The Jobless Recovery

Last week's US jobs numbers reviewed...

NO MATTER how absurd things get, they can always become more absurd, writes Bill Bonner in his Daily Reckoning.

"Summers: US nears 'escape velocity'

That's the headline on the weekend Financial Times.

Larry Summers is jubilant. He got the latest employment figures last Friday. They tell the story of an economy that he thinks is headed into outer space, with 162,000 new jobs created in March.

Hallelujah...all this intervention by the feds is paying off! Thank God Summers was on the job. If he hadn't been...well, the economy would have had to get along on its own...right here on planet earth...just like it did for all those centuries up until the feds got control of it during the Great Depression (or shortly after).

Heck, you know how terrible it was back then. People would go broke...people like speculators. Bankers. Promoters. They would be wiped out. Jobs would be lost. Businesses would go bankrupt. And then, a few months later, they'd have to get back on their feet...begging, borrowing, or stealing enough capital to make a fresh start.

But now things are different. Now, we have a better world, designed in part, by Mr. Summers himself. Now, people don't go broke. Well, at least, major campaign contributors don't go broke. They get bailed out. They stay in business. The feds give them money so they can keep doing what they did before. And then, the feds put a booster rocket under the whole economy...

Yes, dear reader, this is a happy day for Larry Summers. But it also marks a giant stoop for mankind. Finally, man is free from the discipline of the market system. Now, Werner von Summers et al are on the case. So you can forget about anything really bad happening. Now, it's to the moon and beyond...growth and prosperity from here to kingdom come.

Summers is not crazy. He is merely lost in space. He thinks you can manipulate the economy all you want...like solving an engineering problem...well...like sending a man to the moon. But you could say that about almost all modern economists. About all those that don't agree with us. The other 2 or 3 are muttering to themselves while rummaging through trashcans hoping that someone left a little liquor in the bottle before throwing it away.

At least our president has his feet on the ground. Obama believes the US has "turned the corner" on the jobs issue. But wait. The private sector added 123,000 jobs last month. According to our sources it needs to create 100,000 just to stay even with population growth. So, we're not at all sure that 23,000 jobs is really that great after two years, 8 million job losses and $10 trillion of stimulus.

Let's see, at that rate, it will take approximately 320 years to get back to full employment...doesn't sound like 'escape velocity' to us. We've seen Amtrak trains going faster. Maybe we're missing something.

This kind of marginal job performance is not likely to have a major impact on consumer spending. Speaking of which, we wondered how consumers could increase spending when their incomes weren't going up. Comstock Partners explains it:

"The answer is surprisingly simple once you look at the savings rate. As we mentioned, consumer spending has climbed 3.7% since May; that amounts to $373 billion of increased spending in the period. During the same span consumer savings declined by almost the same amount – $374 billion-while disposable income – was basically flat, dropping by 0.1%. It is therefore easy to see that the entire increase in consumer spending for the nine months was due to reduced savings.

"For some context let's look briefly at the household savings rate as a percentage of disposable income in the past. From 1955 through 1992 the savings rate stayed mostly within a range of 7%-to-11%, and then began a steady decline. The decline was slow at first, dropping to about 5% in 1998. After that the rate of decline accelerated, first with the bursting of the dot-com boom, and then with the boom in housing later in the decade. By 2007 the rate had dropped all the way to an average of 1.8%. The period of decline coincided with below average growth in wages and employment compared to prior decades. To maintain their standard of living, consumers went heavily into debt, aided and abetted by extremely easy monetary policy, soaring home prices, rising net worth and lax borrowing terms that enabled millions to borrow more than they could afford.

"As we know, during the recession consumers were hit by high unemployment, lower incomes, tight credit and rapidly declining net worth. By May of last year they had raised their savings rate back to 6.4%. Since then, however, the savings rate has dropped back to 3.1% in February, thereby accounting for all of the increase in consumer spending in that period.

"In our view, therefore, the prospect for further substantial rises in consumer spending rests on an extremely shaky foundation."

Yet here's more of Summers' razor sharp mind at work. Is China a currency manipulator, he was asked.

"We think countries with large surpluses need to be focused on shifting the pattern of demand towards reliance on domestic demand."

Hey wait a minute. If China needs to focus on domestic demand, shouldn't the US change its focus too? Shouldn't the US switch its focus to domestic supply? Let's get this straight. China has been manipulating its population – actually holding down wages so that it could gain market share.

The US, of course, is free from all sin...washed in the blood of Keynes, as it is. But there's no question that its citizens and denizens got a little carried away too, during the bubble époque. While the Chinese made things to excess...Americans bought them to excess. So if the Chinese are supposed to put the kibosh on their exports – by encouraging domestic consumption – it stands to reason that the US should put the kibosh on its imports, by encouraging domestic production, right?

Yes, makes sense. But that would mean lowering the value of the Dollar (the opposite of the remedy advised for China) which would have the effect of lowering wages and consumption in the USA. If you're going to be a manipulator, in other words, you've got to manipulate in a way that is consistent with some theory. Otherwise, you're just a random manipulator...which is to say, you're crazy.

Charles DelValle does research for us at our family office. He reports that households are going broke faster than ever:

"The 149,268 consumer bankruptcies filed in March represented the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code in 2005, according to the American Bankruptcy Institute (ABI) relying on data from the National Bankruptcy Research Center (NBKRC). The March filing total represented a 34 percent increase from the February filing total of 111,693 and a 23 percent increase from March 2009 total of 121,413. Chapter 13 filings constituted 25 percent of all consumer cases in March, representing a 2 percent decrease from February."

Well this makes sense. More stimulus. More jobs. More spending. More bankruptcies...!

What the heck? Wait...it makes some sense. Here's Charles' comment:

"Bankruptcies are good for people (bad for banks) in a deflation. There are more people who aren't burdened by debt payments. These people are now free to spend in the economy as they wish. This also helps reduce outstanding consumer credit, and any other debt related figure relating to consumers."

And what's this? The Wall Street Journal reports that "multi-generational households" have returned, forced together by joblessness. Another report in the WSJ tells us that the "bank of Mom and Dad" has had to close its doors. Apparently Mom and Dad don't have the reserves they used to have...and they're not supported by the Fed the way other banks are.

And here's another item: "Office vacancies at 16-year high."

What to make of it all? For the present, we're just going to assume that our Great Correction theory is basically right. The numbers are confusing. And the facts are contradictory. But that's just what you'd expect in a Great Correction...a lot of adjustments to a new financial world.

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