a third think the $787 billion stimulus plan has done much good, according to pollster Rasmussen. There’s also plenty of worry among the electorate that Washington spending is creating a dangerous level of government debt.

5. Rep. Parker Griffith. Griffith, elected in 2008, could be an electoral harbinger. His district, Alabama’s 5th, gave 60 percent of its votes to Bush in 2004, and 61 percent to McCain. He just switched from Democrat to Republican, saying he couldn’t belong to a party that favors healthcare reform that massively expands the role of government. Even though Griffith voted against the stimulus, cap-and-trade and healthcare plans, he clearly felt that guilt-by-party-association threatened his re-election.

6. Unemployment. Underlying voter unease with Capitol Hill is deep concern about unemployment. And that leads to a simple equation: Joblessness drives presidential approval ratings, and it’s those ratings that drive midterm congressional results. Despite a landslide win in 1980, for instance, unemployment approaching 11 percent drove Ronald Reagan’s approval ratings down to the low 40s in November 1982 when Republicans lost 26 House seats. (And only five narrow GOP victories by fewer than 50,000 votes kept the Senate even.)

As unemployment has risen this year, Obama’s approval has steadily eroded to around 50 percent currently. The White House says it doesn’t expect employment growth until the spring. And if even the economy begins to create jobs, the actual unemployment rate could still rise as the long-term unemployed begin to actively seek jobs again and thus start being counted by the Labor Department. It would take a year of 4 percent growth generating 200,000 to 250,000 jobs a month to bring the rate down to 9 percent. And even that would be twice as high as what Americans have been used to during the past two decades.

7. Discontent with Democrats. At the same time, the generic congressional ballot has shifted from a high single-digit Democratic lead to a low single-digit Republican lead as independents veer back to the GOP. What’s more, a recent poll by the liberal Daily Kos blog found just 56 percent of Democrats definitely or probably voting in 2010 vs. 81 percent of Republicans. Note that a new Rasmussen poll has Sen. Ben “60th Vote” Nelson, who won reelection in 2006 with 64 percent of the vote, down 61-30 in a hypothetical 2012 matchup vs. Nebraska Gov. Dave Heineman. Dems in both chambers will surely take note of those numbers. Indeed, the prospect of a terrible 2010 environment has already pushed some veteran Democratic legislators in competitive districts into retirement such as John Tanner of Tennessee and Brian Baird of Washington.

8.  Economic Damage. Even if the unemployment rate falls a full percentage point next year,  it may not help Democrats much. Americans only slowly regain their economic confidence after a deep recession. When Democrats lost the House and Senate in 1994, the economy had been growing steadily since the nasty 1990-91 downturn and unemployment had fallen sharply, though not fully to its pre-recession levels. Yet 72 percent of Americans at the time still thought the economy was “fair” or “poor,” according to Gallup.

As political forecaster Charlie Cook has noted, what happens in the House depends a lot on there being more Democrat retirements in competitive seats. The GOP needs a 40-seat pickup. The more Dem members that stick, the less likely a changeover. If the numbers start going north of 12-15, a warning signal should sound for Democrats. (In 1994, Democrat departures created 31 open seats, 22 of which were won by the GOP.)  For now, Cook sees a possible 20-30 seat pickup in the House for the GOP and four to six in the Senate. (Harry Reid, Blanche Lincoln and Chris Dodd look especially vulnerable). But Cook may be underestimating how the dreadful New Normal in the economy will create a New Normal in politics in 2010.

COMMENT

Some of this makes sense and some is the same ignorant, bipartisan ranting we need to get away from. O-BAM-I-GOTCHA and his bunch will lose…but I voted for them because Bush was a radical, war-mongering neo-con – clueless, asleep at the helm…I won’t make the mistake of voting for the dems again, but please, please, please, put someone up there who understands we need to get back to the simplistic beauty of the constitution, abolish the fed and IRS, and stop empire-building.

Posted by jay h. | Report as abusive

More 2010 forecasts

Dec 29, 2009 18:12 UTC

Here is an interesting one from MF Global fully adopting the New Normal mantra:

On debt:

The IMF predicts that in 2010 the average government gross debt as a percentage GDP for the 7 major advanced economies will be 109% and 113% in 2011. It was only 84% in 2007 and 77% in 2000. Following the global down turn in the 1990s, average gross debt as a percentage of GDP increased from 58% in 1990 to 80% by 1996. History suggests that post recession, the reduction in government spending is rarely equivalent to the increase catalyzed by the retrenchment in the private sector. Given the breadth and depth of this past recession and lingering risks in the system, the pull-back in government spending will be even less. Moreover, the initiatives of the US government are costly and the passage of the healthcare bill will only increase the financing needs. As the global recovery takes hold it will be increasingly difficult for governments to attract interest in their securities as their yield reside at historic lows. Outside of valuation, fears over defaults will also keep the market wary of government debt. Widening sovereign CDS spreads underscore the market’s already elevated concern. While a widespread tidal wave of defaults is unlikely, poor auction demand in the wake of the recovery and in the face of heavy financing needs will increase trepidation about its possibility.

On unemployment:

2010 will be characterized by a jobless recovery. MFGR sees the unemployment rate peaking in 2010 at 10.5% and closing the year between 9.5% and 10%.  … On the US front, the outlook for taxes is murky and the healthcare initiative which will likely force all employers to provide care or pay a penalty will discourage the expansion of the labour force. Though the Obama administration is extending the capital gains holiday for small businesses, employers need to feel confident that their profit margin will not erode in the future due to tax increases in order to genuinely contribute to job growth. Moreover, budget shortfalls at the state and local government level will cap government hiring. Globally speaking, there has been a significant increase in structural employment that is now part of the new normal. The collapse of the financial markets has led to a permanent shrinkage of the financial industry and the impendingregulation will make financial innovation, a factor that does lead to job growth, very difficult. The manufacturing industry faces the same problem. Globalization will lead to the removal of manufacturing jobs in advance economies and cause a shortage of skilled labour forcing many to look to build other skill sets.

On taxes:

The tax burden in the U.S. and Europe is likely to increase. The on going deterioration in public finances, at both the state and government levels, will put upward pressure on taxes in the U.S. Moreover, the Bush tax cut is expected to sunset in 2011. There is some feeling that Congress will vote to extend lower tax rates, but this is likely to come for earners making less than $250,000. Somehow, the $250,000 income level has become the definition of rich in America. Capital gain and dividend taxes are also likely to rise for high income workers and risk leading to a re-pricing downward of assets. Furthermore, the healthcare bill contains another tax hike on high income workers, and will likely lead to higher healthcare insurance fees. The healthcare mandate will act like a tax by raising the cost of healthcare for many workers. At the state level, California, Illinois, and New Jersey face massive fiscal strain and politicians are reluctant to address pension, healthcare, and wage costs in order to boost the productivity of government workers. Unions are a strong constituent and politicians do not want to upset a large voting block.

On US politics:

Passage of the Democratic healthcare plan will mark an apex in U.S. liberalism. Government policy will shift toward the center into midterm elections. Polling data highlights the falling popularity of the Democratically controlled Congress and President Obama. The NBC/Wall Street Journal poll displayed the Congressional disapproval rating at an elevated 68% in mid December. At the same time, data produced by Rasmussen has shown President Obama’s approval index falling from a peak of +30 on January 22, 2009 to a post Christmas reading of -12. The champion legislation of the Democratic Party, healthcare, is also finding limited support. The recently passed Senate healthcare bill has displayed a high level of public disapproval highlighting anger over the intervention of government into healthcare. Rasmussen’s polling numbers on healthcare show most voters oppose the healthcare plan and just 25% believe they will be better off. The likely and soon to be passed healthcare bill has been passed on a totally partisan basis in the face of growing opposition to government policy. Recent Democratic losses of governorships in New Jersey and Virginia spotlight the tilt of support by the public toward the party out of power. Furthermore, Alabama Congressman Parker Griffith recently switched to the Republican Party from the Democratic Party. The “Blue Dog” feared losing his seat in 2010. The high level of discontent with politicians is occurring in the back drop of “Tea Parties” and grass root movements to stop the reach of government given excessive spending and a high tax burden. Unemployment is still elevated, and income growth is slow. The public is angry over the impact of a stimulus plan which may have saved the financial system from melt down, but did little to improve standards of living. Democrat leaders in Congress have fought for their agenda at all costs, and will now try to reverse their tactics in order to improve their public image. Politicians, at the core, are survivalists and thus policy is likely to move toward the center to attract discontented voters. The Democratic leadership is aware that history is not on their side for mid term election victories and power loss can be expected. For example, during the 1994 mid term election, President Clinton and the Democrats lost 9 seats in the Senate and 54 in the House. In 1946, President Truman and the Democrats lost 12 Senate seats and 55 House seats. Going back further, FDR and the Democrats picked up 10 Senate seats and 9 House seats in 1934, but suffered major losses in 1938 and 1942 with 7 House seats (6 Senate seats) and 45 House seats (9 Senate seats) lost in 1938 and 1942 respectively

Political impact of surprisingly weak 3Q GDP

Dec 22, 2009 14:32 UTC

First, the Commerce Department:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the third quarter of2009, (that is, from the second quarter to the third quarter), according to the “third” estimatereleased by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 2.8 percent.

Me:  And, of course, the original estimate was 3.5 percent. Now  a few thoughts;

1) After such a nasty recession, the US economy should grow in the 6-8 percent range. The first seven quarters after the 1981-82 recession saw 7 percent average GDP growth.

2)  If that doesn’t happen soon, another sign that this recovery/expansion will different. And by different, I mean weaker than is typical.

3) And a weaker recovery, means weaker job growth. To drop unemployment by a full percentage point next year, it will take 4 percetn GDP growth generating 250k a month.

4) High unemployment and weaker growth means a higher level of danger for Democrat incumbents in the 2010 midterms. My working model translates 3 percent growth into typical losses of 25 seats in the House, 2 in the Senate. If growth comes in at closer to 2 percent, that is when you get the 1994-esque scenario with 40+ losses and 5+ Senate seats.

COMMENT

Not a bad deal if it means getting rid of a bunch of lefty politicians and shifting Nobama to the right. That’s what Bill Clinton did in 1994, and ya can’t argue with success.

Posted by gotthardbahn | Report as abusive

The coming assault on the Fed

Dec 11, 2009 15:09 UTC

This piece by Paul Krugman reinforces my feeling that the Federal Reserve is going to be hit hard for not doing even more to boost the economy. He wants the Fed balance sheet expanded even more to promote faster growth.

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

So why isn’t the Fed doing it? Part of the answer may be political: Ideological opponents of government activism tend to be as critical of the Fed’s credit expansion as they are of the Obama administration’s fiscal stimulus. And this has probably made the Fed reluctant to use its powers to their fullest extent. Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation, which they see lurking just around the bend even though there’s not a hint of it in the actual data.

Me: The Fed is going to get hammered if it starts clearing the balance sheet and raising rates while unemployment is still elevated. Expect more attacks by Congress like Barney Frank’s wish to depower the regional Fed presidents, kicking them off the FOMC. Yes, the Fed is getting his in Congress by this audit bill. But the worst is yet to come.

COMMENT

More reason to be short the dollar!

Posted by Johnba | Report as abusive

Obama’s jobs conundrum

Dec 10, 2009 16:27 UTC

The insightful Andy Busch of BMO Capital Markets eyes it:

Here’s the ironic duality of the government spending creating jobs and massive deficits: it creates a small amount of short term jobs that steal a larger amount of long term jobs. Deficits are like weeds, when they are small they’re not a problem. When they get large, they block out the growth of what we want. It’s part of the reason why we have a conundrum of low interest rates while the deficit continues to expand. The markets are buying Treasurys because the prospects for strong growth are low and get further reduced with every new public sector spending initiative that adds to the deficit.

Let’s see if President Obama can morph himself away from FDR towards another presidential acronym: JFK. Like the 1960′s, it would be great to see corporate and individual tax cuts accompanied by a strong US dollar policy by the Federal Reserve to bring in foreign direct investment. Unfortunately, it will most likely take a year of sub-optimal growth to get the political momentum moving in this direction. It’s where economic policy needs to go to create sustainable growth.

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