Another closing

By Bob Eisenbeis

REPOST WITH CORRECTIONS

As the Year Winds Down
December 23, 2011, Bob Eisenbeis, Managing Director, Chief Monetary Economist

As the year winds down, it is customary to take a look at the year ahead.  Unfortunately, the next one doesn’t necessarily look much different from this one when it comes to some of the key risks.  Europe is a mess and continues to be unwilling to face up to the fact that monetizing debt inf the form of providing short-term liquidity, won’t solve the structural design flaws in either its fiscal arrangements or the European system of central banks.  We in the US are not any better at managing our fiscal affairs, and the most recent replay of the threatened closure of the government demonstrates that politicians in DC show no signs of changing their dysfunctional behavior.

Parts of the rest of the world also continue in turmoil, and this too is likely to increase next year.  The Arab spring morphed into summer, then fall, now winter, and likely a new spring, to possibly be joined by unrest in Russia.  Worse yet is the change in leadership in North Korea, where things could get very nasty.  The established military and political leaders will likely make short work of Kim Jung Un.  He may feel it necessary to resort to purges to eliminate rivals and saber rattling to keep the outside world at bay.  How the Chinese react will be key.  As an economist, it is risky to stray too far afield, so suffice it to say that uncertainty and volatility will likely plague world markets for the coming year.

As for the US economy, there may actually be some signs of hope, notwithstanding our budget problems.  The US real economy has continued to grow, albeit slower than we might wish.  We have now had positive real GDP growth for all nine quarters since the NBER Economic Cycle Dating Committee declared an end to the recession.  Inflation remains subdued for the time being, and has actually abated a bit the last couple of months.  Consumer confidence, as measured by both the Michigan and Conference Board surveys, and business confidence seem to have stopped their declines and may even be picking up a bit.  The interesting area to keep a watch on, however, is the US labor market.

Recent attention has been paid to the fact that some states may be actually turning around, but at first glance they appear to be states like Utah and South Dakota, which are not the major movers in terms of GDP share but, like other key states, can serve as important bellwethers of real improvement. The US unemployment rate surprisingly dropped to 8.6% in November of this year.  Nevertheless, over 13 million people are officially unemployed.  This number gets even more serious when one considers that another 2.6 million workers are marginally attached to the labor force, and some 8.5 million people are employed part-time for economic reasons.  In total, we have over 24 million people who are either unemployed or underemployed.  Finally, since the start of the recession, the economy has officially lost about 6.3 million jobs, many of which will not return.

But there is some good news.  Unemployment has been dropping.  In November a total of 43 states showed a reduction in unemployment from the previous month, although part of this was due to a decline in the size of the labor force.

The task ahead when it comes to job growth is daunting. We have estimated that it will take 3.5 to 4 years for the economy to replace those 6.3 million jobs, if it grows at about 3 percent.  This does not consider the fact that we need to create about 150K jobs per month per year just to absorb new entrants into the job market. Where will these jobs be created?

It seems reasonable to conclude that we won’t see significant growth until those states that account for the bulk of US GDP show signs of meaningful improvement. It is nice to point out that the unemployment rate in South Dakota is only 4.3%, but that state is not going to be a job engine for the US, since it only accounts for less than one quarter of one percent of US GDP. What matters is looking “where the beef is.”  There are 14 states that account for about 66% of US GDP. The attached table shows who they are and the percentages of GDP, as of yearend 2010, they produced.

What are the employment and job creation situations in these key states?  First of all, California, which accounts for nearly 14% of US GDP, is a laggard.  Its unemployment rate remains second highest in the nation at 11.3, exceeded only by that of Nevada at 13%.  California hasn’t shown much improvement this year from its peak unemployment of 12.5% in the fourth quarter of last year.  California has also been by far the biggest job loser since the start of the crisis.  California job losses peaked at slightly over one and a half million, and the deficit still stands at about 940 thousand.  This accounts for 15% of the total current cumulative job loss for the nation as a whole since the start of the recession, down from the 17.5% at its peak.  Second, all the rest of the states in the top 14 GDP list have done comparatively well, in that 12 of the 14 experienced a decline in unemployment last month.  Only New York actually experienced a one-tenth of a percentage point increase, which probably isn’t statistically significant.

While it is true that the employment situation is improving, performance is still mixed in the states that count the most.  Interestingly, half of the 14 economically significant states have unemployment rates that have trended above the national average, and these seven states account for 27% of US GDP.  The other half, accounting for 39% of GDP, have consistently done better, led by Virginia.  The attached chart shows the unemployment paths for the 14 key states.  The good news is that those that rank above the national average have shown great improvement in their employment situations.  If they continue to do so, then we may be presently surprised by both the jobs numbers and GDP growth in 2012.

content/commentary/Bob122311.gif

There are several important conclusions from this brief analysis.  First, the employment situation is improving where it matters most.  Second, from an investor prospective, it may pay to watch the performance of the improving states for signs of further growth and fiscal improvement.  Some of the investment underperformers may also show signs of life.  Third, any deterioration in the employment or GDP performance of those states that have outperformed the nation should serve as a warning sign.  All in all, there are encouraging signs that suggest we may have turned the corner and 2012 may be a better year than even the forecasters are suggesting.

Bob Eisenbeis, Managing Director, Chief Monetary Economist

As the Year Winds Down
December 23, 2011

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com.  He may be reached at Bob.Eisenbeis@cumber.com.

As the year winds down, it is customary to take a look at the year ahead.  Unfortunately, the next one doesn’t necessarily look much different from this one when it comes to some of the key risks.  Europe is a mess and continues to be unwilling to face up to the fact that monetizing debt in the form of providing short-term liquidity, won’t solve the structural design flaws in either its fiscal arrangements or the European system of central banks.  We in the US are not any better at managing our fiscal affairs, and the most recent replay of the threatened closure of the government demonstrates that politicians in DC show no signs of changing their dysfunctional behavior.

Parts of the rest of the world also continue in turmoil, and this too is likely to increase next year.  The Arab spring morphed into summer, then fall, now winter, and likely a new spring, to possibly be joined by unrest in Russia.  Worse yet is the change in leadership in North Korea, where things could get very nasty.  The established military and political leaders will likely make short work of Kim Jung Un.  He may feel it necessary to resort to purges to eliminate rivals and saber rattling to keep the outside world at bay.  How the Chinese react will be key.  As an economist, it is risky to stray too far afield, so suffice it to say that uncertainty and volatility will likely plague world markets for the coming year.

As for the US economy, there may actually be some signs of hope, notwithstanding our budget problems.  The US real economy has continued to grow, albeit slower than we might wish.  We have now had positive real GDP growth for all nine quarters since the NBER Economic Cycle Dating Committee declared an end to the recession.  Inflation remains subdued for the time being, and has actually abated a bit the last couple of months.  Consumer confidence, as measured by both the Michigan and Conference Board surveys, and business confidence seem to have stopped their declines and may even be picking up a bit.  The interesting area to keep a watch on, however, is the US labor market.

Recent attention has been paid to the fact that some states may be actually turning around, but at first glance they appear to be states like Utah and South Dakota, which are not the major movers in terms of GDP share but, like other key states, can serve as important bellwethers of real improvement. The US unemployment rate surprisingly dropped to 8.6% in November of this year.  Nevertheless, over 13 million people are officially unemployed.  This number gets even more serious when one considers that another 2.6 million workers are marginally attached to the labor force, and some 8.5 million people are employed part-time for economic reasons.  In total, we have over 24 million people who are either unemployed or underemployed.  Finally, since the start of the recession, the economy has officially lost about 6.3 million jobs, many of which will not return.

But there is some good news.  Unemployment has been dropping.  In November a total of 43 states showed a reduction in unemployment from the previous month, although part of this was due to a decline in the size of the labor force.

The task ahead when it comes to job growth is daunting.  We have estimated that it will take 3.5 to 4 years for the economy to replace those 6.3 million jobs, if it grows at about 3 percent.  This does not consider the fact that we need to create about 150K jobs per year just to absorb new entrants into the job market. Where will these jobs be created?

It seems reasonable to conclude that we won’t see significant growth until those states that account for the bulk of US GDP show signs of meaningful improvement. It is nice to point out that the unemployment rate in South Dakota is only 4.3%, but that state is not going to be a job engine for the US, since it only accounts for less than one quarter of one percent of US GDP.  What matters is looking “where the beef is.”  There are 14 states that account for about 66% of US GDP. The attached table shows who they are and the percentages of GDP, as of yearend 2010, they produced.

What are the employment and job creation situations in these key states?  First of all, California, which accounts for nearly 14% of US GDP, is a laggard.  Its unemployment rate remains second highest in the nation at 11.3, exceeded only by that of Nevada at 13%.  California hasn’t shown much improvement this year from its peak unemployment of 12.5% in the fourth quarter of last year.  California has also been by far the biggest job loser since the start of the crisis.  California job losses peaked at slightly over one and a half million, and the deficit still stands at about 940 thousand.  This accounts for 15% of the total current cumulative job loss for the nation as a whole since the start of the recession, down from the 17.5% at its peak.  Second, all the rest of the states in the top 14 GDP list have done comparatively well, in that 12 of the 14 experienced a decline in unemployment last month.  Only New York actually experienced a one-tenth of a percentage point increase, which probably isn’t statistically significant.

While it is true that the employment situation is improving, performance is still mixed in the states that count the most.  Interestingly, half of the 14 economically significant states have unemployment rates that have trended above the national average, and these seven states account for 27% of US GDP.  The other half, accounting for 39% of GDP, have consistently done better, led by Virginia.  The attached chart shows the unemployment paths for the 14 key states.  The good news is that those that rank above the national average have shown great improvement in their employment situations.  If they continue to do so, then we may be presently surprised by both the jobs numbers and GDP growth in 2012.

There are several important conclusions from this brief analysis.  First, the employment situation is improving where it matters most.  Second, from an investor prospective, it may pay to watch the performance of the improving states for signs of further growth and fiscal improvement.  Some of the investment underperformers may also show signs of life.  Third, any deterioration in the employment or GDP performance of those states that have outperformed the nation should serve as a warning sign.  All in all, there are encouraging signs that suggest we may have turned the corner and 2012 may be a better year than even the forecasters are suggesting.

Bob Eisenbeis, Chief Monetary Economist

Resources:
To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.aspx
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.aspx?file=styles_index.asp
For personal correspondence: bob.eisenbeis@cumber.com

Advertisements

One thought on “Another closing

  1. COMMENTS FROM DAVID KOTOK

    In today’s commentary a table was unintentionally left out. We have a revised version of the commentary on our website with the table added. (http://www.cumber.com/commentary.aspx?file=122311.asp) In addition, when talking about the number of jobs to be created, the statement should have read “150K jobs per month per year.” I am sorry for any confusion this may have caused.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s