A Gallup random dial poll of 607 small businesses conducted November 12-16 2012 asked the question "Over the next 12 months, do you expect the overall number of job positions at your company to increase a lot, increase a little, stay the same, decrease a little, or decrease a lot?"

The net survey results show Small-Business Owners' Hiring Intentions Plunge.

U.S. small-business owners expect to add fewer net new jobs over the next 12 months than at any time since the depths of the 2008-2009 recession, according to this November's Wells Fargo/Gallup Small Business Index survey. Small-business owners' net hiring intentions for the next 12 months plunged to -4 in November, down from +10 in July and matching the previous record low recorded by the Wells Fargo/Small Business Index of -4 in November 2008.



Historically, net hiring intentions have tended to be very positive, with small-business owners expecting to grow and hire more new employees than they will let go over the next 12 months. In good economic years, net hiring intentions have been in the double-digits. This has not been the case since the recession and financial crisis in 2008-2009 with net hiring intentions reaching a low of -4 in November 2008. There was considerable improvement in small-business owners' hiring expectations during much of 2012, prior to the recent November plunge, but now expectations have deteriorated to tie the low recorded in 2008.



In November, 21% of owners say they expect to decrease jobs at their companies over the next 12 months, the most recorded on this measure since the inception of the Wells Fargo/Gallup Small Business Index in August 2003. At the same time, 17% of small-business owners say they expect to increase the number of jobs or positions at their companies, down from 20% in July of this year and the lowest level measured since November 2011.

Owners' Net Hiring Down Over Past 12 Months

In addition to asking about future hiring intentions, the survey also asks small-business owners to report on hiring over the past 12 months. In November, more small-business owners reported decreasing the number of employees (26%) than increasing (14%), resulting in a net hiring score of -12. That is down from -7 in July and -9 in the prior three quarterly measurements. Net hiring over the past 12 months is about where it was in July 2011, at -11. This lack of improvement in small-business owners' self-reported hiring helps explain why too few new jobs have been created during much of 2012 to significantly lower the U.S. unemployment rate.

Implications

That net hiring expectations at the nation's small businesses have declined to levels last seen in late 2008 is reason for concern. Such low net hiring expectations were followed by massive layoffs in early 2009. While a repeat of that experience seems unlikely in 2013, there is the potential for a serious decline in jobs early next year if small-business owners' hiring intentions do not improve.

Whether the pessimism of the nation's small-business owners is due to the fiscal cliff, Superstorm Sandy, the election, or some combination of these factors, the U.S. economy remains weak and unemployment remains high from a historical perspective. A further sharp increase in small-business layoffs, resulting in higher unemployment on top of the current economic conditions, could turn today's slow growing U.S. economy into something worse.

Not Sandy, Not Fiscal Cliff

It is difficult to blame this on the fiscal cliff, and even more difficult to pin this on Sandy. More than likely, the poor net result is primarily the result of a clear slowdown in the economy (lack of customers).

I believe the US is back in recession and so does the ECRI.

On top of deteriorating economic conditions, also factor in the election and Obamacare.

Obamacare Discussion

• Is Obamacare Responsible for the Surge in Part-Time Jobs? What About Obama's Defense Layoff Suspensions?
 
• Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?
 
• Mish on Capital Account: IMF Downgrades, Unemployment, Participation Rate, Conspiracies; What is the Best Way to Measure Unemployment?

No Election Relief

I suspect a majority of small business owners are Republican, and most Republicans seemed to believe Romney would win. Certainly any businesses expecting election relief from Obamacare were mistaken.

It would have been interesting if Gallup asked "why?" to those who intended to hire less.

Regardless of "why?" it makes perfect sense for businesses to cut back if the economy is slowing, and indeed it is.

Manufacturing leads the way (see ISM Manufacturing in Contraction; Expect Conditions to Worsen), and services will follow sooner rather than later.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Republican House Speaker John Boehner’s has offered president Obama a proposal to generate $800 billion in new revenue. Obama rejected Boehner’s proposal in one hour flat because it does not go far enough in raising taxes on the wealthy.

Indeed, all Boehner proposed was closing loopholes. Yet, closing loopholes to raise $800 billion over ten years is too much for Tea-Party activists such as Senator Jim DeMint, co-founder of the Senate Tea Party caucus.

Bloomberg reports Republican DeMint Criticizes Boehner’s Deficit Plan.

House Speaker John Boehner’s proposal to generate $800 billion in new revenue “will destroy American jobs” and Republicans should oppose it, Senator Jim DeMint of South Carolina said today.

The comments from DeMint, co-founder of the Senate’s anti- tax Tea Party caucus, represent a strong indictment of Boehner’s plan from a fellow Republican lawmaker. Boehner yesterday proposed a $2.2 trillion deficit-cutting plan that seeks $800 billion in revenue in the next decade from an overhaul of the tax code that would curb some breaks.

“Speaker Boehner’s $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more, while not reducing our $16 trillion debt by a single penny,” DeMint said in a statement. “Republicans must oppose tax increases and insist on real spending reductions that shrink the size of government and allow Americans to keep more of their hard-earned money.”

Other Republicans back Boehner’s offer including House Majority Leader Eric Cantor of Virginia, Budget Committee Chairman Paul Ryan of Wisconsin, and Senate Majority Leader Mitch McConnell of Kentucky.

Boehner's Plan Dead-on-Arrival

Boehner's plan is dead-on-arrival regardless of how many Republicans are in favor of it.

The president will not accept any plan that does not hike taxes on the wealthy, and unlike a few months ago, Obama is prepared to offer little or nothing to get his way.

Reflections on "Hard Choices"

Last summer, Obama said he was prepared to make "hard choices".

In return for higher taxes, I had this three-point proposal

1. Ending collective bargaining of public unions
2. Passing national right-to-work laws
3. Scrapping the Davis-Bacon prevailing wage law

Negotiation tactics would have been easy.

Start by offering higher taxes on those making over $1 million, then work down to $250,000, putting pressure on the Democrats every step of the way. If Obama rejected the offer, the Republicans would have had the upper hand in who was to blame. If Obama accepted, we would have negotiated real reforms.

But No!

Republicans flushed a golden opportunity for "hard choices" right down the toilet.

Why?

Republicans were foolishly cocky as to their odds of winning the election.

As a result, we now witness massive infighting of Republicans, instead of massive Democrat infighting over "hard choices" a few short months ago.

The bottom line is we are going to suffer from higher taxes and get little in return for it, "not reducing our $16 trillion debt by a single penny” as Senator DeMint says.

Game Theory

At this point, game theory suggests both sides may have more to gain by doing nothing than compromising. If so, welcome to the fiscal cliff.

I am actually OK with that vs. the alternative of unwinding everything. We do need to address the deficit.

Unfortunately, game theory also suggest a deal in 2013, undoing the fiscal cliff, further kicking the deficit-can down the road.

Bright Opportunity Ahead

Looking ahead, I do see a shining light.
Rand Paul 2016! 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Here is an interesting video in which Bloomberg's Mia Saini looks at the effect of an aging population on a country's economy.



Link if video does not play: Old Problem, New Reality

As a consequence of the youth gap and a record low birthrate in the US, "the alternative would be to keep on increasing taxes or reduce benefits for the elderly".

The US birthrate per thousand was 122.7 in 1957, it was 63.2 in 2011.

Difficult Trade-Offs 

In regards to the problem facing aging countries, Singapore prime minister stated "None of them have come to any very satisfactory solution because the trade-offs are difficult ones."

US demographics are better than Europe and Asia, but with US Medicare and Social Security promises related to costs far greater than elsewhere, the US is in no better shape.

There is no alternative to massively increasing taxes unless Congress comes up with genuine health care reform to rein in cost of medicine. Even then, age limits will need to rise and some rationing of services near the end of people's lives will be necessary.

Demographics are such that few politicians are willing to tell US citizens we cannot afford the promises we have made, so the pretending continues.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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As costs of college soars (with thanks to absurd union salaries and benefits, as well as absurd administrator salaries and benefits), those attending college have increasing trouble paying back loans.

The fully expected consequence is Student-Loan Delinquencies Now Surpass Credit Cards.

The proportion of U.S. student loan balances that are in delinquency — that is, unpaid for 90 days or more — surpassed that of credit-card balances in the third quarter for the first time, according to the Federal Reserve Bank of New York. [no link provided]

Of the $956 billion in student-loan debt outstanding as of September, 11 percent was delinquent — up from less than 9 percent in the second quarter, and higher than the 10.5 percent of credit-card debt, which was delinquent in the third quarter. By comparison, delinquency rates on mortgages, home-equity lines of credit and auto loans stood at 5.9 percent, 4.9 percent, and 4.3 percent respectively as of September.



Since the NY Fed’s data began in 2003, the share of student debt which is delinquent has nearly doubled, from a starting level of 6.13 percent, while credit-card delinquency has steadily drifted lower since peaking at 13.74 percent in mid-2010 in the wake of the financial crisis.

Moreover, the actual rate of student loan delinquency is far higher than the official tally suggests. According to the New York Fed [no link provided], “these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle.”

In other words, the real delinquency rate for loans in the current repayment cycle is “roughly twice as high,” per the Fed — which would put it north of 20 percent.

37.5% of Graduates Work in Jobs Requiring No Degree

In its article Student Loan Debt Hits Another New Record: Study, Senior CNBC Correspondent Scott Cohn cites a study noting these facts.

1. The average college student who graduated in 2011 had $26,600 in student loans
2. Two-thirds of last year’s college graduates had student loan debt
3. 37.8 percent of recent graduates are working in jobs that do not require a college degree
4. State budget cuts, which have led to large tuition increases, fewer grants, and an increasing need for college students and their families to borrow money to finance their education
5. 96 percent of graduates from four-year, for-profit colleges took out student loans, borrowing 45 percent more than graduates of other types of colleges.

Cohn mentioned the word "study" fourteen times without once providing a link to the study, or even mentioning the name of the study. I suspect this is some kind of record, jut not one anyone should be proud of.

Such semi-plagiarism is quite frankly inexcusable.

Who is to Blame?

I receive emails from readers all the time blaming the problem on point number four above, state budget cuts.

Nonsense.

Taxpayers are overburdened too much already.  States have cut back on the percentage of money to education out of sheer necessity as education costs have risen far faster than anything else including health care and energy.

Here are some charts and comments from my post What Role Does Government Play in Price Inflation?

Inflation Comparison - Select Components Since 1978



Inflation Comparison - Current CPI Components Since 2000



The above charts are from Doug Short at Advisor Perspectives. Doug creates excellent charts every month on various CPI components. Rather than reinvent the wheel, I asked Doug for a set of custom charts.

Specifically, I had asked Doug to go back to 1971 for both charts.

Unfortunately, data for components in the first chart only goes back to 1978, and in the second chart not even that far.

The reason I asked for a starting year of 1971 is that's when I started college.

Tuition at the University of Illinois in Fall of 1971 was $250 a semester for engineers (My degree is in civil engineering). Current University of Illinois Tuition is $8,278 per semester for Illinois residents, $15,349 for non-residents.

Note that tuition difference: $250 in 1971 vs. $8,278 today.

Note Areas of Highest and Lowest Price Inflation

The least government interference is in apparel and recreation. The most government interference in the free market is education and health care.

Education is rife with "no child left behind" madness, free tuition for veterans, and for-profit school scams that flourish only because student loans cannot be discharged in bankruptcy.

Chasing the American Dream, Gone Bust

I have talked about this many times before. One key post is Trading Caps and Gowns for Mops; Why Go to College If There Are No Jobs? Chasing the American Dream

Some People Do Not Belong in College

Pelletier perpetuates the myth everyone belongs in college. Many don't. Arguably at least half don't. In Portland Oregon, ACT scores show less than half of test-takers are ready for college math

Useless Degrees

Pray tell what good is a degree in English, history, PE, or political science other than teaching English, history, PE, or political science? And how many of those teaching jobs are even available?

Yet colleges churn out thousands of graduates, year after year, with perfectly useless degrees.
Debt Slaves

President Obama promotes education as the answer to the unemployment problem. Other presidents have done the same thing. However, throwing money at the problem has done nothing but raise the cost of education for everyone, leaving many graduates debt-slaves for life, with totally useless degrees.

Whenever government sticks its neck into solutions, costs escalate. We saw it in housing, with hundreds of affordable home programs artificially increasing demand, and with Bush's "Ownership Society" artificially increasing demand, etc., etc. We see the same thing now in health care.

Expect such problem to grow until they blow sky high, which appears to be right at hand.

Mish's Six Point Education Proposal?

1. Increase competition by certifying more online schools
2. Make student debt dischargeable in bankruptcy
3. Abolish the student loan program
4. Abolish Pell Grants
5. Get rid of unions driving up costs
6. End all support for for-profit colleges

I assure you that if those actions were taken cost of college education would crash. But no one really wants that, any more than they want affordable housing.

Politicians gain far too much in campaign contributions from unions, from for-profit schools, and from banks wanting to make kids debt-slaves, to really address the problem.

Legislators would rather pretend they want to do something rather than actually doing something because it suits their purpose (getting reelected). Unfortunately, millions of students will pay the price as debt-slaves for life.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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President Obama says there is a "skills gap". A quick search says that many misguided souls believe the president.
For example Forbes writer Rich Karlgaard says The Skills Gap Exists.

Karlgaard believes the "gap is sure to grow as the population ages and industries from health care to manufacturing are altered by technology. Outsourcing to China won’t be the answer, either. Its population is aging the fastest of all the major economies."

Vicki Needham writing for The Hill says Skills gap is hampering labor market.

Needham, citing a report by Deloitte says "job creation in the United States is hampered by a lack of highly skilled and adaptable workers whose talents don't match current job openings".

The Atlantic comments on Solving the Manufacturing Skills Gap.

Eighty percent of the manufacturing companies in the United States say they cannot find enough workers with the proper skills to fill open positions at their facilities. That's the number President Barack Obama cited, as he announced the Military-to-Civilian Skills Certification Program, in June 2012.

"If you can maintain the most advanced weapons in the world, if you're an electrician on a Navy ship, well, you can manufacture the next generation of advanced technology in our factories like this one," Obama said, speaking from the floor of a Honeywell plant in Minnesota.

But the problem is that veterans have had trouble getting hired, as Obama said, "simply because they don't have the civilian licenses or certifications that a lot of companies require."

Skills Don't Pay the Bills

The above columnists express widely believed economic hooey.

In contrast, Adam Davidson, in his New York Times column, Skills Don’t Pay the Bills, precisely summarizes the problem in four deep thoughts.

Deep Thoughts

1. There is no skills gap.
2. Who will operate a highly sophisticated machine for $10 an hour?
3. Not a lot of people.
4. As a result, there is going to be a skills gap.

Davidson visited the engineering technology program at Queensborough Community College in New York City led by instructor Joseph Goldenberg whose manufacturing classroom consisted of "nothing but computers".

With that introduction, inquiring minds tune in a bit closer to some snips from Davidson.

Nearly six million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry’s future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs — the ones that require people who know how to run the computer that runs the machine.

Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly. And aspiring workers often need to spend a considerable amount of time and money taking classes like Goldenberg’s to even be considered. Every one of Goldenberg’s students, he says, will probably have a job for as long as he or she wants one.

And yet, even as classes like Goldenberg’s are filled to capacity all over America, hundreds of thousands of U.S. factories are starving for skilled workers. Throughout the campaign, President Obama lamented the so-called skills gap and referenced a study claiming that nearly 80 percent of manufacturers have jobs they can’t fill. Mitt Romney made similar claims. The National Association of Manufacturers estimates that there are roughly 600,000 jobs available for whoever has the right set of advanced skills.

The secret behind this skills gap is that it’s not a skills gap at all. I spoke to several other factory managers who also confessed that they had a hard time recruiting in-demand workers for $10-an-hour jobs. “It’s hard not to break out laughing,” says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. “If there’s a skill shortage, there has to be rises in wages,” he says. “It’s basic economics.” After all, according to supply and demand, a shortage of workers with valuable skills should push wages up. Yet according to the Bureau of Labor Statistics, the number of skilled jobs has fallen and so have their wages.

Goldenberg, who has taught for more than 20 years, is already seeing it up close. Few of his top students want to work in factories for current wages.

It’s easy to understand every perspective in this drama. Manufacturers, who face increasing competition from low-wage countries, feel they can’t afford to pay higher wages. Potential workers choose more promising career paths. “It’s individually rational,” says Howard Wial, an economist at the Brookings Institution who specializes in manufacturing employment.

Situation in a Nutshell

• Companies cannot afford to pay so much that they lose money.
• Companies would rather invest in technology and robots to reduce the need for labor, than to pay workers more money
• A shift manager at McDonald's can make $14 an hour, comparable to what manufacturing jobs pay
• Union wages and benefits are a major problem

High Cost of Education

The problem is actually quite a bit deeper. Given the preposterously high cost of education in the US, students graduate from college with an expectation they need to make more than they can to pay off student debt.

The same holds true (and even more so) for those going back to school as well as those attending for profit colleges such as the University of Phoenix.

Here are a few eye openers:

Education Bubble: Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion

Debt for Diploma Schemes: Debt for Diploma Schemes and the Cookie Monster Principle

Off-Balance-Sheet Budget Fraud: Budget Deficit Accounting Fraud and the Off-Balance-Sheet Student Loan Scam; Time to Scrap Entire Student Loan Program

Pell Grant Debt Zombies: For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program

Buried in Debt: Subprime Goes to College; Students Buried in Debt; Who is to Blame?

Living Wage Nonsense

Keynesian and Monetarist clowns conclude that wages are not high enough. The masses lament for "living wages".

The problem is not that wages are too low, but rather costs are too high. Ben Bernanke, president Obama, union sympathizers and other misguided fools seek to drive wages up.

The results are what any rational person should expect: loss of jobs to Asia, loss of jobs to technology, prices rising faster than wages, and overall debt soaring to the moon.

Reflections on Affordable Housing, Education, Medicine

There are hundreds of "affordable housing" programs. Every damn one of them drove costs higher by artificially creating demand right up until the pool of greater fools ran out. Then, as soon as housing crashed, government and the Fed stove to drive back up prices.

In effect, no one really wanted affordable housing. Rather they all wanted "affordable housing slush funds".

The same holds true for education and health care.

Why is the Middle Class Shrinking?

The simple fact of the matter is there is absolutely nothing wrong with falling prices. Indeed the average guy on the street would welcome falling prices. The Fed, however, says no.

The first result of Fed policy (coupled of course with Fractional Reserve Lending) is rising prices of essential goods and services coupled with falling real wages.

The second result of Fed policy was a real estate and financial asset crash.

The third result of Fed policy is reduced demand for credit (which constitutes deflation in my book).

Since the Fed never learns, we have seen reckless rounds of QE following reckless rounds of QE hoping to stimulate jobs and lending. Yet, people actually wonder "Why the middle class is shrinking"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Progress on the alleged fiscal cliff has been non-existent. Obama wants tax hikes on the wealthy, Republicans want to close loopholes.

With little possibility of a breakthrough on the fiscal cliff until the "last minute", inquiring minds are likely wondering what the term "last minute" precisely means.

I can help.

Please consider the Wall Street Journal article Obama Calls Boehner, Reid on 'Fiscal Cliff'.

President Barack Obama called House Speaker John Boehner and Senate Majority Leader Harry Reid over the weekend to discuss the fiscal cliff, as staff-level negotiations have moved slowly and produced no visible signs of progress on how to avoid the tax increases and spending cuts due take effect in January.

A broader group of negotiators that includes Senate Minority Leader Mitch McConnell (R., Ky.) and House Democratic Leader Nancy Pelosi of California, had been expected to reconvene this week, but that is now unlikely.

With each passing day, the government moves closer to the fiscal cliff, the combination of $500 billion in tax increases and spending cuts that begin in January and that economists have said could tip the country back into a recession.

One veteran Democratic aide said he wasn't surprised major concessions hadn't been made, given that real deal making usually happens at the last minute, which he put at "two weeks away."

Expect Definition to Change

Two weeks away would be December 10, which I suggest is far too early to be considered "last minute".

As supporting evidence, I present the online Congressional Calendar for December.



Green is Senate in Session. Orange is House in Session. The green hashed bars are TBD "to be determined".

Note the Congressional calendar does not include Saturday or Sunday.

Schedule Not Finalized

Out of curiosity, I called the office of the House majority leader Eric Cantor and was told the Congressional schedule for December will not be finalized until Friday, November 30.

Thus, we will not know the semi-final definition of "last minute" until then, but right now the preliminary estimate is no sooner than Friday, December 14.

Bear in mind, should December 14 (or whatever day Congress adjourns for the year) come and go without a Fiscal Cliff deal, assume that "last minute" will be redefined to mid-January 2013 when leaders of both parties will be anxious to roll back some of the tax hikes, referring to the rollbacks as "tax cuts".

Reflections on Our Hard-Working Congressional Representatives

While waiting for the final definition of "last minute", inquiring minds just might want to take a look at other months in the Congressional Calendar to see how frequently our representatives are at work for us.

Here are some sample months to consider.



Shock and Awe

Some people are probably shocked by this. I was not only shocked by appalled.

Indeed, my very first reaction was "My God! Look at how horrendously overworked our representatives are!"

No doubt, many of you had the exact same initial reaction.

That strenuous schedule coupled with hard work explains many things, such as why we have 73,608 pages of tax code piling up month after month year after year.



click on chart for sharper image

US Congress: The Most Productive Workers on the Planet

The results speak for themselves: US Congress collectively has the most productive workers on the planet.

These horribly-overworked souls are so dedicated to churning out mind-numbing pages of legislation that any clear-thinking individual should be able to quickly spot the need to reduce the number of hours Congress is in session.

Thus, I propose Congress be in session no more than three days per month.  Should that fail to dramatically reduce total the number of pages of Congressional bills, I further propose limiting Congressional sessions to alternating months.

If this sounds backwards, you just are not thinking clearly.

Everyone knows nothing gets done until the "last minute" anyway, and this clever proposal will massively increase the percentage of time worked at the "last minute" while also reducing the sheer volume of pages of legislation produced, hopefully to a readable number.

Perhaps Congress would even find the time to read the bills they sponsor.

So please call your representatives and tell them you support "Mish's Proposal to Reduce Congressional Sessions" but only after they reduce the number of pages in the tax code to 15.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Those looking for late Sunday evening humor can certainly find it in this short YouTube clip of New Jersey governor Chris Christie.



Link if video does not play: Chris Christie on Twinkies
At a recent news conference, Christie was asked a question about Twinkies. He responded ...

"Really, seriously, you're not asking me about Hostess Twinkies are ya? What's the next question? I'm on Saturday Night Live enough. You think you're getting me behind this microphone having me talk about Twinkies? This is a setup man, I know it. You people are the worst. This is a setup. I am not answering questions on Twinkies. No, no, no, no, no, no. It's bad that I even said the work Twinkie from behind this microphone. You are not getting me to do that, no way."

That is so obvious, it almost appears as if Christie was trying to make the opening skit of Saturday Night Live.

In case you are not familiar with the Twinkies story, please consider Hostess to Liquidate if Bakers' Strike Continues Through Thursday; End of Twinkies Hours Away?

The bottom line is the union would not give into demands and  the company filed a motion last Friday to liquidate. Shutting down the company will mean the loss of 18,500 jobs (less any jobs picked up by buyers of brands Twinkies, Ding-Dongs, Wonder Bread, Ho-Ho's etc.)

There is plenty of blame to go around, including untenable wages and benefits, leveraged debt, untenable management salaries etc.

However, the enabling factor behind the debt is loose monetary policy by the Fed coupled with fractional reserve lending. Factor in unions and corrupt management and there is no way  the company could make it without huge concessions from the union.

Still, it is difficult to have much sympathy for those who vote to have no job in these trying times.

The union will likely see pension benefits slashed by 50% or more when handed over to the Pension Benefit Guarantee Corporation (PBGC). The PBGC is of course US taxpayers who should not have to pick up any of this tab at all (but they will).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

A week has passed since the election. It's time to reflect on the polarization of America, hate mail, and what went wrong for the Republican party, all in a constructive way.

Hate Mail

Hate mail came pouring in to my inbox before and especially after the election. One person wrote a blazing "F U" email. I received some radical attacks regarding abortion.

One person blamed me personally for the election results in a rather threatening manner, (but ambiguously enough to make reporting it useless). Another blamed libertarians.

Liz, a very close friend of mine, received a phone call after the election from one of her close friends stating "Liz, I cannot be your friend anymore because you voted for Obama."

How's that for extreme polarization?

Wake-Up Call for Republican Party

Here's the deal:

I did not abandon the Republican party it abandoned me. In more general terms, the Republican party abandoned women, gays, independents, even Catholics.

As amazing as this may seem, and in spite of the Catholic church position on abortion, Catholic Culture reports Obama Won Catholic Vote. It was not by much, but it is stunning that it happened at all.

Yet this is what happens when views are too extreme. I am very pleased to report 'Red' Indiana sends Democrat to US Senate, as women fled Mourdock.

Mourdock said "God intended" pregnancies that result from rape. Romney was stupid enough to say he still supports Senate candidate after rape comment.

Mistakes Add Up

Extreme views, especially in a close election, are bound to add up, and they did.

I was actually hoping Republicans would pick up two senate seats. Instead they lost two.

In spite of weak economy, in spite of the fact Obama did not deliver any of his promises on jobs, in spite of the fact unemployment rate is a reported 7.8% (but more like 10.5% in practice), Romney lost the election.

How? By abandoning women, gays, independents, blacks, Hispanics, atheists, Catholics, etc.

Romney's last ditch effort to move towards the middle, coupled with an amazingly bad performance by president Obama in the first debate is the only thing that prevented a complete devastating blowout.

Exactly as I suggested in 90% Chance of Obama Win; Three Things Romney Needs to Win; Election Night Coverage With Mish on National Syndicated Radio, the late deciders swung to Obama.

No one should be surprised by this. I certainly wasn't. After all, it's pretty hard to win an election when you abandon so many groups.

Time to Move On

On Coast-to-Coast  national syndicated radio, election night with George Noory, I commented this was a wake-up call for Republicans. I also commented Mitt Romney and Rush Limbaugh were the past and that it was time to move on.

I propose it's time to stop fighting World War II and the cold war. US military is supreme and will still be supreme with reasonable (even massive cuts). It's time to move on.

Independents want cuts in military spending. The far-right doesn't. It's time to move on.

Independents can go along with some abortion restrictions, but not extreme positions as that espoused by Mourdock. Thanks to Obama's re-election Roe vs. Wade will not be overturned. It's time to move on.

The US cannot afford to keep troops in 140 countries. It's time to move on.

It's time to move on (and to the middle) and to abandon the far-right for so many reason and in so may ways I cannot begin to name them all.

Yet, it's also time to face the facts on entitlements, on public unions, on  pension promises, on collective bargaining, on prevailing wages.

By taking extreme positions on peripheral issues, Republicans abandoned the chance to make much-needed headway in numerous other places including fiscal responsibility, Davis-Bacon (and prevailing wage laws), and ending collective bargaining of public unions.

Future of the Republican Party

The future of the Republican party, as I stated on Coast-to-Coast election night is Rand Paul and other libertarian-minded Republicans.

Thus, I was pleased today to see the POLITICO headline Welcome to the Rand Paul evolution.

He’ll push to loosen marijuana penalties, legalize undocumented immigrants and pursue a less aggressive American foreign policy.

Call it the Rand Paul Evolution.

In the wake of Barack Obama’s reelection win and ahead of a possible 2016 White House bid of his own, the Kentucky Republican plans to mix his hard-line tea party conservatism with more moderate policies that could woo younger voters and minorities largely absent from the GOP coalition. It’s the latest tactic of the freshman senator to inject the Libertarian-minded views shared by his retiring father into mainstream Republican thinking as the party grapples with its future.

In an interview with POLITICO, Paul said he’ll return to Congress this week pushing measures long avoided by his party. He wants to work with liberal Democratic Sen. Patrick Leahy and Republicans to eliminate mandatory minimum sentences for pot possession. He wants to carve a compromise immigration plan with an “eventual path” to citizenship for illegal immigrants, a proposal he believes could be palatable to conservatives. And he believes his ideas — along with pushing for less U.S. military intervention in conflicts overseas — could help the GOP broaden its tent and appeal to crucial voting blocs that handed Democrats big wins in the West Coast, the Northeast and along the Great Lakes.

Rand Paul 2016

This is welcome news. Had Romney won, we would have been stuck with Romney running again in 2016.

Instead, Republicans have the chance to purge the war-mongers, purge the Rush Limbaugh clones, purge the extremists of all kinds, and get down to fiscal-conservative business.

Please read the rest of that POLITICO story because Rand Paul is the future.

For more on the need to address the budget, including a brief mention of Rand Paul, please see Misdiagnosing the Fiscal Cliff; Shrill Voices and Economic Nonsense; Tyranny of Balanced Budgets

One Final Thought

Here is one final thought on the polarization of the US. A very close life-long friend offered these comments on the hate mail that I received:

"Unfortunately an ethic has developed where it’s OK to yell at people with whom you don’t agree. In fact, it’s considered manly and admirable in some quarters. All these extremist jackasses that believe it courageous to talk about advancing their position with force. Of course, they’ve never lived in a place where that actually happens."

Please read those last paragraph again and again (especially the last two sentences) until it sinks in.

Embrace the Opportunity

Had Romney won, there would have been no chance to move on. Now there is. That is the best thing to come out of this election.

Republicans need to embrace the opportunity to move on that this loss provides.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Here's a headline story including an interview on Fox news that caught me by surprise: New Jersey Chris Christie Praises Obama, Doesn't 'Give a Damn' about Election Day

The presidential candidates have canceled all campaign events on Tuesday, but Republican New Jersey Chris Christie seemed to be stumping for President Barack Obama by appearing on several networks to praise the federal response to Hurricane Sandy.

In an interview on NBC, Christie called Obama "outstanding" for expediting relief efforts. He also told MSNBC that Obama "deserves great credit. He gave me his number at the White House and told me to call him if I needed anything," Christie said.

The New Jersey governor even took his message to Fox News, saying that Obama had helped "tremendously."

"I spoke to the president three times yesterday," he explained. "He called me for the last time at midnight last night asking what he could do. I said, if you can expedite designating New Jersey as a major disaster area that that would help us to get federal money and resources in here as quickly as possible to help clean up the damage here."

Chris Christie Video



Will Christie's Comments Tip the Election?

New Jersey, Christie's home state is solidly in the Obama column. However, storm-damaged Virginia is in a virtual dead heat. Praise from Governor Christie certainly cannot hurt Obama's election chances.

Mathematically, I do not believe Romney can win if he loses either Ohio or Virginia. Romney certainly cannot win if he loses both of them.

Here is question of the day: Is this genuine praise or is Christie looking to run for president in four years? I suggest both.

Regardless, widespread perception that Obama is doing a good job in response to Sandy, fueled by gushing praise from Christie may be enough to tip Virginia into the Obama column, and the election right with it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

I just finished slogging through a 69 page PDF by the State Budget Crisis Task Force outlining the dire state of affairs in Illinois.

I knew in advance that pension funding is the biggest issue facing Illinois. The task force shows exactly that. Here is a summary.

Pension Funding Levels

• Teachers Retirement System (TRS) - 46.1%
• State University Employees Retirement System (SURS) - 45.3%
• State Employees Retirement System (SERS) - 34.9%
• General Assembly Retirement System (GARS) - 20.2%
• Judicial Retirement System (JRS) - 31.0%

Those funding levels assume 8% returns going forward, something that is not going to happen. So as bad as the above looks, the true pension underfunding is even worse.

Illinois' infrastructure is in bad shape, and the report has the details.

There were many things in the report that I did not know about including the loopholes that let legislators pretend Illinois' budget is balanced when it's not.

Here is a surprising fact: Illinois has more governmental taxing agencies than any other state including California, a grand total of nearly 7,000 taxing bodies!

Here's a juicy tidbit on infrastructure "Nearly two-thirds of Metra and CTA passenger rail cars were in a marginal state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life."

The report finished with "recommendations" but they were broad stroke, budgetary meaningless things like timely reporting, long-term planning, accrual planning, etc.

I am in favor of most of the report recommendations, but they will not solve a single problem.

Here is the scariest single sentence in the report "If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years."

Illinois is insolvent, but what can be done about it?

Mish Six-Point Proposal

1. Immediately end all defined-benefit pension plans
2. Default on pension obligations in the fairest possible manner (cap benefits)
3. End collective bargaining of public unions  
4. Eliminate prevailing wage laws that are murder on local budgets
5. Lower corporate income taxes to attract business
6. Eliminate property taxes as the primary method of funding schools

Point number two is against the constitution but I believe it could be accomplished by taxing all benefits above a certain amount at 100%. The alternative is also simple. If the money is not there (the pension plan is bankrupt) all payouts will cease.

The way to win approval from the unions is to set the cap high enough so that the majority of union members get 100% of their benefits.

State Task Force Report

Everything that follows is from the report. It is lengthy and will be easier to read if it is not in blockquotes as per my usual format. Emphasis is generally, but not necessarily mine.

“What Would It Take” Calculations

• If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years.
• To close the gap with an income tax increase would require the individual tax rate to rise to 7.1 percent from the then-existing 3.0 percent and a proportional rise in the corporate rate.
• To close the gap with a sales tax increase would require the rate to jump from 6.25 percent to 13.5 percent.
• To close the gap with spending cuts alone would require over 25 percent across the board reductions in all spending (other than for pensions, debt service, and transportation).

Of Illinois’ three biggest fiscal problems — pension costs that are crowding out the rest of the budget, Medicaid cost increases that have grown faster than the state’s resources and will be unsustainable as the federal ARRA funds expire.

Despite greater recognition that the growth in pension costs cannot be sustained, different views of how to cut or shift the costs have led to a stalemate. No action on pension reform is expected until after the November 2012 elections at the earliest.

Illinois’ demographics show an aging population with a trend toward fewer workers and more retirees, which will pose daunting fiscal challenges in the years ahead. Illinois is also a diverse state with a variety of competing interests, which makes it difficult for political leaders to reach consensus on key issues.

The Politics of Spend, but Don’t Tax

While in Illinois, as elsewhere, the desire to please constituents by expanding government services without increasing taxes is a given, the origins of the structural gap between spending growth and sustainable revenues can be traced to the 1990s. Governor Rod Blagojevich (Illinois’ first Democratic governor since 1976) was elected in 2002 with an agenda to expand programs for children, seniors, and the poor.

However, conflict between Blagojevich and Speaker of the House Michael Madigan (both Democrats) meant that tax increases became virtually impossible as the two “checkmated one another.… The governor declared he would veto any general tax increase…. Madigan blocked all the revenue initiatives proposed by the governor.”

Illinois’ Squishy Balanced Budget Requirement

It would appear that Illinois’ budget is required to be balanced. The Illinois Constitution states that “Proposed expenditures shall not exceed funds estimated to be available for the fiscal year shown in the budget”

However, Illinois’ balanced budget requirement has some serious limitations.

First, it refers to anticipated revenues, and there is no requirement that the state adjust its spending if the anticipated revenues are not realized. There is nothing to stop a governor or General Assembly from using an unrealistically high estimate when crafting the budget.

Illinois’ balanced budget requirement is also a cash concept, referring only to the current fiscal year. This means that the balanced budget requirement does not refer to future pension liabilities or unpaid bills from the previous year. Each fiscal year from 2009 to 2012 ended with a larger stack of unpaid bills — $8 billion at the end of fiscal year 2012 — and each year these bills were ignored when projecting balance for the next year’s budget.

Underfunded Retirement Promises Are Crowding Out Other Needs

It is widely recognized that Illinois  has the worst unfunded pension liability of any state. Its five retirement systems had a total of $85 billion in unfunded liability in 2011 (Table 2), and the figure has increased since then. Dealing with some of the lowest funded ratios of public pensions in the nation has contributed to the state’s ongoing fiscal crisis. Illinois’ pension problems were cited by Moody’s Investors Service when it downgraded the state’s bond ratings in January 2012, making Illinois’ credit rating the lowest of all fifty states. However, Illinois has done nothing to reform state employee pensions since that time and it is doubtful that anything will happen before 2013.

Table 2 describes the five retirement systems the State of Illinois is responsible for funding: Teachers Retirement System (TRS), State University Employees Retirement System (SURS), State Employees Retirement System (SERS), General Assembly Retirement System (GARS), and Judicial Retirement System (JRS). It also shows the Illinois Municipal Retirement Fund (IMRF), which the state administers but the local government entities are responsible for funding. Most of the state’s
$85 billion in unfunded liabilities are in the three largest funds, TRS, SURS, and SERS. All five state funds have funding ratios below 41 percent. The IMRF has a much higher funding ratio because of a state law that obliges local governments to make “annual required contributions” (ARC).



click on chart for sharper image

The Way Pension Costs Are Reported Can Obscure the Problem

Illinois’ pension systems are likely in a more dire fiscal condition than they seem. Illinois’ three largest pension systems discount future pension liabilities using an assumed rate of return on investments of around 8 percent. Since the financial crisis, ongoing economic instability in Europe, and worries of a double-dip recession, many believe that this assumed rate of return is overly optimistic. Most state pension systems have exceeded an 8 percent rate of return over the past several decades, but the rates have been much lower in recent years. Lower discount rates will soon be required in Illinois and other states.

Under new rules approved by the Governmental Accounting Standards Board (GASB) in June 2012, Illinois will be required to report liabilities using “market rates,” which are typically closer to 5 percent. Although this change will no doubt have a positive impact by more accurately estimating the level of state liabilities, it reveals an even more precarious financial position. For example, “under the new rules, the Illinois Teachers’ Pension System [TRS], one of the country’s worst funded, would have shown just an 18 percent funding ratio as of July 2010.”

Schools

In Illinois, total preK-12 education spending per pupil slightly exceeds the national average, but the proportion that comes from the state’s own resources is low in comparison to other states. In the 2008-2009 academic year Illinois was ranked forty-eighth in per-pupil education revenues from state sources, but tenth in per pupil revenues from local sources. Illinois’ heavy reliance on local property taxes to fund education means that disparities between wealthy and poor communities are reflected in the quality of the schools.

During the 2009-2010 academic year, Illinois’ wealthiest elementary districts spent about $24,000 per pupil while the poorest districts spent about $6,000. A 2010 national study found that Illinois has the second-highest disparity between high-poverty and low-poverty schools.

Illinois has the third highest number of school districts of all U.S. states. More than 200 of Illinois’ 868 school districts have only one school.

Underinvestment in Infrastructure

Crowding out has also become increasingly evident in the case of Illinois’ aging infrastructure. In 2010, the American Society of Civil Engineers (ASCE) Infrastructure Report Card gave Illinois an overall grade of D+.140 The state’s infrastructure is in urgent need of immediate repairs to meet basic standards of public safety, and in need of expansion and modernization to accommodate future growth. However, as Illinois continues to struggle to pay its pension, Medicaid, and debt obligations, the state’s infrastructure condition will only worsen. Illinois state agencies estimate that infrastructure needs over the next twenty to thirty years will exceed $300 billion. But the state does not have a comprehensive capital improvement plan, and the information needed to make an accurate assessment of the condition of Illinois’ infrastructure is incomplete.

Condition of Illinois’ Infrastructure

The poor condition of Illinois’ infrastructure — including highways, roads, bridges, trains, buses, dams, locks, and buildings — has become critical.

A FY 2011 survey of Illinois’ highways and roads by the Illinois Department of Transportation indicated that approximately half of Illinois’ highways and roads were in Fair or Poor condition. According to the Federal Highway Administration, in 2010 over 15 percent of Illinois’ 26,000 bridges were structurally deficient or functionally obsolete.

Illinois’ mass transit infrastructure is also lacking: in 2010 approximately one-third of mass transit bridges and structures; maintenance facilities; and buses were not in a state of good repair. Nearly two-thirds of Metra and CTA passenger rail cars were in a “marginal” state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life. Little state funding is available to address these needs.

Local Government Fiscal Stress

Local government taxing jurisdictions weave a complex web in Illinois. According to the 2007 Census of Governments, Illinois has more units of government than any other state — nearly 7,000. This includes 102 counties, 1,400 townships, 1,300 municipalities, 868 school districts, and about 4,000 special taxing districts such as library, fire protection, forest preserve, and park districts.

In Illinois, the fiscal condition of thousands of local governments is intertwined with that of the state. At present, neither is in a position to help the other. The state’s fiscal stresses have led to cutbacks in transfers of state revenues to local governments, exactly at the time that local governments are most in need of assistance.

Everything above, starting with "What Would It Take Calculations" were pieces snipped from the 69-page PDF.

Illinois is in deep "sheet" and the primary proposals under discussion all involve tax hikes and more pandering to public unions which will do nothing but drive businesses away.

My six-point alternate proposal would put Illinois back on a track towards fiscal sanity and also encourage businesses to relocate to Illinois.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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The BLS Glossary defines full-time workers as "Persons who work 35 hours or more per week".

For monthly reporting, the BLS defines part-time as "those who worked 1 to 34 hours during the survey reference week". With that wording, I am not precisely sure where 34.1 or 34.5 hours fit.

Interestingly, the Obamacare mandate says Anyone Who Works 30-Hour Week Is Now 'Full-Time'

A little-known section in the Obamacare health reform law defines “full-time” work as averaging only 30 hours per week, a definition that will affect some employers who utilize part-time workers to trim the cost of complying with the Obamacare rule that says businesses with 50 or more workers must provide health insurance or pay a fine.

“The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week,” section 1513 of the law reads. (Scroll down to section 4, paragraph A.)

If an employer has 50 or more "full-time employees" and does not offer health insurance, it must pay a penalty per employee for each month it does not offer coverage.

Lookback Period Three Months To One Year

The IRS has a publication on Determining Full-Time Status for Purposes of Shared Responsibility for Health Coverage. The key to explaining the recent jump in part-time employment is found in the look-back period.

Under the look-back/stability period safe harbor method, an employer would determine each employee’s full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week.

Common sense would dictate employers look back the minimum time (three months), as opposed to a year. 

Thus, any employer in his right mind would reduce the hours someone worked from say 34 to something like 25 or 28, just to make sure the average hours worked was under 30.

If a lot of corporations did that, and a lot people had reduced hours, then corporations would have had to hire more workers to keep the same total number of hours.

Indeed there was a massive surge in part-time employment (+582,000) in October that spawned many conspiracy theories.

As noted in September Jobs +114,000; Unemployment Rate 7.8%; Part-Time Workers +582,000; Initial Reaction and Election Impact, the entire .3 percentage point drop in the unemployment rate was based entirely on a surge in part-time employment.

Thus, it's looking more-and-more likely that Obamacare is a healthy chunk of the explanation.

Acceleration of Trend

Many people emailed me that Obamacare did not start the push to part-time employment. Fair enough, but I never said it did.

However, Obamacare did accelerate the trend. Moreover, it will now reduce the number of hours part-timers work.

The upside is more people will be working, and there is benefit to that even if it does not reflect the true state of unemployment or the economy.

Obamacare Employment Recap

I have written about this issue three times recently. Here is a recap.

• Is Obamacare Responsible for the Surge in Part-Time Jobs?
 
• Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same?
 
• Mish Obamacare Mailbag: Expect More Part-Time Jobs

How to Reduce Unemployment

It will be interesting to see if the BLS changes its standard from over 34 hours to 30 hours or more for full-time work.

As an aside, it would be easy enough to reduce unemployment to zero. All the government need do is hire everyone in the country who does not have a job to work one hour per week at minimum wage.

Voilà! We would have "full employment" in a jiffy.

If that seems too radical, the administration can always try dropping the measure of full-time employment to 21 hours while pitching the resultant drop in unemployment as "Good news! Half-time is now full-time."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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I received a number of interesting emails from readers in response to Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?.

Here is a sampling of emails.

Reader John, Owner of 37 Restaurants Chimes In

Hello Mish,

I own a chain of 37 fast food restaurants. I am doing the same thing as Olive Garden  [going to part-time workers] as are many of my small (50 to 1000 employees) competitors. This ObamaCare tax will continue to cause a large shift in employment figures starting now and continuing for the next several years, decreasing the unemployment rate as each full time employee gets replaced with more than one part time employee.

John

Reader Kris writes About Whole Foods

Hello Mish,

Thanks for your wonderful data analysis on all my favorite B(L)S topics...

As an anecdotal note to Prepping for Obummer care... Whole Foods also limits their non-management hourly workers to 20 to 29 hours per week. Says so right on any of their existing location employment openings via their online application process.

Thanks and keep up the great debunking work.

Kris.

Reader Mark (a Medical Doctor) Discusses Obamacare

Hello Mish,

That Obamacare encourages part-time employment is as clear an argument as can be made for separating health care coverage from employment.  There are no advantages to the American public at large of creating a large underclass of uninsured people flooding ER's for expensive and fragmented care providing poor outcomes at high cost.  That is where we will be headed if corporations decide that their workers don't matter.

As an aside, I would expect workers placed in such situations to provide worse service and to degrade the experience of customers in these restaurants (and other businesses) damaging the businesses themselves over time.

Mark

Small Business Owners Focus On The Economy

The above anecdotes are via email from Mish readers. Let's now take a look at snips from the Yahoo!Finance article Small Business Owners: Engines of the American Economy

Cham Chun To, Owner of Big Wong take-out restaurant in Manhattan writes ...

Will we be able to handle the additional cost of health insurance for the employees? If we can, we’ll keep doing business; if not, we’ll have to stop. Our employees are self-insured now. Things are going to change in 2014. It’s going to be hard to maintain. It’s another expense, and it’s going to be no easy feat for us. The government can’t handle it, decided to pass the responsibility down. How are we going to handle that? We will lose money, especially when the economy is no good. We haven’t been able to increase the prices on our menu. We used to be able to increase a quarter on our prices every half a year or so. We’ll lose customers if we do that now.

John Pruitt, Owner of The Frameworks (picture framing) in Carrollton Texas writes ...

"I think more than anything else, I'm going to repeat what 90 million people are saying, get rid of Obamacare, or at least most of it."

Sarah McNally Owner of McNally Jackson Books in Manhattan, New York writes ...

"Bring down health care costs. We spend a damn fortune. We offer health care to all employees over 24 hours a week, and their families, common law partners, etc."

Jeff Popp of Mile High Mountaineering Complains About Tariffs ...

The biggest issue that absolutely drives me crazy and makes me want to pull my hair out is how high tariffs and duties are to import backpacks. And I understand that they want to protect American industry, but the fact is there is no American industry for stitched goods anymore. There’s just not, so I really don’t know who they’re protecting. And we’re getting charged — by the time shipping, duties and taxes are included — 24% of each product, is about what it costs. And that’s ridiculously high.

If they lightened up on duties, that would help us a lot. But we haven’t even found a manufacturer that would be capable of making our packs because they’re pretty complex and technical. Any American-made backpacks you find are going to be really simple, usually school-oriented type stuff. And if we did it here they’d be four times the cost. So even with the high duties and tariffs, it’s still way cheaper for us to offshore.

The talent is all over there now. That’s the thing. People always think that offshore goods are always cheaply made and stuff but no, those factories are on it. They do everything in one house; they’re very talented sewers, they know what they’re doing. No one here knows how to sew anymore.

Obama Responsible For Surge in Part-Time Jobs?

On October 9, I asked Is Obamacare Responsible for the Surge in Part-Time Jobs?

Clearly my readers believe that, and judging from Yahhoo!Finance, many others do as well. More importantly, anecdotal evidence suggests that business owners are indeed reacting that way as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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For the second time in less than a week surprising jobs numbers came into play. This morning the Labor Department reported a four-year low of 339,000 first-time claims.

Some claimed this validated last Friday's jobs report, a silly notion because the two are not that closely related and a single week of data is meaningless.

I still think Friday's jobs report will be revised away, but I am positive today's "surprising" report will be (for the simple reason California forgot to report 30,000 claims).

Please consider Jobless Claims Data Skewed Downward.

Initial jobless claims, which are a measure of the number of people recently laid off, fell by 30,000 to a seasonally adjusted 339,000, the lowest level in more than four years.

But the Labor Department spokesman said the numbers were skewed by one large state that underreported its data. The spokesman declined to identify the state, but economists believe California is the only state large enough to have such a significant impact on the overall numbers.

According to the spokesman, the reason that state’s claims numbers fell short was because the state left out a pile of unprocessed claims related to seasonal factors around the beginning of the fourth quarter, which began Oct. 1.

In a research note, Stephen Stanley of Pierpont Securities summed up the data: “In short, this reading is worthless in terms of informing on the general economy.”

Actually, the report isn't worthless, it's simply erroneous. Add back in 30,000 claims and the number is 369,000 right about where it has been for some time.

Is there a conspiracy here? Once again the answer is no.

This large state has a history of reporting “volatile” numbers at the beginning of quarters and that the Labor Department has complained and tried to work with the state to more accurately report its claims but with little success.

“There is no explanation” for the volatility. “We have tried and tried to work with them. It’s like playing hardball with them,” the spokesman said.

The spokesman said that the unprocessed claims are likely to show up in the numbers in the next week or two. “We should see some sort of catch up.”

What We Learned Today

The labor department did not confirm the state was California but who else can it be?

We did learn one useful piece of information today: The first couple weeks of every quarter are likely to be seriously messed up by under-reporting of claims from California.

Mike "Mish" Shedlock

Following the surprise drop in the unemployment rate last Friday, I have seen many conspiracy charges leveled against the BLS.

I do not believe any of the conspiracy charges. Had Obama instructed the BLS to juice the numbers, someone in the BLS would surely be yapping. They are not all Democrats. Many were hired under President Bush.

Is Obamacare Responsible for Surge in Part-Time Jobs?

Some stated the 582,000 surge in part-time workers was a seasonal thing based on teachers going back to work. I do not buy that explanation either because the surge in part-time workers and the decline in the unemployment rate were seasonally adjusted.

One likely explanation is an outlier and the data will be revised lower soon enough (or the previous month's of weakness up). There is a second possible explanation although the timing as to precisely when it would matter is uncertain.

Please consider Staffing Companies: How to Profit from Obamacare’s Job Outsourcing.

Obamacare is so huge and transformative, its effects will be felt far beyond just the healthcare sector; its tentacles of government control and penal taxes will permeate and affect the entire U.S. economy.

According to the Heritage Foundation – a Washington think tank – Obamacare’s employer mandate will increase the cost of employing a single minimum-wage employee by $3,588 per year. The employer burden is even greater for minimum-wage employees with a family; in that case, the extra cost will be $11,026 per year.

You might think that one way around this problem would be for employers to offer unskilled workers cheaper health insurance with higher deductibles. Think again. Obamacare has a non-discrimination provision that says that if an employer offers health insurance, all full-time employees must be offered the same “minimum essential benefits” and at a cost that is no higher than 9.5% of the employee’s household income.  Bottom line: there is no escape for employers of full-time workers.

The only solution is for employers to eliminate full-time employment positions for unskilled workers earning near minimum wage. Since businesses need unskilled workers for certain functions, employers will only offer temporary and part-time positions to these poor workers because temporary and part-time jobs are exempted from Obamacare’s employer mandate provisions.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor and now a Senior Fellow at the Manhattan Institute, came to a similar conclusion:

If an employer offers insurance, but an employee qualifies for subsidies under the new health care exchanges because the insurance premium exceeds 9.5 percent of his income, his employer must pay $3,000 per worker. This combination of penalties gives businesses a powerful incentive to downsize, replace full-time employees with part-timers, and contract out work to other firms or individuals.

Businesses can reduce costs by hiring part-time workers instead of full-time workers. A firm with 85,000 full-time work¬ers and 7,000 part-time workers that does not offer health insurance would pay a tax of $170 million. By keeping the number of hours worked the same, and gradually reducing full-time workers and increasing part-time workers, until the firm reaches 17,000 full-time workers and 92,000 part-time workers, the tax is reduced to $34 million. If the firm abandons full-time workers altogether, admittedly an unlikely option, but useful for illustration, the tax is reduced to zero.

What About Obama's Defense Layoff Suspensions?

Diana Furchtgott-Roth writing for Real Clear Markets notes Obama Asks Big Business to Break the Law.

The White House has initiated an effort, possibly extra-legal, to head off required layoff notices to employees of defense contractors on the cusp of Election Day. Worse, without congressional approval, it has offered to pay firms' penalties and court costs, potentially $500 million or more, out of the Pentagon budget.

Layoff notices are required by November 1, according to the 1988 Workers Adjustment and Notification Act (WARN),because deep cuts in military spending, known as sequestration, are currently scheduled to take effect on January 1. If cuts occur, they will lead to mass layoffs.

The Obama administration is concerned that layoff notices could cost the Obama-Biden ticket votes, especially in Ohio and Virginia, swing states with a strong defense presence.

It is the first time in history that the White House has asked firms not to file layoff notices.

In a memorandum dated September 28, the White House Office of Management and Budget counseled defense employers not to issue layoff notices on November 1.

OMB assured employers that if they did not send out layoff notices and layoffs occurred, the "contracting agency," namely the Pentagon, would absorb the penalties and attorneys' fees the employers would have to pay, a significant cost to taxpayers.

If firms don't file WARN notices and plant closings or layoffs of more than 500 workers occur, employers are liable for penalties of 60 days back pay and benefits paid to workers.

No problem, says OMB in the memo, the contracting agency will pay the costs. It specified that if sequestration occurs and the contractor has followed Labor Department guidelines, "any resulting employee compensation costs for WARN Act liability as determined by a court, as well as attorneys' fees and other litigation costs (irrespective of litigation outcome), would qualify as allowable costs and be covered by the contracting agency, if reasonable and allowable."

It's not clear that the White House has the authority to offer to pay the costs.

Nevertheless, defense companies, such as Lockheed Martin and Boeing, which were planning to send out notices to tens of thousands of workers, have announced that they will refrain.

Blatant Manipulation

This is clear manipulation by president Obama. That said, it would not affect the unemployment rate now. Nor is it a conspiracy.

However, it was a cowardly act, one that certainly cannot inspire confidence in the president at all.

For more on the jobs situation, participation rate, and controversy regarding the surprising drop in the unemployment rate, please see ...

• About That "Expected" Drop In Participation Rate
 
• Lost Bet
 
• "Unbelievable Numbers" Says Former GE CEO Jack Welch; Another Look at Jobs Including Government Jobs and Self-Employment
 
• September Jobs +114,000; Unemployment Rate 7.8%; Part-Time Workers +582,000; Initial Reaction and Election Impact

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Fed Chairman Ben Bernanke was yapping about jobs today in his speech Five Questions about the Federal Reserve and Monetary Policy in Indianapolis.

Bernanke asked five questions of himself and gave five self-serving responses, all absolving the Fed of its role in the global financial crisis.

Bernanke also patted himself on the back numerous times (indeed in the answers to nearly every question).

In particular, Bernanke bragged about the inflation-fighting prowess of the Fed, not pointing out the Fed and fractional reserve lending are the source of inflation.

Direct Lies

In the direct lie category, Bernanke stated "The Federal Reserve is also very open about its finances and operations."

In reality, it took freedom-of-information lawsuits from Bloomberg and others to get information from the Fed. The Fed still does not want to be audited.

Here are a couple of key snips regarding monetary and fiscal policy.

Pledge To Hold Rates Low

In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve's commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.

Bernnake Begs Congress to Address "Fiscal Cliff"

I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery.

Bernanke Tosses Monetarist and Keynesian Hats Into the Ring

Although Bernanke does not want Congress meddling in monetary policy at all, he meddles in fiscal policy all the time. Bernanke cannot make decisions or pass laws, however, Bernanke is clearly warning Congress the alleged "Fiscal Cliff" of tax hikes and automatic budget cuts "would likely throw the economy back in recession".

I suggest the US economy is already back in recession. Regardless, Keynesian and Monetarist clowns (Bernanke wears both hats when he attempts to manipulate Congress),  never want to do anything "now" to fix structural problems.

Indeed, Bernanke does not even want to do anything until at least mid-2015 regardless of what the economy is doing.

If you want to know why the boom-bust cycles have ever-increasing amplitudes and troughs, look at the policies of the Fed.

Bear in mind that I side with Bernanke that price inflation is not going to get out of hand. However, His policies have destroyed those on fixed income (a claim he tries but fails to address in his five questions). More importantly, those with first access to money (primarily banks and the wealthy) are the biggest beneficiaries of monetary printing exercises.

Those wondering how the 1% got so wealthy need only look at the Fed for the answer.

That was a question Bernanke did not address, but I addressed in detail a few days ago in Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Please take a look at that post if you have not yet done so.

Mike "Mish" Shedlock

"Wine Country" Economic Conference Hosted By Mish
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The California hit parade keeps on rolling as yet Another California city scrambles to avoid bankruptcy.

Atwater, a city of roughly 28,000 in California's Central Valley, may declare a fiscal emergency as soon as next week, but it is trying to avoid becoming the fourth California city to file for municipal bankruptcy this year, its mayor said.

Under California law, a local government must either declare a "fiscal emergency" or go through a 60-to-90 day confidential negotiation process with its creditors before it files for municipal bankruptcy. Since late June, three Golden State cities-Stockton, San Bernardino and Mammoth Lakes-have filed for bankruptcy protection.

"We are planning to stay current on our ... bonds," said Mayor Carol Joan Faul in a telephone interview with Dow Jones Newswires. "We are hoping to avoid" bankruptcy, she said, "but as far as I'm concerned, we may have to declare a fiscal emergency" on Oct. 3.

According to its fiscal 2011 financial statement, Atwater had roughly $95 million in outstanding debt, a mixture of bonds related to its sewer as well its now-defunct redevelopment agency. Ms. Faul said Atwater intends to make an upcoming bond payment of $2 million on its sewer bonds.

Atwater is Burnt Toast

Once things reach this stage, one does not even need to look at the details because it's a done deal.

Yet, I did look further and as expected, public unions appear to be smack in the middle of things as noted in a Reuters article on Potential Atwater Bankruptcy.

Atwater's economy is "pretty bleak" and starving the city of so much revenue its leaders must consider a drastic overhaul of the services, said Jim Price, vice president of operations at Gemini Flight Support at Atwater's Castle Airport.

"Police and fire, you keep them - and everything else is going to have to be privatized," Price said. "I just don't know how they can do it any other way."

RAISING REVENUE, CUTTING COSTS

Atwater's officials are just beginning to consider their options, Faul said, noting the city must consider raising 20-year-old rates for water services and 10-year-old rates for garbage services while clamping down on costs.

Union representative Nancy Vinson said she expects the city will seek concessions from its roughly 30 non-safety employees, who gave up 10 percent of pay last year through furloughs.

"They could ask for a wage reduction, they could ask for a different contribution to the retirement system, they could ask for a higher health benefit contribution," Vinson said. "We have not been unwilling to talk to them."

Atwater must also seek concessions from its roughly 50 safety and management-level employees, Vinson said, adding she is concerned city officials are moving too fast on a plan for declaring a fiscal emergency.

Atwater's Choice: Bankruptcy Today or Bankruptcy Later

Atwater can enter bankruptcy today, saving taxpayers a lot of money, or it can waste taxpayer money for years, scrambling to make bond payments and then default.

Either way, Atwater is burnt toast. Attempts to make bond payments is a fool's mission.

Mike "Mish" Shedlock

"Unexpected" weakness and downward revisions are hallmarks of the beginnings of recessions. And so it it with durable goods. Economists had forecast a gain, instead there was a 1.6% drop. Moreover July was revised lower as well.

Bloomberg reports Orders for U.S. Goods Excluding Transportation Unexpectedly Drop

Orders for goods meant to last at least three years, excluding volatile demand for such things as airplanes and automobiles, fell 1.6 percent last month after a greater-than- previously estimated 1.3 percent decrease in July, the Commerce Department reported today in Washington. Total bookings plunged 13 percent, the most since January 2009, paced by a decline in demand for civilian aircraft.

“There was broad-based weakness,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “What this now means is that capital expenditures are now going to probably fall for the first time since the recovery started. It remains a terribly challenging backdrop in the U.S.”

The median forecast of 53 economists surveyed by Bloomberg projected a 0.2 percent gain in ex-transportation orders. The Commerce Department revised July data down from a previously reported 0.6 percent decrease.
Survey Results

The decline in total orders was more than twice as large as the 5 percent drop median estimate in the Bloomberg survey.

Other reports today showed the economy grew less than previously forecast in the second quarter and claims for jobless benefits dropped last week to a two-month low.

The world’s largest economy expanded at a 1.3 percent pace in the second quarter after growing at a 2 percent rate from January through March. The revision, the third estimate for the quarter, compared with a prior estimate of 1.7 percent and the Bloomberg survey’s 1.7 percent median forecast.

The reduction in growth reflected slower gains in consumer spending and farm inventories, the latter caused by the drought.

Civilian aircraft bookings, which are often volatile, slumped 102 percent in August after surging 51 percent the prior month, today’s Commerce Department report showed. The size of the decrease may reflect some cancellations in prior months. Boeing Co. (BA), the largest U.S. aircraft maker, received an order for a single plane, down from 260 the month before.

Orders for non-defense capital equipment excluding airplanes, a proxy for future business investment in items such as computers, engines and communications equipment, rose 1.1 percent after decreases of 5.2 percent in July and 2.7 percent in June, the Commerce Department data showed.

Shipments of those goods, used in calculating gross domestic product, fell 0.9 percent after decreasing 1.1 percent in July.
Caterpillar Forecast

Exports dropped 1 percent in July as American companies shipped fewer automobiles, metals and consumer goods abroad, according to Commerce Department figures issued earlier this month.

Recession Call

• Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness
 
• ECRI's Lakshman Achuthan Says US in Recession Now; That Makes Three of Us

I am very comfortable with pegging of the start of the recession in June and I expect more downward revisions in GDP and employment are on the way.

Mike "Mish" Shedlock

Gallup Polls show Little Appetite in U.S. for More Gov't Regulation of Business

Americans say there is too much (47%) rather than too little (26%) government regulation of business and industry, with 24% saying the amount of regulation is about right. Americans have been most likely to say there is too much regulation of business over the last several years, but prior to 2006, Americans' views on the issue of government regulation of business were more mixed.

Question: In general, do you think there is too much, too little, or about the right amount of government regulation of business and industry?



The collapse of Lehman Bros., the failure of the secondary mortgage market, and other business problems in 2008 and 2009 might have been expected to increase Americans' desire for more government control of business and industry. But that was not the case. Americans' views that there is too much government regulation in fact began to rise in 2009, perhaps in response to the new Obama administration and new business regulation policies such as Dodd-Frank, reaching an all-time high of 50% in 2011 before settling down slightly this year to 47%.

There has been little change since 2003 in the percentage of Americans saying there is too little regulation of business. The changes that have occurred in recent years have involved shifts between the percentages choosing the "too much" and "about right" alternatives.

The polls look a lot different if you break down the results by political party.

• 77% of Republicans say there is too much regulation and only 9% think there is too little.
• 46% of independents think there is too much regulation, and 24% too little.
• 25% of democrats think there is too much regulation, and a whopping 42% think there is too little.

Cause of the Financial Collapse

The Democrats are simply wrong. One of the reasons we are in this mess is because of too much regulation. Here several examples.

1. President Kennedy allowed forced collective bargaining of public unions which eventually drove cities and states to fiscal ruin.
2. The Fed micromanages interest rates and that was a huge factor in creating the housing bubble. Note the Fed was created as a result of government regulation.
3. Congress had hundreds of affordable housing programs including Fannie Mae and Freddie Mac. Affordable housing programs and lending mandates such as the Community Reinvestment Act also contributed to the housing bubble
4. The SEC anointed Moody's, Fitch, and the S&P as "Nationally Recognized Statistical Rating Organization (NRSRO)". Once again this regulation came back to bite years later when  the ratings agencies labeled pure garbage as "AAA"

Time To Break Up The Credit Rating Cartel

Let's take a closer look at point number four. I discussed the ratings agencies in depth in Time To Break Up The Credit Rating Cartel

The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.

Establishment of the NRSRO did three things (all bad):

1) It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized.
2) In effect it created a nice monopoly for those in the designated group.
3) It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating.

With that I have to sit back and laugh at one of the original opening statements in this article: "I do not think that the market can discipline ratings agencies sufficiently," said Mr Mindich, chief executive of Eton Park Capital and a former colleague of Hank Paulson, the Treasury secretary, at Goldman Sachs, the investment bank.

Clearly Mr. Mindich does not understand the free market. The problems arose because the free market was disrupted by a misguided mandate by the SEC.

The Solution is Amazingly Easy

Government sponsorship of organizations and intervention into free markets always creates these kinds of problems. The cure is not an executive shuffle, third party verification or half-measures and more regulation that mask over the issues by splitting functions within an organization. The SEC created this problem by creating the NRSRO. The problem is easily fixable. It's time to break up the cartel by eliminating the rules that created it. Moody's, Fitch, and the S&P should have to sink or swim by the accuracy of their ratings just like everyone else. Ratings would be a lot better if corporations had to live or die by them. Free market competition, not additional regulation is the cure.

Government Regulation a Leading Cause of the Housing Bubble

Many point to elimination of Glass-Stagall as the cause of the crisis. They are wrong. Glass-Steagall would not have stopped the securitizion process or passing the trash to Fannie Mae or investors. It would not have stopped the AAA rating scam of Moody's, Fitch, and the S&P.

A case can be made for Glass-Steagall on the grounds that separation of duties wouls prevent fraud, and regulations designed to preserve property rights and prevent fraud are reasonable. However, Glass-Steagall would have done nothing to stop the housing bubble or subsequent crash.

The key point is government regulation, the Fed, and fractional reserve lending are the primary causes of numerous boom-bust cycles.

Regulation should focus on fraud prevention and preservation of property rights, not misguided social agenda like "affordable housing". Government never makes anything affordable.

Mike "Mish" Shedlock

Once again I had the pleasure of being on Capital Account with Lauren Lyster on Tuesday. We discussed the election, my comments on  "Mitt Romney's Foot-in-Mouth Disease", a US recession, "QE to Eternity", and other topics.



Mish for President?

Lauren Lyster mentioned my statement that I would not vote for Obama nor Romney. I received several email from readers on that wondering if I was going to opt out of the election.

I will vote. I have voted in every election since 1972. I believe people should vote. I just cannot stand the choices presented. In the previous two elections I wrote-in Ron Paul.

However, Ron Paul is retiring from Congress, having served the nation well. So I am considering instead other possibilities such as Libertarian candidate Gary Johnson or perhaps even myself.

The latter possibility came up when a close friend made an out-of-the-blue yet sincere statement that he was writing-in me. Well, why not? If he can write-in me, why shouldn't I write-in me?

I do not expect to win, and I will not hire an exploratory commission led by Donald Trump to prove it. However, Ron Paul and Gary Johnson will not win either.

Moreover, a handful of write-in votes  for Ron Paul would not merit much media attention, but 50 wrote-in votes in every state for "Mish" might conceivably get a mention.

So if you think as I do, that Obama and Romney are bad choices for America, then please go ahead and write-in "Mish".

Unlike the others, I pledge to spend zero dollars on my campaign, I pledge to bring all the troops home, I will end collective bargaining of public unions by decree (reversing what President Kennedy did by decree), and I will get rid of Ben Bernanke, appointing someone who will work out a plan to get rid of the Fed entirely as well as eliminate fractional reserve lending.

Those are things a president can do, without support of Congress, and I will do them if elected. If you like that platform, please write-in "Mish" in November.

Mike "Mish" Shedlock

In my previous post Desperation Bazooka Tactics; Gold Soars Following Huge Headfake, I mentioned "This seems like desperation bazooka tactics. Specifically, the Fed is in a panic state over jobs."

I am not the only one to come to that conclusion. Saxo Bank economist Steen Jakobsen sent out a post moments ago, FED Did Panic......

They are now doing 'open ended' bond buying - no finite time or amount...hence this will go down as QE Extreme.

I remain of the view this is final phase...

I'm long stocks, gold, short us dollars next 24-48 hours but ..on the anniversary for LEHMAN... tonight could be the day where FED did too much.

Low yield and monetary policy stopped having an impact two years ago, tonight could be the night where after the rally low rates no longer impact stock and risky asset - the only cheap asset right now is: money ...every time this has been the case in history it has ended in bubble and tears.

Congratulations to Steen for predicting this outcome today. On a podcast with Chris Martenson yesterday, both of us stated the Fed would not do much this month but would at some point panic.

Well, panic the Fed did, and sooner rather than later.

Mish Interview With Eric King

Last evening, I had the pleasure of chatting with Eric King for about an hour regarding the state of the global economy and how central bankers would react.

The results are on King World News in a post released today before the FOMC announcement: Global Economic Plunge, Money Creation & Soaring Gold

Today Mish warned King World News that investors should prepare, “... for a big plunge in economic growth worldwide.” Mish also said that despite the plunge in the global economy, “I expect to see gold breakout to the upside and I think we are starting to see that right now. The same thing is true for silver.”

But first, here is what Mish, who runs the Global Economic Analysis site, had to say regarding the plunge in economic activity: “We are seeing a decline in the global economy. China has slowed down dramatically, so any commodity exporters which export to China are slowing down as well. We’re already seeing this happen in countries like Australia. We are also starting to see the Australian housing market begin to crash.”

Mish had this to say regarding gold: “I think that gold is about ready to blast higher. Now, the Fed has managed to stoke the stock market as well as inflate the corporate bond market.

But they [corporations] are not doing any more hiring, and Bernanke is puzzled over this. Well, he’s puzzled over pushing on a string because people are still saddled with debt. Students are graduating with debt, but they are still unable to get jobs, so they are simply moving back home.

But Bernanke has ignited a rally in gold from around $800, to over $1,700 now. And we’ve seen the same thing in silver. We’ve also seen this in energy and food.  But other commodities such as steel have plunged. This will impact the economies of exporting nations such as Australia and Canada very badly.

The bottom line is the monetary printing is out there, and gold is going to be the big beneficiary, and possibly silver as well. The chart of gold is beautiful. We have seen a perfect consolidation wedge forming for about a little over a year now.

I expect to see gold breakout to the upside and I think we are starting to see that right now. The same thing is true for silver. This big lift in gold recently has been because of what they are doing in the ECB.

God only knows what we are going to see from China.  I expect all of the central banks to push on the string once more, but I don’t expect to see any job creation as a result of that. Investors don’t realize that we are in a global recession, but they will shortly.

Panic Over Jobs

So what is Bernanke panicked about? One word: "jobs". If you want a second word it's "recession".

I covered both aspects last Friday in "Yes Virgina, It's a Recession".

Recession Numbers Second Consecutive Month

Yesterday I was asked if the services ISM changed my view about the US being in recession. I responded that I wanted to see today's job report first.

Well I have seen it and the report is nothing short of a certified disaster.

Yes, Virginia, based on the household survey, and manufacturing reports, the regional Fed surveys the US is in recession.

The one survey that is different is the ISM services report. The question is why? This is speculation, but I believe ISM has too few companies in the survey, and perhaps large companies are still growing while medium and small-sized firms are not. The other possibility is the ISM report is an outlier for another reason.

Regardless, last month the the household survey had a decline of 195,000 jobs and this month the decline is 119,000. Thus, in the last two months, there are 314,000 fewer employed.

At turns, the household survey leads. I strongly suggest the economy has turned.

• US Unemployment Rate -.2 to 8.1% 
• This month the number of people employed fell by 119,000.
• In the last two months, the number of people employed fell by 314,000!
•  In the last year, the civilian population rose by 3,695,000. Yet the labor force only rose by 971,000.
• This month the Civilian Labor Force fell by 368,000.
• Last month, those "not" in the labor force increased by 348,000 to 88,340,000, another record high. 
• This month we set another record high with a whopping 581,000 dropping out of the labor force. If you are not in the labor force, you are not counted as unemployed. 
• In the last year, those "not" in the labor force rose by 2,723,000 
• Over the course of the last year, the number of people employed rose by 2,347,000. 
• Participation Rate fell .02 to 63.5%;
• There are 8,031,000 workers who are working part-time but want full-time work, a decrease of 215,00. This one the only bright spot in the report.
• Long-Term unemployment (27 weeks and over) was 5.033 million a decline of 152,000 (likely an artifact of the decline in the labor force).
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

I am going to reiterate my belief that the household survey tends to lead and today's panic suggests the Fed believes that was well. Here are two key Household Survey figures.

1. In the last two months employment dropped by 314,000.
2. In the last two months the labor force fell by 518,000 while those not in the labor force rose by an amazing 929,000!

Household Survey Data



click on chart for sharper image

In the last year, the civilian population rose by 3,695,000. Yet the labor force only rose by 971,000.

Those not in the labor force rose by 2,723,000 to yet another record high 88,921,000.

That is an amazing "achievement" to say the least, and one that has the Fed in panic mode.

Addendum:

Note to All Facebook Users: If you have not yet voted for your favorite charity (it costs nothing to vote), please do so. Chase is giving away $5 million to charity, and I have a cause that I support.

Please click on this this link: Facebook Users, I Have a Favor to Ask, then follow the instructions.

Mike "Mish" Shedlock