As we noted last Monday, most economists consider the labor market as a lagging economic indicator. That is because on initial signs of economic recovery firms will tend to call back laid-off workers and increase overtime before they make the commitment to increase their payrolls. In this vein the latest monthly jobs report, which showed an unexpected drop in the unemployment rate and a smaller than expected decline in payrolls, was heralded as a positive sign or a green shoot as it were, that the recession has ended.
Perhaps the recession is over, but has the recovery begun? If it has, does this justify Wall Street’s $85 oil forecast (which translates into +$3 gasoline at the pump) in today’s environment?
Here at , we do not think so.
For starters, that unexpected decline in the unemployment rate to 9.4% was largely explained by a 2.7% (422,000) reduction in the civilian labor force. The employment-to-population ratio – which smooth out outliers by looking at employment as a percent of the population, rather than as a percent of the labor force – dropped to the lowest level since April 1984, 59.4%.
More importantly, over the last 12 months average hourly earnings have increased by 2½%, while average weekly earnings have risen by only 1% due to declines in the average workweek. Of the long-term unemployed, 1 in 3 were jobless for 27 weeks or more. Therefore, Americans are working less and earning less. Consequently, we are going into hoc at a record pace. Moody’s Investor Services reported that in May, the latest month for which data is available, the U.S. monthly credit card charge off rate – the rate at which banks do not expect credit card balances to be repaid – surpassed 10% for the first time and hit a sixth straight record.
Furthermore, the extant retrenchment in the housing bubble correlates to negative mortgage equity withdrawal (MEW) rates. That means overleveraged consumers can no longer use their homes as ATMs, i.e. Americans are now forced to live within their incomes… assuming they are still drawing an income. In other words, the American consumer is still under tremendous pressure.
Add to this the doubling in oil price since the first quarter and we fail to see why Friday’s reported decline in the University of Michigan’s preliminary consumer confidence survey was a “surprise”.
As we noted in the July 06th issue if apropos the “unexpected” drop in the Conference Board’s consumer index, since February, when the confidence index bottomed, 2.6 million Americans have lost their jobs and gasoline at the pump rallied 40%. It is our contention that the energy tax break Americans were able to reap in the fourth and first quarters was the single largest driver behind the rebound in consumer’s attitudes. Now that that tax break has been repealed, what else do consumers have to look forward to? The jobs market is tenuous, credit card bills are mounting and we can no longer extract equity from our homes to pay for the essentials, like…the Margaritaville Frozen Concoction Maker, only $259 on Amazon if you order today, $348 if you go with the deluxe model.
Bottom line, perhaps the recession is over, but given that consumer spending is responsible for more than two thirds of the U.S. economy, the recovery is in doubt. In terms of our glass, it might be half full, but if you recall those dreaded word problems from ninth grade algebra… if you put X ounces of water per minute into a cup and take Y ounces per minute out, how long will it take the cup to overflow? In our case, X is represented by massive government borrowing (aka “stimulus”) and Y is represented by the potential of a jobless recovery. The implied assumption here is that X > Y.
If it is not, then the real question is, how long will it take our cup to drain?
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.