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The Unemployment Rate Controversy & Presidential Politics

Positive unemployment numbers were all over the press Friday and markets were up across the board. Since most financial reporters simply rewrite the BLS press releases, here’s a quick explanation of the report and the controversy around the numbers.

According to The Bureau of Labor Statistics, the unemployment rate declined by 0.2 percentage points in January to 8.3 percent. 

While today’s unemployment numbers are positive and show continued improvement, these numbers probably overstate the pace of recovery.

As Zero Hedge points out, there are some curious changes in the number of people not in the labor force which impacts the numbers:

A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million. No, that’s not a typo: 1.2 million people dropped out of the labor force in one month!

The Labor Force Participation Rate declined to 63.7% in January. This is the percentage of working-age persons in an economy who are employed or are unemployed and actively looking for a job. This rate is well below the typical 66% to 67% rate we experienced for most of the past 20 years.

The participation rate data is the source of the controversy.

Every January, the BLS data includes updated population estimates from the 2010 Census. The change sets a new population base and in accordance with usual practice, BLS does not revise previous household survey estimates.

So the headlines from the BLS release proclaim an unexpected improvement in the unemployment rate. However, the improvement probably exists due to the changes in the population figures and the participation rate, not a sudden surge in hiring. 

When you combine the decreases in the participation rate with modest increases in employment, you see the overall improvement in the unemployment rate that is being widely reported today.

Is the employment market improving? Yes.

Is it robust growth? Probably not.

Was this a positive report? Maybe. But it will take a few more releases to work out the statistical noise related to adjustments in the calculations to really know.

Why all the yelling and controversy?

Only one U.S. president since World War II -- Ronald Reagan -- has been re-elected with a jobless rate above 6 percent. Reagan won a second term in 1984 with 7.2 percent. Since it is an election year, you can expect more charges of manipulating the data from all sides depending on the monthly changes between now and November.

One thing is for sure, I don’t think anyone expects the rate to drop to 6% by November. If it even gets close, expect a lot of continued howls about manipulation of the data by the BLS.

Is Household Debt To Blame For The Employment Collapse? Well…Sort Of

Does Household Debt Contribute to Unemployment?  That’s the argument of Professors Amir Sufi and Atif Mian who claim that weakness in household balance sheets and the associated pullback in spending are directly responsible for 65 percent of the U.S. job losses from 2007 to 2009.

Using county level retail sales data, they attempt to show that the large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. They argue that the decline in consumption was much stronger in high leverage counties with large house price declines and is directly linked to high levels of unemployment in the U.S.

The author’s findings, which they detailed in Bloomberg this week, has generated a lot of discussion (see Calculated Risk) including a posting of the author’s summary presentation at Business Insider.

Here’s where I think they missed the boat.

The "accumulation" of debt was not the trigger or key factor in the slowdown. It was the lack of access to debt that contributed to the consumption collapse.

Easy access to debt kept the economy going from 2002-2006. In 2007, access to debt became more and more restrictive which led to a steady decline in consumer credit card balances.

Card-issuing banks tried to rein in risk amid rising delinquencies and charge-offs and before new legislation and regulations were implemented.

US consumers did not become frugal, they no longer had access to easy debt. Both consumers and small business owners with stellar credit scores felt the sting of reduced credit limits and closed accounts.

Starting this past summer, new credit card account originations began to rise and U.S. consumer revolving credit rose indicating that the sustained pullback in consumer lending has started to ease.

Since personal income in the US remains stagnant, much of the economic growth that we have seen over the past few quarters is probably the result of the increased availability/utilization of consumer credit. While this can fuel a strong third and fourth quarter of 2011, I would expect a slow start to 2012 when credit card statements begin to hit consumer’s mail boxes or email.

Understanding Small Business Confidence, Consumer Confidence and the Impact of the 2012 Elections on the Economy

Plus Some Tips on Selling To Small Businesses

In a previous post, I talked about the weakness in consumer confidence and its value as a gauge of the economy. In short, weakness in consumer confidence is more a function of the political climate and lack of faith in political leadership rather than a barometer on the current state of the economy.

The same can be said for small business confidence.

Yesterday, the National Federation of Independent Business (NFIB) released their latest issue of the NFIB Small Business Economic Trends including their Index of Small Business Optimism.

The index of small-business optimism rose 1.3 points, nudging the index up to 90.2. This was below the year-to-date average of 91.1 and only slightly better than the average since January 2009. It should be noted that the report is not a random sampling of business owners. The report is based on the responses of 2,077 randomly sampled small businesses in NFIB's membership. So, the results reflect the views of their membership of business owners which is dominated by smaller brick and mortar businesses. Despite that huge caveat, it is widely used in the business press as an indicator of the health of small business in the US.

NFIB’s index typically mirrors consumer confidence. As you can see below, there is a strong positive relationship between NFIB’s Small Business Optimism and the University of Michigan’s Consumer Sentiment Index. I also included the PMI or Purchasing Managers Index from the Institute for Supply Management to illustrate an indicator that does not have as strong a relationship to small business optimism.

Here’s a tip for marketers to small businesses.

Small business owners are people too. Their impressions of the economy strongly resemble the views of the overall public as illustrated in the above chart. You’re not selling to a business, you are selling to an individual whose income is directly tied to their business and not an employer (i.e. they “eat what they kill.”) Their view of the economy and their future prospects are more closely allied to the views of the overall public and will dictate how they will spend, invest, and grow their business.

As you can see in the above chart, the sentiment of purchasing managers does not have as strong a relationship to the small business index, and the factors purchasing managers use to make purchasing decisions and to assess the state of the economy are very different from those of your typical small business. Right now, corporate earnings continue to grow and corporate purchasing has been rather resilient. Conversely, personal income among consumers and the revenue of small business owners continues to be challenging and a drag to the economy.

Remember, selling to small business owners is a lot like selling to consumers, both respond to messages that will save them time and money. And for small business owners, you can also add in the message of more revenue.

The overall confidence of small business owners and the prospects of selling to them will improve when the overall sentiment of the economy improves, and this is directly tied to both groups’ faith in the political leaders who shape economic policy. If people believe that political leaders are incompetent, this will lead to a lack of confidence in the economy.

And based on the current numbers from the Pew Research Center for the People & the Press, the public’s confidence in congressional leaders and the President remains rather low. With the coming budget battles over the next few weeks, I doubt that we will see much improvement in either of these indexes.

When the public’s confidence in their political leadership improves, you will begin to see some improvement in consumer sentiment, small business sentiment and small business employment.

As we get closer to next year’s elections and the prospect of changing the political landscape in Washington becomes more of a reality, we should start to see some improvement in consumers and business owners’ confidence in the economy and their political leadership. With that improvement, we should see a stronger uptick in the economy and stronger growth in the second half of 2012.

Until then… expect a bumpy ride.

The Coming Divorce Boom

During a recession, consumers typically build up their savings and hold off on purchases due to uncertainty about the economy. Following a recession, we often see a burst of economic activity thanks to an increase in consumer confidence and spending.

Pent-up demand can cover everything from auto sales to home purchases to travel. It can also lead to a surge of activity in areas outside of consumer products or services.

One such area is divorce.

As you can see from this chart, divorce rates typically fall as unemployment rates rise.

US Unemployment and Divorce Rates 2000 to 2009

As we begin to see improvement in the economy, we will probably see increased rates of divorce as consumers become more confident in the stability of their incomes, the outlook for the economy, and their ability to form a separate household.

The relationship between labor force participation and divorce has been studied by economists for many years. The prevailing wisdom among most economists (explained in more detail in this 2004 AEJ paper) theorizes that female labor force participation increases income, financial independence, and consequently, the probability of divorce. Financial independence is generally regarded as the strongest of these factors.

As we see continued improvement in the economy over the next couple of years, we should see a pickup in home sales, rentals and probably household formations as current single households become two households.

This has implications for many industries outside of divorce attorneys. We should see an uptick in home sales, cosmetic surgery as newly singled couples prepare for finding new mates, and stronger traffic for dating websites. This also impacts fashions and apparel styles since singles and divorcees tend to be more fashion conscious than married couples with children. Apparel sales should benefit from the coming boom as well.

This also has implications on voting and elections.

Ending a marriage is a stressful process that frequently disrupts familiar routines, including voting. Married adults are more likely to vote than those who have never been married; in turn, previously married people are the lightest voters.

Because voting requires two considered routine actions (registration and turnout), divorce negatively impacts voting. Married partners have help with household tasks and also most of the chores associated with voting: not only registration, but also locating polling places or obtaining absentee ballots.

After the 2012 elections where turnout should be relatively strong for a myriad of reasons, we should start to see decreasing levels of voter turnout over the following few cycles as the economy continues to recover from the great recession, and unfortunately, due to an increasing number of dissolving households.


No Double Dip Recession. What Does Consumer Confidence Really Mean?

Looks like the double dip recession predicted for the U.S. in three consecutive summers will again fail to arrive at the party.


Retails Sales:


While the recovery remains exceptionally weak, it does not appear that we will face a second recession in the near future. This assumes (a very big assumption) that we do not face any additional policy headwinds from Washington D.C. leading up to the super budget committee deadline. It also assumes that Europe will continue to kick the can down the road, which will lead to continued volatility in the stock markets with minimal impact on the U.S. economy.

One weak area is consumer confidence, which slumped in October to the lowest level since the recession. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 45, the worst reading since February 2009.

The weakness in consumer confidence is more a function of the political climate and lack of faith in political leadership rather than a barometer on the current state of the economy.

If consumers have confidence in the political leaders who shape economic policy, this may enhance their confidence in the future of the economy. If people believe that political leaders are incompetent, this may lead to a lack of confidence in the economy. Since the public's confidence in our leadership in Washington is at all time lows, I am opting for the latter scenario.

While politicians try to influence both the economy and economic sentiment, much of their effort has little direct influence on the economy, but it may well have an impact on economic sentiment. Sentiment can also be influenced by poll respondents’ tendency to view the economy as something separate from their own personal financial situation. Quite often, respondents to polls will have a rather dour outlook on the economy while they rate their own economic situation as good. I often hear focus groups participants say, “I’m doing okay, but my neighbors and people in my community are really struggling.”

Consumer confidence is an important part of the picture that typically says more about the mindset of the public instead of the current dynamics of the economy.

Economic Outlook For 2012: Not Rosy, But Optimistic

Despite our dysfunctional government, continuing debt issues in Europe, and a schizophrenic stock market, it doesn’t appear that we will have another recession in the next few quarters. In short, corporate earnings are just too strong for another recession. While unemployment and a weak housing market continues to plague the economy, companies continue cost reducing investments and if we can get some relief for the consumers in the form of lower gas prices and perhaps an extension of the payroll tax cut we should see some consumer strength going into 2012.

Granted, this assumes that our friends in Washington avoid making any substantial mistakes that could damage the economy (a big if) and that we don’t see a run-up in commodity prices (mainly oil and gas).

While there is plenty to worry about and the current economic numbers remain troubling, my outlook going into an election year foresees modest growth and continued improvement in the economy. Typically, we see economic improvement in an election year and without any negative legislation coming out of D.C., I remain cautiously optimistic going into 2011.

Payroll-Tax Cut Would Not Boost Jobs, But Extending The Payroll Tax Cut Would Boost The Economy

A proposal to cut payroll taxes in an attempt to help increase hiring has drawn criticism from some economists and business owners, but it is likely one of the few stimulus proposals that could pass a sharply divided Congress.

If Congress wanted to make a difference, an extension of the two-percentage point reduction in Social Security payroll taxes paid by employees would go a long way helping to avoid a recession in early 2012.  Cutting payroll taxes for employers would not spur any new hiring, but putting more money into consumer’s hands would help avoid a slowdown in growth in the first quarter of next year.

Poll Today, Gone Tomorrow

The latest employment numbers continue to show significant improvement in the economy. Granted, the recent numbers have been a jumbled mess due to Easter and the Census. But if you look below the misleading headlines and campaign speeches, you will find significant improvement.

It looks like the private sector produced 123,000 jobs in March and 60% of all reporting industries indicated job growth. I think it is now safe to say the economy is growing again and the recession did indeed end in July or August of last year. We have turned a corner and the immediate future is looking better.

Granted, the picture is not completely rosy. Those unemployed less than 26 weeks are likely to get recalled to work. However, those unemployed for more than 26 weeks due to a plant closure will probably remain unemployed for a significant amount of time. 

Moderate GDP growth of 2 to 3 % for 2010 and 2011 is definitely on tap.

One thing to watch out for is the impact of a growing economy on the fall elections. Republicans have partially enjoyed relative strength on most generic polls due to the problems in the economy. As the economy begins to expand, democratic candidates in communities with less structural unemployment (i.e. areas without significant plant closures) will be able to point to the improvement in the economy and make the case that their policies are working.

A key to successfully interpreting research is to realize that polling and market research is a snapshot of today, not tomorrow. When assessing the results of any project, you have to include other inputs and information (such as economic data) to really understand what is happening and most importantly what you will face tomorrow or in November.

Glimmer of Consumer Optimism

BIGresearch's March 2010 Consumer Intentions & Actions Survey contains a few kernels of optimism on the economic front. Here are a few highlights:

  • In March, fewer than one in three (29.8%) contend they are confident/very confident in chances for a strong economy. While this figure has risen 2+ points from a month ago (27.2%), it continues in the “about 30%” holding pattern begun in May-09. This month’s reading represents an improvement from a year ago (19.5%) as well as Mar-08 (24.8%), but is still well below Mar-07’s 46.9%.
  • One in five (20.6%) assert that they worry more about political/national security issues, down nearly a point from last month (21.3%) and three points from Mar-09 (23.8%).
  • Consumer confidence showed slight improvement from February, nearly half of those surveyed (48.4%) contend they’ve become more practical in purchasing, up five points from a month ago (43.3%), but still below the 52.7% reading recorded in Mar-09.
  • More than half of those surveyed (55.7%) say they are focused on just the necessities when spending, up more than three points from a month ago (52.1%), but lower than Mar-09’s (58.1%).

Brother Can You Spare Loan

As banks continue to tighten lending, many small businesses are turning to microlenders, which grant loans averaging about $10,000. According to The Washington Post, small businesses also are increasingly looking to Internet-based peer-to-peer lenders to meet their capital requirements.

Starting a business right now is difficult, but not impossible. Financing is one of the major roadblocks which is forcing many new entrepreneurs to bootstrap or use plastic. Once the banks are allowed to start lending, new business activity should begin to grow.

Cautiously Optimistic: Outlook For 2010

On the heels of Christmas, all eyes turn to the economy and the outlook for 2010. This time of year, organizations big and small look to implementing, or in some cases, completing their business/operational plans and this year’s outlook is significantly brighter than last year.

Last year, I bet that the economy would improve in the 3rd and 4th quarter. Fortunately, it did begin to rebound in the 3rd quarter. There was simply too much money pumped into the system for it not to improve.

So what can we expect from 2010?

Improvement. Despite the recent negative employment news, it definitely looks like the employment market has hit bottom and by February we should start to see signs of an improving labor market. Based on the Fall numbers, auto manufacturers should start to become profitable again, but overall consumer spending will remain weak and choppy. Too much wealth has been destroyed in this recession and it will take some time for real income to rise, which is necessary for strong retail growth.

The dollar remains weak giving strength to exports, local and state government continues to struggle, and commercial real estate continues to tank.

On the plus side, the first half of the year looks positive, especially for stocks. However, inflation or fears of inflation and higher rates becomes the story of the second half of the year.

2010 looks positive. It is 2011 that I’m worried about.

Hope, prayer and a charge card

Credit cards have always been a source of credit for startups, but other options are disappearing as banks withhold traditional loans and fail to buy into the Small Business Administration's loan-guarantee program. The 22 big banks that received government-bailout funds have cut their lending to small businesses by $8 billion since April when the government made them start reporting it.

Almost 60% of small business owners have used a credit card in the past year for business capital, according to a recent survey by the National Small Business Association (NSBA). In contrast, 45% of those polled had a bank loan. As traditional loans dry up and lenders such as JPMorgan Chase hoard cash and build reserves or just file bankruptcy, business owners are doing what they always do. They are finding another to way to succeed and to make things work.

Pocketbook Vs The Medicine Cabinet

During a rough economy, pocketbook issues are always number among voters. According to the latest American Pulse™ Survey, a majority of Americans (55.5%) think the #1 issue that the President and Congress should be focusing their attention on is the economy.  Following not so closely behind is: Healthcare Reform (18.3%), Terrorism (6.4%), Social Security (5.8%) and Afghanistan (5%).

Seemingly, everyone and everything is focused on healthcare and not the economy. Talk about ignoring the needs of your customers/voters.

The study also found that 81.9% of Americans say the U.S. Government is spending too much. Of those who agree, 76.9% say the high level of spending may be sacrificing future economic growth. Over 60% of Americans have negative feelings towards Government spending.

Regarding Government spending, which of the following best describes your feelings?  (Adults 18+)     

Angry, debt is bad                                               


Happy, debt is good if it helps people                     


Powerless, no one in Government                  
seems to care      


Empowered, the more Government               
does, the better it is for everyone





Yes, healthcare reform is important. But not addressing the country’s number one issue and piling up a mountain of debt in the process is irrational and incredibly out of touch. Is it really a wonder that more than one out of three Americans say they feel powerless in regards to government spending? A lot can happen in a year, but I have no doubt that voters will be empowered to punish incumbents in 2010.

A Slow and Steady March Up

The latest Rasmussen Employment Index finds that only 26% of American workers now say their employers are laying people off. That’s the lowest number reporting layoffs since last November.

However last week’s ADP survey suggested that job weakness was still high and the Labor Department’s employment report indicated that more jobs were lost in September than in August.

I think it is safe to say that a V shaped recovery is out of the question. There is just not enough consumer strength or wealth to sustain a quick improvement in consumer expenditures. Until real wages grow faster than inflation, we will not see any major upticks in growth.

A slow, steady, but uneven march upward is the most likely scenario. Think 2% growth for next year. Not strong, but enough to keep us steady.

A Rising Tide For All Boats?

According to the EU, Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades.  Germany and France unexpectedly returned to growth in the second quarter. It also looks like Italy probably emerged from the recession during the third quarter as well.

Economies in Asia and in India are also showing signs of growth despite continued sluggishness in Japan.

Conditions in the US are becoming less terrible. Consumers continue to hunker down, building up a savings cushion and paying down revolving debt.  However, it really looks like July was the bottom that finally ends a recession that started in December of 2007.  

A lot of this recovery is a consequence of the fact that consumption fell so dramatically in 2008 and people finally have to buy things they need in 2009.

Looks like we are finally beginning to see a sustainable but sluggish recovery.

The ABC's Of Recessions

In the past week, we have seen a lot of stories and information contending that the recession ended in July, including a lot of talk about U, V, and W shaped recessions. So what is a V shaped recession?

Recessions are typically defined simply as a period when GDP falls (negative real economic growth) for at least two quarters. Since this is measured by quarterly GDP numbers, many of the recessions are illustrated on graphs and charts. The shape of the GDP curves is used to describe the type and depth of the recession.

V Shaped Recession– sharp downturn followed by sharp recovery (1983)


U Shaped Recession– typical downturn followed by recovery (1991, 2001)


W Shaped Recession– short, severe recession followed by weak recovery, leading to another recession (1980, 1982)


Current Recession (Long Extended Downturn)


I didn’t do graphs for them, but there are two other very important types of recessions

  • Sideways L Recession– long downturn followed by recovery (Japan)
  • Checkmark Recession- sharp downturn followed by gradual recovery

So what’s going to happen? Real growth is likely during the summer, but some of that will be at the expense of the fall (read Cash for Clunkers). In September, we will see a jump in the employment rate due to seasonal factors that will probably push the number up to the promised 10%.

So, yes conditions are getting better, but a relapse is quite possible and any chance of a V recovery are basically slim and none. My guess? A sideways to checkmark recovery is ahead. Should be an interesting and bumpy Q3 and Q4. When employment outside government and healthcare begins to improve, stronger growth will appear again.

Postive Economic Signs Ahead

Looks like the economic turn has started. Here are a few signs that July may be the turning point.

First, owners of small businesses say they see signs of economic improvement. The Discover Small Business Watch, the card company's monthly survey, found that 30% of small businesses believe the economy is getting better, up from 26% a month earlier.

Second, the “clunker credit” has done more for auto sales than I think anyone expected. Who knew that the program would be this effective at wiping out excess auto inventories?

Third, while we are facing a jobless recovery, it looks like the continuing losses are beginning to ameliorate. More people are being recalled to work and we should start seeing lower new claims for unemployment in the next few weeks.

I’m guessing that we will see positive 3rd quarter economic growth. The clunker program virtually confirms positive news. It looks like we can mark July or August as the inflection point for recovery.

I do have a feeling that this will be one of the weakest recoveries in history. Employers will squeeze out significant productivity gains (read longer work hours) and try to hold down wages ( read continued losses in personal income) to bolster improved profits. The economy is about to grow, just a slower than we all would like.

The One They Got Right

The decision not to bail out CIT has finally opened up the Obama administration to criticism that they are not doing enough to aid small businesses. According to the WSJ, critics complain the administration and lawmakers have bailed out major corporations but denied help to this small-business lender, unveiled a health care plan that will penalize small companies that fail to offer health insurance and been too slow to spread stimulus funds through Small Business Administration initiatives. The Wall Street Journal

This administration has not been helpful, and I’m being kind here, to small business. But I don’t think you can criticize them for not bailing CIT. I’m actually shocked that they didn’t bail them out and cite small business as the reason to do it. They deserve all of the criticism on the other issues, but not on this one. Let CIT work it out on their own.

Fall Is For Football And Growth

Last week’s jobs reports was a shocker to many. We lost more jobs in June than during any month in the previous two recessions. The size of the jobs loss was discouraging and more than anyone thought.

While it appears that we are starting to recover from a near financial collapse, we still have to dig ourselves out of a very deep hole. A lot of household wealth has been destroyed in the past year and most economists are forecasting another 1 to 2 million more job losses, about the size of the last two recessions.

Things are starting to improve and corporate earnings are beginning to improve. But it will be a few more months before we see the signs of good times and significant growth.

Why Small Biz Prefers Local Bankers

One writer calls for banks to stand up and do what's right for small-business owners. "It's easy to understand why banks would push to recover whatever they can immediately from small companies facing insolvency, considering the cost and time involved in doing workouts with companies that may not be viable in the long term," writes John Tozzi. BusinessWeek/The New Entrepreneur

It is times like these that remind small businesses owners on the value of working with smaller local banks. Workouts are more common for small banks, and the officers of smaller banks tend to put more value on relationships. Larger regional banks spend a lot of time during good economic times on ways to pickup small business customers. Many of their actions today should make it abundantly clear why they find it difficult to penetrate and hold onto the SMB customers.