Category: Markets, Business, and the Economy

Wand? Check. Fairy dust? Check. Smoke and mirrors? Check.

Today, the White House predicted the creation of 2.6 million jobs in 2004. It is worth noting that last year’s White House prediction of creating 1.7 million jobs was not reached; job creation in 2003 fell short by almost 1.8 million.

It sounds like a lot of jobs: 2,600,000 jobs created in one year. Now, divide that by 12 months in a year. Feel free to use a calculator, but my figure is 216,666.67 jobs per month. In the interest of simplification, lets say between 216,000 and 217,000. This number is already optimistic. Remember when we found out there were only 1000 jobs created in December of 2003? That number was revised upwards to 16,000 (320 jobs per state). Just Friday we learned that although the economists figured there were 160,000 jobs created in January (still far short of 216,000), in reality only 112,000 jobs had been created (51% of 216,000). Oh, and please note that this ambitious level of projected job creation in 2004 still falls short of what was achieved in the Clinton Administration. People are starting to wonder how this jobless recovery thing works.

But wait, it gets worse. Remember, economists pretty much agree that just to keep the unemployment rate from rising, the economy must add something like 150,000 jobs each month. This is a consensus number, an average; some economists think the number is closer to 100,000, others believe it’s more like 200,000. So not only does the January number fall short of helping the unemployment rate, the unmet projection would barely have helped. Indeed, the whole 2.6 million jobs this year might be needed just for new additions to the workforce. And that’s before we go giving work permits to non-citizens.

But remember that 1.7 million jobs that was supposed to have been created last year? That would have only worked out to 141,666.67 jobs per month. Even if that modest goal had been achieved, we would still be looking at rising unemployment.

Oh wait, you say. I have forgotten that the job creation numbers are skewed by the self-employed and independent contractors, that legion of people who have created jobs for themselves. Tell it to this guy:

Even those who still count themselves among the employed in America are struggling to make ends meet. Self-employed computer programmer Thomas Mooney — who bills himself as the “president/janitor” of his Minneapolis company, TeleProc — said he cannot last much longer with so little work in an industry that was once booming. “I’m barely employed — no income yet this year,” Mooney said. “I have $7,000 in future prospect business and that is all I know about for the rest of the year.”

Yeah, being your own boss is great. It’s even better when you have an income.

The Congressional Budget Office now predicts record budget deficits. In fact, they are predicting that budget deficits will double the National Debt within 10 years… and they are using very modest assumptions to predict it. This story is big enough to be international news. Not everyone understands why this is a big deal (or even what this is) so let me explain.

Who is this Congressional Budget Office anyway? The CBO is a non-partisan office that provides Congress with financial and economic information they need to put together the Federal Budget each year. For what it’s worth, they are currently hiring for several positions.

How is the National Debt different from the National Budget Deficit? They both mean the Federal Government owes money, right? The budget deficit is just the money the Government will spend that it doesn’t have in one year. The National Debt is the cumulative money owed by the Government for all the years it has spent more than it has taken in, minus what it has paid off, but plus interest. All told, it’s a lot of money.

Alright, who do we owe this money to? The National Debt is owed to the people who hold United States Savings Bonds and Treasury Bills. These instruments are considered very safe because, after all, they are backed by the full faith and credit of the United States of America. Impugn the safety of these investments at risk of being labeled some kind of communist. Even if you don’t have any of these bonds yourself, some of the interest you earn from your bank or brokerage account is probably derived from such bonds.

Let me rephrase that, who owns the bonds? A large hunk of the debt is actually owned by none other than the Federal Government. That doesn’t mean it doesn’t exist, and it doesn’t mean you could slash the debt by invalidating bonds held by the Government. Agencies such as the Social Security Trust buy bonds because they know the day is coming when expenses will outstrip revenues. The next biggest holders are, in order, Japan, China, and the United Kingdom. In 1999, it was estimated that 55% of bonds were held by “private investors” including individuals, fund managers, and corporations.

Why is this such a big deal? I hear the political candidates talk about it, but how does the National Debt affect me? There are lots of ways the National Debt might affect you. Money the Government pays on the National Debt is money that can’t be used to pay for highways, schools, law enforcement, courts, and other important things in your community. Money that banks use to buy United States bonds is money they can’t lend you to buy cars and houses, and that means you will have a harder time getting a loan and you will have to pay more in interest. Money that banks use to buy bonds is also money they can’t lend companies to build new factories and create new jobs for you and your community. This is part of how the economy was able to create so many jobs during the Clinton Administration when there was a budget surplus and the National Debt was going down. Money the Government uses to pay the debt and the interest on the debt must ultimately be paid with taxes you pay. So far, your personal share is over $23,000. It’s a lot of money.

Who says we have to pay it off? Can’t we just keep making bonds? Heck, why not print money to pay off the debt? There is a ceiling on the amount of debt the nation is allowed to have, although Congress can vote to raise it. Besides which, just like your own credit rating, the national credit rating will suffer if we owe “too much.” And when a person or nation has a lousy credit rating, they have to pay higher interest rates (meaning it will cost even more to pay off the debt). Printing money is not a solution because it causes inflation (meaning it will cost even more for you to make ends meet). If that wasn’t reason enough, the standard prescription for inflation is for Agent Greenspan at the Federal Reserve to raise interest rates.

What can we do about this? Start by doing the normal democracy things, like voting and writing your elected officials. This thing is destined to become a political minefield. There’s nothing stopping you from campaigning for a candidate you feel will encourage more fiscal responsibility. In fact, if you meet the requirements, you can run for office yourself. Even if you lose, you will get your opinions out there in a big way.

One last thing. You said this CBO report used “very modest assumptions.” What do you mean? Could this be worse? Yes, there are several key assumptions that even the authors of this report know are unrealistic: that the tax cuts will be allowed to expire under current law with no new tax cuts; that there will not be another recession; and that there will be no large spending initiatives. Oh yeah, and the report does not forecast far enough out to reflect what happens when the Baby Boomers start to retire and collect Social Security.

And there you have the critical things you need to know about the budget deficit and the National Debt. Finally, as primary season is now in full swing, you might want to take a look at this little comparison of the Democratic candidates ideas on health insurance. It’s an interesting read.

I have spoken often in the last few weeks about the official employment numbers. Today, an authority no less impressive than the President of the United States of America (not these guys, this guy). Today’s official weekly Presidential address, widely seen as a preview to the State of the Union Address, includes this quote:

“Our economy grew at its fastest pace in two decades in the third quarter of 2003. Manufacturers are seeing a rebound in new orders in factory activity. And more than a quarter-million new jobs have been created since August.”

Gosh, a quarter million jobs sounds impressive. But divide that out over September, October, November, and December, and that’s 62,500 jobs per month. Economists say we need 100,000 jobs created each month just to keep up with people entering the workforce, and 200,000 new jobs each month to actually reduce the unemployment rate (please see link in “Lies, Statistics, and Economic Forcasting,” below). In short, Mr. Bush’s number is not impressive, but he is counting on you not doing the math to figure it out. He hopes nobody will start to loudly ask “If there are all these jobs being created, why can’t I find work?”

The more damning question is “If the economy is growing so fast, how come more jobs aren’t being created? If an 8% rise in GDP isn’t enough to create so much as 100,000 new jobs per month, what is it going to take?”

And about those jobs Mr. Bush keeps talking about — the ones Americans don’t want so lets give them to illegal aliens — back in the old days, long about 1998 or 1999, employers who could not find willing workers did things like raise the pay and improve the benefits. Do you remember when Alan Greenspan was worried about “wage inflation”?

Some people are beginning to think that the administration is going to be relying more and more on true-but-not-the-whole-story numbers as the months until the election wear on. I have long preferred to think of the discrepancy as an honest difference of opinion regarding what the numbers really mean. My patience in this regards is wearing thin.

Finally, my deepest sympathies go to the families of the 500 American soldiers who have died in Iraq since last March. You can find out more about them here or here.

I hate to sound like Cassandra, but I think it would be a bad idea for the regulatory Powers That Be to allow the recently announced merger of J.P. Morgan and Bank One.

In the plus column, this merger creates America’s second largest financial institution, behind Citigroup (which you may or may not recall was the result of merging Citibank and Travellers, an insurance concern, in a merger only made possible by Phil Gramm ramming through legislation to make it legal). The combined entity will have 90 Million credit cards out there. They would also have about 2300 branches across the nation, combined, serving most areas of the country. The combined company expects to save several billion dollars over the next few years. But the benefits boil down to “bigger is better.” Oh, and lets not forget all the fees the investment bankers will earn on this and the cascade of mergers it is likely to start.

Now the minus column. The combined company will have to figure out how to consolidate 111 mutual funds undoubtedly with overlapping holdings and goals, and wildly divergent fee schedules. They will also have to get two very different management teams to work together — never an easy task. In the end, about 10,000 people will lose their jobs in the consolidation. The local economy in Chicago and New York City may well be adversely effected.

That is to say nothing of the impact on the customers: ordinary people like you and me who have credit cards, bank accounts, and brokerage accounts at Bank One, J.P. Morgan, and the companies they own. We can expect new credit card user agreements, and we cannot expect them to contain more favorable terms. We can also expect higher fees and interest rates, because competition is reduced. The end consumer will probably not benefit at all. Don’t try to bluff by saying how convenient it will be that you can go to “your” bank anywhere in the country. Bank laws vary enough from state to state that if you relocate, you will still be better off shopping for a new bank, unless you like dealing with a 5 day out-of-state check hold on your paycheck.

And frankly, everything I have said depends on things going well and working out as planned. It does not allow for what might happen when your credit card, bank, mortgage, and brokerage information end up in one place. It does not consider what might happen to the J.P. Morgan/Chase/Bank One mortgage portfolio should it turn out there really is a “housing bubble.” It assumes there is no creative accounting at either firm — and do not presume to say that banks are heavily regulated, not only because banks have been known to fail too, but also because energy and telecommunications are heavily regulated too.

Yet somehow you can bet this will be approved. And it won’t turn out as marvelously as everyone expected. Let’s hope it isn’t as bad as it could be.

I know I briefly mentioned this point earlier in the week, but the matter has gotten worse.

There is seriously bad news on the employment front. First, we had the unemployment report, released yesterday. Because this link only contains the current information, allow me to post the important bits for the benefits of those who might read this in the future. For the week ended January 3, 2004, seasonally adjusted initial claims — the widely reported number — were up 14,000 to 353,000. However, there were actually 546,823 new unemployment claims that week, up 30,431. Now, I don’t know about you, but I think it’s more important to know that there were over half a million people who applied for unemployment checks for the first time, 3,724,660 total claims, and 765,570 making claims under a Federal program for the relatively long term unemployed last week than to harp on “seasonality.”

Now, please scroll down with me to this chart, as taken directly from the DOL link above:

States with an Increase of More than 1,000

AL	+1,043		Layoffs in the textile and electrical equipment industries.
MN	+1,167		Layoffs in the manufacturing industry.
RI	+1,170		Layoffs in the trade and service industries.
VT	+1,630		Layoffs in the manufacturing industry.
IL	+1,919		Layoffs in the construction, service, and manufacturing industries.
ID	+2,351		No comment.
KS	+3,240		Layoffs in the trade, service, real estate, and manufacturing industries.
AR	+3,379		No comment.
CA	+3,781		Layoffs in the motion picture industry.
OH	+3,906		Layoffs in the construction industry.
IN	+3,935		Layoffs in the manufacturing industry.
IA	+3,937		No comment.
WA	+3,958		No comment.
OR	+5,245		No comment.
NJ	+5,930		Layoffs in the transportation, warehousing, food, public administration, and manufacturing industries.
MA	+7,043		No comment.
PA	+13,179		Layoffs in the food, textile, primary and fabricated metals, industrial machinery, transportation, and manufacturing industries.
WI	+16,375		Layoffs in the construction, trade, service, transportation, communications, and public utilities industries, and agriculture.
MI	+20,583		Layoffs in the automobile and transportation equipment industries.

That’s right, the increase in people laid off in Michigan alone was more than the seasonally adjusted rise in first time claims. First time unemployment claims in Michigan rose by a number just short of the entire undergraduate student population at the University of Michigan Ann Arbor campus. The increase in new claims in Wisconsin alone exceeded the seasonally adjusted rise in first time claims, and the Pennsylvania numbers were only slightly better.

There is the first part of the answer to the great economic question: How come the economy looks great on paper, but seems so lousy to me and everybody I know? The stuff on paper is a lie.

But wait, there’s more. It seems that the economy created about 1,000 jobs last month. That falls short of economists’ expectations of 140,000. That is an error of over 99%; an error most of us who still actually have jobs would get fired over. Yes, gaining a thousand jobs is better than losing them — although in a nation of 292 million people, a thousand jobs is a rounding error. But still, a thousand jobs created falls well short of the 100,000 needed just to keep up with additions to the labor force and 200,000 needed to really reduce unemployment.

Hold on, you say, unemployment did drop, from 5.9% to 5.7%. Yes, yes it did. That’s because about 430,000 unemployed people gave up even looking for work. They are now termed “discouraged workers” as opposed to merely “unemployed.”

If enough people get “discouraged,” we’ll have full employment.

Maybe there will be jobs on the Moon.

Today, President Bush announced an initiative to help illegal alliens get jobs here in the United States. This was announced with rhetoric of “There is an economic need, and it is important that we have an immigration policy that meets those economic needs,” and “So many illegal immigrants are in the country, we need to find a way to resolve that problem in a compassionate and productive way,” and how this proposal would “match willing workers with willing employees.” Or, briefly summarized, “they are here, they are cheap, we may as well make them legal.”

Meanwhile, a research and analysis group released a report concluding that there were 1,236,426 job-cut announcements in 2003. Please remember that these figures do not include all the unannounced job cuts at all the small businesses that do not put out press releases. This same report concluded that there might not be substantial job growth in this country until 2008. It would seem that announced job cuts for 2004 are already off to a roaring start.

Now, please consider last week’s unemployment data as released by the Department of Labor. The data in that url will be replaced with more current figures as time goes by, so please let me point out the relevant numbers for the week ended December 27, 2003. The widely reported number for first time unemployment claims was 339,000. However, this was a seasonally adjusted number.* There were actually 516,501 who followed through on the unpleasant task of walking into the unemployment office and filing a first time claim. Even this figure does not include those who lost part time jobs, professionals who feel small check is not worth the time it takes to fill out the paperwork, and students who might have finished a college degree (and the associated student work placement) in December.

This same Department of Labor is currently trying to finalize rules that would effectively eliminate overtime pay. That’s right, they want to cut the income of our hardest working families, and curtail the creation of new jobs while they are at it: your Lumberghian boss will not hire a new person full time and give them benefits when he can simply make all his existing employees work harder. Your Senator needs to hear from you now.

So let me make sure I understand this correctly. We are in a “jobless recovery,” the Department of Labor is pursuing “reforms” that will thwart job growth, well over a million people were put out of work in “announced layoffs” alone last year, half a million people applied for unemployment benefits in the last week of December, and President Bush wants to normalize the status of illegal aliens working in this country?

That makes less sense than Britney Spears’s ephemeral marriage.

*Much thanks to Seeing the Forest for pointing this out.

It is January, and that means a parade of financial experts giving their personal opinions — I mean predictions — regarding the new year.

Almost inevitably, one will say that this will be a year where small cap stocks outperform the big ones: that buying stock in relaticely small companies will make you more money than a nice, diversified S&P 500 or Dow 30 index fund. I have listened to this claptrap for a half dozen years now. Here is why it is still wrong.

First, investing in small cap stocks is a dicey game of cat and mouse for small investors. Doing it sucessfully depends on finding a small company that is publicly traded, and hoping some fund manager finds it and buys large quantities of it later, driving up the value of the shares. Oh yes, it also depends on your finding this needle in a haystack without being played by some pump and dump scammer, who tells you that XYZ Corp is the up and coming thing shortly after buying it himself, and sells it shortly after enough foolish people buy it so as to drive up the price.

The second flaw in the “year of the small cap” theory is the chart they will toss up in their defense. It will be a chart of a stock index called the Russell 2000. Russell takes the 3000 biggest cap companies, calls the top thousand a big cap index, and the lower 2000 a small cap index. The first problem with this is that there are over 6000 publicly traded companies, meaning there are 3000 companies smaller than any of those in the Russell 2000.

But wait, there’s another problem with the Russell 2000, and it has to do with being the bottom 2000 of the top 3000. There are two separate schools of stock market thought that say nothing more than Newton’s first law of motion: things tend to keep going the way they are going. Both Momentum Traders and Technical Analysis adherents will tell you that stocks going up are likely to keep going up, and stocks going down are likely to keep going down, although they differ substantially on the details.

Stocks in the Russell 2000 that do well gain market cap, and graduate to the Russell 1000. On the other hand, stocks in the Russell 1000 that do poorly drop in market cap and end up in the Russell 2000. If I were designing an index to decline, it would look a lot like this. It might well go up short term, as it did in 2003, but do not get to thinking the Russell 2000 is a long term investment.

Remind me to republish this post next January.

The economy is great. All the numbers say so, right? So it must be true. GDP is up, way up. Despite all the unemployed people you know, the official unemployment rate is under 6%, so what’s the problem?

So then, how can the numbers be that good and yet, up close, things look so bleak? How come all the State governments are cutting and scraping and scrounging to make ends meet? How come we still on a semi-monthly basis get these heartbreaking stories of family working as hard as they can and still struggling? Or worse, pounding the pavement and still can’t find work more than part time and barely exceeding minimum wage? At what point is there enough anecdotal evidence that we start trying to find data?

The official unemployment numbers undercount millions of people who want jobs. The 4.9 million people who took part-time jobs to put food on the table until something full time (maybe even *gasp* with benefits!) don’t count. the 9.6 million people who call themselves “self-employed” regardless of whether or not they are actually making a living don’t count. The 1.9 million people (up 20% from last year) who have been out of work so long they aren’t looking real hard anymore — “discouraged workers” — don’t count. People who decided to go back to school, update their skills, and live off loans or other student financial aid don’t count. People who have signed on with a “temp” agency, picking up temporary work and possible “working interviews” don’t count. People who have managed to get themselves declared “disabled” regardless of their ability to work don’t count.

It’s a lot less work to just say that you only count if you lost a full time job, are not employed in any way, and are seeking a new full time job. Two out of three isn’t good enough.

Oh yeah, and it seems that jobs aren’t getting any easier to come by. Nevertheless, we have political candidates who are convinced that somehow jobs can be created by tax incentives and home ownership. Sorry, people being able to afford houses is the result of a good economy, not the cause.

Best New Year’s wishes from the ShortWoman. Have a very nice New Years Eve, and be vigilant but don’t panic! Unless of course you see someone carrying an almanac.

Diversity is a good thing. Diversity in nature makes all the different plants and animals in a given area into a sustainable ecosystem; a pond of nothing but frogs would not last long. Diversity in your assets buffers you against market drops; a portfolio of nothing but Enron stock would not make a good nestegg. Diversity in the workplace keeps businesses from making stupid cross-cultural mistakes; a Yom Kippur grocery sale would go over about as well as the apocryphal sale of the Chevy Nova in Spanish speaking nations.

Sometimes we try to impose artificial diversity — or artificial lack of diversity. For example, we plant a field of nothing but corn because it would be terribly confusing to separate ripe corn from ripe potatos; we accept the premise that this situation is unsustainable without human intervention. Or, we implement a program to insure that a school has a student population more closely mimicing the overall American population.

As the State of the Union address approaches, you will be hearing more about Bush’s ideas for the “ownership society,” an idea he has actually been building towards for some time. The short version of this policy is that not only is diversity good, but it is a good idea for all kinds of people to own things: “that American workers aspire to be owners — of stock for their retirement, homes, businesses, good health insurance, and skills they need to navigate multiple changes of jobs and careers.” And who is stupid enough to disagree with that thesis? Particularly if there is not much talk about the actual proposals?

Recent Fannie Mae ads are already towing the line on this issue. Those of you who have been reading the ShortWoman for a while know my opinion of such warm, fluffy idiocy. Again, the central idea is that everybody should own a house. Anybody foolish enough to ask why is greeted with a stare of disbelief and a speech about tax deductions and biggest asset the typical American has and stability. Never mind the tax deduction being smaller than the money spent, never mind a mortgage being the biggest liability the typical American has, never mind that quite simply there are reasons people might not want or need to own real estate. Indeed, although new legislation would help 40,000 low-income families with the downpayment on a house, these people are the most likely to find themselves buried under a house in serious need of Norm that they can neither afford to fix nor sell.

Unfortunately, when the Administration speaks of “ownership,” they really mean it in the therapist’s definition: “responsibility.” When you “take ownership” of something, you are “responsible” for it, responsible for needed changes to it. The Administration does not want you to just own your house, they want you to own your retirement (privatize social security, an idea which should have been completely debunked by this chart); they want you to own your healthcare; they want the unemployed to take responsibility for finding a new job. Here’s the problem: “For starters, the very people who lack the decent health insurance, the money for retraining, and the secure nest eggs are short of adequate earnings from which to take out savings. So most of the tax breaks, like the rest of the Bush tax program, will go to people who don’t really need them, while those who rely on genuine help will come up short.”

They aren’t interested in you owning assets; they are interested in you being responsible for liabilities. If the Administration had any stake in broad ownership of actual property, they would encourage more policies that promote small business, a proven wealth generator that even creates jobs.

There are jobs being added to the American economy! They are in the restaurant business. The good news is most of the jobs make more than minimum wage. The bad news is most of them still make less than the poverty line.

Some of you have already started to grumble: So what’s the big deal? These people are getting by, aren’t they? If they want to get a better job that pays better, what’s stopping them? If they want to earn more money, why don’t they just put in some overtime? Aren’t these people all students working part time anyway? And have you considered the cost to the economy of suddenly raising everyone’s pay to a living wage?

Please, allow me to explain why it’s a big deal. First, it isn’t all part-timers and students making these pathetic wages. The majority are adults trying to get by with their families. We are talking about 25% of American workers. Yes, some of these people are part-timers, and almost 5 million of them would love to have a full time position.

Part-time positions, and many low-paying full-time positions, have the additional problem of no benefits. Alternatively, benefits may be available, but at a price that is not feasible for the employee. Lack of health insurance means that people don’t see the doctor until problems are so serious as to be incapacitating; a complaint that could have been taken care of in an office visit the family could ill afford turns into an even more costly visit to the emergency room. Lack of any type of retirement benefits insures that such workers must do one of three things: buck the odds and become upwardly mobile; work until they day they die; spend retirement in even more desperate poverty.

And no, these people are not “getting by.” Financial experts say you should not spend more than 30% of your monthly income on housing. Most reputable apartment complexes simplify this a little and call for a maximum rent-to-income ratio of 3:1. For reference, someone working 40 hours a week at $7 per hour takes home roughly $1200 per month. A third of that is $400. Can quality housing be found in your hometown for $400 per month? What if you have kids, and need a 2 bedroom apartment? I have never been able to isolate a figure for the maximum percentage of monthly income that should be spent on transportation, but I strongly suspect that many families exceed it by trying to keep an unreliable but necessary car running.

Finally, I’d like to point out what few options low wage individuals have to improve their financial situation. Overtime is effectively being eliminated. Congress decided that battle was no longer worth fighting, despite the outrageous number of voters effected. Your Representative and Senators hope you will not remember this slight next November. In fact, if you are too busy at work to make it to the polls, that will not hurt their feelings in the least. I have already pointed out the millions of people who work part-time despite the fact that they would rather work full-time. One of several sad truths — both for these people and for people working full-time at low wages — is that when you are working, it is very hard to look for a job.

The cost to the economy in terms of lost productivity and public assistance may well equal what it would cost to simply pay a living wage.

This item is meant as humor, and contains words considered vulgar, but unfortunately it is true.