Raise the Economy Threat to "High"
I scribbled a note on my calendar: "Bush lost re-election today."
Baring a major gaff by the opposing team, today's bombshell job report has exposed once and for all the fraudulent claim that the U.S. economy is in recovery. Wall Streeters headed for the bomb shelters this morning after learning that U.S. employers were only able to add a paltry 32,000 workers to payrolls in July just a bit short of the 215,000 to 240,000 the administration had projected would be created last month.
As you try to grapple with the significance of these numbers keep in mind that the economy has to create 150,000 new jobs each month just to keep up with natural population growth. And, if you want to keep the economy from slumping into recession employers have to create 200,000 new jobs each and every month.
The bad July news now makes three months running that the administration has failed to produce the robust job growth promised its $1.6 trillion in tax cuts. Trickle-down has, as it did under Reagan, only produced chuck-full reservoirs at the top and drought at bottom. If anything should trickle down it's only because someone's reservoir sprung a leak.
I have warned for months that we should not to confuse the spurt of economic activity created last year by the Bush tax cuts with a sustainable recovery. Mailing refund checks to a hundred million consumers will always spark a round of spending. But, unless we are ready to keep mailing those checks that spending will disappear quickly. We didn't, and it did.
So, the trickle-down chickens have once again come home to roost.
This morning news included the following other indicators:
* The New York Stock Exchange index, American Stock Exchange index and the Russell 2000 index of smaller-company stocks all tumbled. Declining issues outnumbered advancing ones by 8 to 3 on the NYSE.
* The price of the Treasury's 10-year note rose sharply marking a flight to safety by savvy investors. And the already nervous precious metals investors rushed out to buy more gold which now stands near $400 an ounce.
* And rising energy prices will further dampen economic growth. Oil for September delivery settled at $44.41, up $1.58 a barrel.
Earlier this week I published a complete explanation why I thought the administration was wrong when they claimed we were enjoying a robust recovery. Several readers wrote complaining that I took it down before they could read it, so what better time than today – the day Bush lost re-election – to reprint it.
("Repurposed" From August 3)
I think it may be time to adopt a second color-coded warning system, so I will. I am hereby unveiling the Economic Threat Level System. So as not to reinvent the wheel we will use the same colors as the Terrorism Threat Level System already in place. That indicator was recently bumped from "Elevated" (Yellow,) to "High" (Orange.) Here at the new Economic Threat Agency we scanned this morning's financial news and have decided to kick things off with a burnt orange – a threat level somewhere between Elevated and High. The intelligence reports that contributed to this decision were fresh from this morning's business headlines:
U.S. stocks opened lower on Wednesday after crude oil hit a new high on worries of scarce supplies.Analysis: Both US oil companies and the world's largest oil source, Saudi Arabia, have been cooking their books, though for different reasons. Shell Oil recently got caught inflating its oil reserves by a staggering 5 billion barrels in order to bolster the company's stock price. The Saudis have been lying about how much oil they still have underground in order to maintain its political leverage over the oil-addicted US. The fact is that we all knew that someday demand for oil would outstrip supply, and that day has arrived. Both China and India are industrializing and are demanding their fair share of the black stuff. In the old days the US could ring up a prince in the Sandpile Kingdom and ask they turn the spigot up a bit to ease prices. But the Saudis are now hoarding what oil they have left. Which explains the next headline.
Oil prices surged to yet another record high on Wednesday, battering stock markets and helping keep up demand for government bonds as investors pondered pricey crude's impact on world economic growth. U.S. light sweet crude touched $44.28 a barrel – the highest price since oil futures were launched on the New York Mercantile Exchange in 1983.Analysis: Duh!
New applications for U.S. mortgages eased last week with a dip in refinancing despite steady 30-year mortgage rates, an industry group said on Wednesday.Analysis: Homeowners have been maintaining middle class life styles with cash-out refi's. They paid off their original mortgage by taking out a larger one at lower rates. The extra cash, equity from appreciation, went to improve their homes and other major purchases. This spending contributed to a short up tick in economic activity. But now tapped out, and saddled with an even larger mortgage – many with adjustable rates poised to increase – homeowners are retrenching and are no longer able to fuel further growth. Which explains the next headline.
American consumer spending in June unexpectedly plunged by the steepest margin since the September 11, 2001 attacks, government figures showed.Analysis: It's not just homeowners who are tapped out. Those who did not have home equity to tap have used credit cards to maintain their pre-2001 lifestyles. One credit expert described credit cards as "Yuppie food stamps," a way to maintain standard of living young workers have come to consider an entitlement. U.S. consumer debt has reached staggering levels after more than doubling over the past 10 years. According to the most recent figures from the Federal Reserve Board, consumer debt has finally passed the $2 trillion level representing credit card and car loan debt, but excluding mortgages, of nearly $20,000 per US household. And, defaults and personal bankruptcies are also at record highs and promise to get worse, as the next story indicates.
Layoffs in the United States rose 8 percent in July from the previous month, a report said on Monday, as the job market recovery struggled to gain momentum.Analysis: A free market economy operates just like a natural world eco-chain - trouble anywhere along the chain quickly cascades throughout the entire system. Consumers under stress stop spending, orders for goods slow causing wholesalers to cut future orders from manufacturers, who lay off workers. Those workers then come under stress and stop spending, which then triggers the next downward cycle, as indicated by the next story.
U.S. houses were less affordable in the second quarter than in the prior quarter because of rising home prices and interest rates.Analysis: Hey, isn't this where we started, with homes? You betcha. Rock bottom interest rates over the past three years ignited inflation in residential real estate – good news for homeowners who saw their paper wealth increase, but bad news for those who wanted to buy their first home. These would-be homeowners are now about to get hit with a double whammy. First home prices screamed past their price range and now, while prices are cooling a bit, interest rates are on the way up meaning that even a lower prices will not help much because the monthly payments are too high, which explains the next story.
Outlays for U.S. construction fell unexpectedly in June as spending on housing dropped for the first time in 16 months, a government report showed on Monday.
Analysis: Fewer buyers who can qualify for a new home mean fewer new homes will be built. This will result in construction layoffs – one of the few remaining blue-collar jobs in America where a person can earn a decent wage. Advice to construction workers seeking a new job: hard hats not required at Wendy's.
One final piece of intel on the economy. Our operatives on Wall Street have been tracking sentiment among those who bet their own and their client's fortunes daily on the direction things are heading, and the picture they draw is not a pretty one. The Dow Jones 90-Day moving average has been moving down, down, down for the past six months. This represents the best guess by frontline investors of what's in store for the economy just over the horizon.