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3 Things - Employment, Interest Rates & Retail Sales

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

Birth/Death Adjustments Vs. Reality

There has been much discussion as of late about the "longest string of employment gains since the 90's." There is certainly no argument that employment has improved since the financial crisis, however, with the economy six years into a recovery we should certainly expect as much.

However, there has been much debate about the real strength of those employment gains given the fact that a large majority of the population, the highest levels on record, remain unaccounted for. As I discussed recently, the most perplexing of is the near record low participation rate of the 16-54 age group.

One of the issues that has come under fire over the last few years has been the method by which the Bureau of Labor Statistics (BLS) adjusts the employment data to smooth otherwise volatile data. One of the more questionable adjustments is the birth/death model which is a monthly guess at the addition and subtraction of businesses to the economy.

Gallup CEO & Chairman recently took the BLS to task on the measure stating:

"We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

 

The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying."

Birth-Death-Firms-011514

This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS we find that jobs have been overstated by 3,678,000 or more than 613,000 annually.

Employment-BD-Adj-Diff-011515

How does this compare to the cumulative number of jobs as reported by the BLS since 2009? It is quite substantial.

Employment-BD-Adj-011515

If we assume that Gallup is correct in its assessment, this goes a long way in explaining the existing slack in the labor force and lack of wage growth. However, Jim summed it up best by when he stated:

"My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, 'The economy is coming back.'

 

Let's get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses."

Yields Continue To Fall

In June and July of 2013, I began writing a series of articles discussing why the macro-view, that the "bond bull market" was dead, was wrong. As I stated then:

"I have been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios.  (See here and here There are several fundamental reasons for my belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment."

Since then, not only have interest rates fallen, but they have recently pushed back below 2%. The last time rates were at this level was during the 2011 "debt ceiling debate" and during the 2012 "Eurozone crisis." Currently, it is the problem of a global deflationary spiral. The rush into Treasuries has also been magnified by the end of the Federal Reserve's "quantitative easing" program which marked the shift from "risk" to "safety" as the liquidity for the "carry trade" was removed.

Interest-Rates-Events-011515

Most importantly, there are virtually NO economists suggesting weaker economic growth in 2015. There is a firm belief that the foundation for continued economic prosperity is firmly planted despite rest of the globe struggling with economic weakness, recession, and deflationary pressures. However, as shown in the chart below, there is little historical evidence that falling bond yields have occurred in the midst of strengthening economic growth.

Interest-Rates-GDP-Inflation-011515

From this standpoint, as investors, it is worth considering that given the fall in inflationary pressures in the U.S. there is a rising risk of economic weakness to come.

 

Retail Sales Vs. Oil Prices

Over the last couple of months, I have written several articles explaining why falling oil and gasoline prices ARE a problem for the economy. (see here, here and here)

The mainstream view is that falling oil and gas prices are a boost to economic growth because it gives consumers more money to spend. However, as I explained in the articles above, that has historically not been the case. The reason is that in the economy, spending is a zero-sum game. If a consumer spends less on one item and redeploys those saving on another purchase, they did not spend MORE money. The only thing that increases consumption, is either increases in debt or incomes.

The retail sales report for December demonstrated this to be the case. For the month retail sales plunged much more than expected even after a substantial fall in energy and gasoline costs. More importantly, the fall in oil prices suggest that retail sales will likely continue to deteriorate in the months ahead as shown in the chart below.

Retail-Sales-Oil-Prices-011515

The obvious ramification of the plunge in oil prices is that eventually the loss of revenue will lead to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all capex expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.

The majority of the jobs "created" since the financial crisis have been lower wage paying jobs in retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy related areas has had a "ripple effect" of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.

Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the "savings" provided to consumers.

Keep a watch on retail sales, historically an annualized rate of growth below 3% has been a precursor to recessions.

 

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Thu, 01/15/2015 - 15:28 | 5666082 Gaengphed
Gaengphed's picture

Jihadi shelters in Belgium are being raided by police at the moment. Action against jihadi's possibly in 7 other countries as well...

Thu, 01/15/2015 - 15:30 | 5666096 junction
junction's picture

Role playing by chubby guys in SWAT outfits recalled from their croissant breaks.

Thu, 01/15/2015 - 16:58 | 5666557 MisterMousePotato
MisterMousePotato's picture

I know that Belgium is not in America, but you're never going to convince me that they, too, eat aught but donuts.

Thu, 01/15/2015 - 15:30 | 5666100 cossack55
cossack55's picture

Quick, cover the Ardennes trails.

Thu, 01/15/2015 - 15:30 | 5666090 junction
junction's picture

No mention of government corruption?

Thu, 01/15/2015 - 15:35 | 5666120 NoDebt
NoDebt's picture

It's assumed.

Thu, 01/15/2015 - 15:38 | 5666140 KnuckleDragger-X
KnuckleDragger-X's picture

Corruption is a given. The only question is where and how much and the answer is lots and everywhere.

Thu, 01/15/2015 - 16:56 | 5666555 Son of Loki
Son of Loki's picture

<< large majority of the population, the highest levels on record, remain unaccounted for >>

 

No they're not. Just check out the Walmart parking lot.

Thu, 01/15/2015 - 15:32 | 5666105 new game
new game's picture

sums up the situation the fed has cornered themselves into. they will take care of the tbtf banks though. that is there unstated policy. watch for that and only that.

Thu, 01/15/2015 - 16:32 | 5666449 froze25
froze25's picture

Makes since since TBTF banks are the banks that make up the Fed.  Same major stake holders anyway.

Thu, 01/15/2015 - 15:32 | 5666107 MarketAnarchist
MarketAnarchist's picture

Buy Water Purifiers, ammunition, firearms, Food, Clothing, Ethanol-free gasoline, gold, and silver, in that order.

Thu, 01/15/2015 - 15:49 | 5666210 Seasmoke
Seasmoke's picture

Most people are not going to make it to bottom of your list. :(

Thu, 01/15/2015 - 15:33 | 5666110 Disc Jockey
Disc Jockey's picture

Laughter is frankly all i got left for this point.

Hahahahahaha! We are so fucked. 

Anyone for a bourbon? Eagle Rare neat.

Thu, 01/15/2015 - 15:38 | 5666141 clade7
clade7's picture

Done and done old Pal!

 

With Sonny Landreth/Mark Knopfler's rendition of "Blue tarp Blues" a blaring...

Thu, 01/15/2015 - 15:38 | 5666143 tarsubil
tarsubil's picture

I will lift a glass of Midleton to that. Cheers.

Thu, 01/15/2015 - 15:40 | 5666158 madcows
madcows's picture

I just tried the Eagle rare recently and thought it was quite nice.

I still prefer the sam houston, or even better is the Basil Hayden.  Two shots worth in a highball glass with a couple ice cubes and I'm ready to settle in for the night.

Thu, 01/15/2015 - 19:24 | 5667371 Disc Jockey
Disc Jockey's picture

Mmmm. That Basil is good stuff.

Best bang for your buck might be Elijah Craig...not too bad for $22ish.

Thu, 01/15/2015 - 15:46 | 5666177 Seasmoke
Seasmoke's picture

Makers 46. Double. Also neat. Cheers. 

Thu, 01/15/2015 - 16:23 | 5666388 stant
stant's picture

Plain old Evan Williams for me. They are just down the rd apiece

Thu, 01/15/2015 - 15:35 | 5666115 Mike Honcho
Mike Honcho's picture

What are things that will remain low?  I will take WWIII for $400 please.

Thu, 01/15/2015 - 15:35 | 5666117 KnuckleDragger-X
KnuckleDragger-X's picture

Being a knuckledragger I tend to have a lot of working class friends that I grew up with and they've all seen good times and bad but they are all talking about the hole their in and can't see their way out of. the economy is made up of these people and what's killing them is what's killing the country.

Thu, 01/15/2015 - 15:40 | 5666155 NoDebt
NoDebt's picture

Lots of my friends are in the same boat.  What little work there is they've been waged-arbitraged into wishing they never got it.  Some of these are union jobs, too.  The unions work FOR the companies now.  Easier to get the union to hire the Mexicans than to have the company do it themselves.

Thu, 01/15/2015 - 15:47 | 5666168 clade7
clade7's picture

 ...We have lived through 4 recessions in our working lifetime so far, pulled ourselves 'up by our bootstraps' so much our ass is up around our ears!...after a while a guy says 'fuck it' and goes fishing...although, ginseng hunting for our future Chinese overlords would be perhaps profitable in season, keep a guy in shape right?

Thu, 01/15/2015 - 15:37 | 5666132 Luapnor
Luapnor's picture

I disagree with the premise that spending is a zero-sum-game.  Money not sent to OPEX stays in the US and is recirculated. Cheap oil means more recreation using oil and more spending at locals that benefit from that spending... the list goes on.

Thu, 01/15/2015 - 15:47 | 5666159 NoDebt
NoDebt's picture

I agree with your disagreement.  But neither of us is going to win.  Not here.  Not in this forum.

As much as you hear us rail against Keynesianism, when the chips are down, everyone worships at the altar of aggregate demand.  Rarely a thought as to it's detailed composition.  Frankly, little understanding of the basic difference between consumption and investment.  Between what gets recirculated through the economy and what goes out into the "dead zone", never to help most participants in the economy again.

Whatever.  It's tiring just talking about stuff like this.

Thu, 01/15/2015 - 15:53 | 5666219 Bell's 2 hearted
Bell&#039;s 2 hearted's picture

i would agree with your sentiment ... IF we're talking about a fixed amount of $$s that could be reallocated ... BUT we're in a fiat world where $$s (debt) are created out of thin air to pay for energy ... US consumer got a break on gas ... sure didn't filter over into retail sales ... and energy layoffs/slashed capex about to come ashore

anyways, hundreds of $billions less for OPEC princes to spend like drunken sailors

Thu, 01/15/2015 - 15:45 | 5666182 25or6to4
25or6to4's picture

Luapnor
"....the list goes on." Like spending moar on made in china shit at walmart.

Thu, 01/15/2015 - 16:09 | 5666306 Luapnor
Luapnor's picture

No disagreement... but there will be increased oil consumption.. for example, increased boat use equals more spending on fishing and more local money spent for bait and food and other items that arent sent to china.  But youre right, if all that saved money is used to buy chinese crap then the only people helped are retail clerks and trucking companies....but even that helps more than a direct money transfer to foriegn oil companies.

Thu, 01/15/2015 - 15:51 | 5666184 daveO
daveO's picture

OPEC oil money gets recycled thru the big money center banks. That will decline, hurting the banksters. So, from their perspective, the debt slaves will get to keep more of their money. 

Thu, 01/15/2015 - 15:44 | 5666171 Bell's 2 hearted
Bell&#039;s 2 hearted's picture

has lance thrown in the towel on his "10yr yield @ 4% in 2015" call of a few months ago yet?

Thu, 01/15/2015 - 15:56 | 5666240 Ban KKiller
Ban KKiller's picture

Join the Free Shit Army! Hide your real assets! Get on the dole! Work part time for cash! Sell shit on Craig's list! OH....and try and validate your debts. No validation? Quit paying! 

You either have to be the .01 or off the radar due to being "poor". Hide in plain sight...

IF that doesn't work, then bong hits all around. 

Thu, 01/15/2015 - 16:48 | 5666516 froze25
froze25's picture

I suppose you could transfer all of your assets into a trust including your home with you and your heirs listed as the beneficiaries.  Than get on the Govt dole.

Thu, 01/15/2015 - 15:57 | 5666252 Consuelo
Consuelo's picture

"My hunch is that no one talks about the birth and death rates of American business because Wall Street and the White House, no matter which party occupies the latter, are two gigantic institutions of persuasion. The White House needs to keep you in the game because their political party needs your vote. Wall Street needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, 'The economy is coming back"

Hence the term: 'Political Economy'

 

 

 

Thu, 01/15/2015 - 16:01 | 5666270 crazybob369
crazybob369's picture

"This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years."

 

Oh my God!!! Really? Who would have guessed that?

Thu, 01/15/2015 - 16:01 | 5666275 NoWayJose
NoWayJose's picture

Is it time for the algo driven reversal of the reversal of yesterday's reversal?

Thu, 01/15/2015 - 16:13 | 5666328 Omen IV
Omen IV's picture

"In a time of universal deceit, telling the truth is a revolutionary act." -George Orwell

Thu, 01/15/2015 - 16:18 | 5666363 JRobby
JRobby's picture

3 Things:

No Demand

No Demand

No Demand

Fucked

Fucked

Fucked

Thu, 01/15/2015 - 16:20 | 5666366 wagthetails
wagthetails's picture

With rates droppoing, shound the Fed be at least trying to sell some of thier assets?  i'm not saying enough to drive rates up, but with the massive momentum for decreasing rates, surely they could unlead a fair amout of debt and for profit? 

Although then deb "held by public" woudl go back over 100% GDP.  They rather window dress a data point than actually unwind as much as they can w/o blood.  this to me, is proof the the FED NEVER intends on selling securities.

Thu, 01/15/2015 - 16:35 | 5666409 besnook
besnook's picture

banks hate it when they have to find another bubble to blow up.

kind of flawed premise without the numbers. 100000 guys losing out on 100000/year dollar paychecks is only 10,000,000,000 dollars compared to 100000000 people saving(to spend on other walmarty things) 100dollars/month on their fuel bill equals 10,000,000,000 dollars/month.

 

if the consumer is not buying at walmart then where is this money being spent? is it being saved? paying down debt? spent on hookers and blow so it is not counted?

i bet we are seeing an anti consumer sentiment similar to depression babies' sentiment about debt and frugality. this is the recycle, re purpose generation, the millenials' only useful trait. they have grown up in war and economic(personal and aggregate) turmoil. they are risk averse and frugal(born out of brokeassness), a banker's nightmare.

Thu, 01/15/2015 - 16:50 | 5666523 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Lance Roberts is brilliant, Tyler.

 

This is a great article that shows real insight into the real economy, Z/H.

 

Lance Roberts is an honest arbiter IMHO.

 

This dude should be kept in mind for the next government after this one is run out of town on a rail, or hung from oak tree limbs, in about five months.

Thu, 01/15/2015 - 16:53 | 5666534 hawk nation
hawk nation's picture

Bullshit low oil prices are a net positive for the economy

More money in 90% of the populations pockets to spend elswhere

NOw the banking cartel can buy up all the over leveraged oil producing small companies at penies on the dollar. That is why the federal reserve creates all these bubles so someone else can do the heavy lifting for them and they can steal the riches

Thu, 01/15/2015 - 16:56 | 5666554 adr
adr's picture

Of course the jobs number is complete bullshit. There hasn't been net job 1 added to the economy since 2009.

In fact the total number of people employed is lower than it was in 1997. How many more people have entered into the workforce since 1997? How many immigrants have we seen added to the population in the past near 20 years?

There are also a record number of part time vs full time jobs in the economy. SO anyone claiming there has been the longest streak of employment gains since the '90s deserves to be fucked in the ass with a rusty railroad spike.

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