×

Farrell: I Can't See Larry Summers Moving at "Escape Velocity"

Speaking in London, Larry Summers, senior economic advisor to the President, said the US economy, due to the Administration's policies, is "moving toward escape velocity. You hear a lot less talk of "W" shaped recoveries and double-dips than you did six months ago." It's like Captain Kirk telling Scotty to take it up to warp speed. The 162,000 jobs created last month is indeed reason to cheer, and maybe we are escaping from the recent past, but let's break it down critically.

January and February were both revised to the good. February was originally reported as -36,000 and it was changed to -14,000, and January from -26,000 to +14,000. Of the 162K jobs, 48,000 were census jobs which are part time and will go away. A total of 1.2 million census workers will eventually be hired.

Unemployment stayed at 9.7%. The unemployment rate is figured off the "household survey" and that "small" business index showed a growth of 264,000 in the number of people looking for work, so the index did well staying unchanged at 9.7%. Average hours worked per week increased to 34 hours, but average hourly earnings fell by 0.1%. A record 6.5 million people have been out of work six months or longer. Just over 40% of people out of work fall into the category of long-term unemployed. In 1981 and 1982, a dark economic time in US history, the long-term unemployed were about 26% of the work force. The situation is worsened today, said an article in Saturday's Wall Street Journal, by the fact that workers are saddled with underwater mortgages and can't move. In the past, worker mobility helped relieve the unemployment picture, with people relocating.

The wider U-6 measure of underemployment (those out of work, those working part-time and wanting full-time work, or those who have given up looking altogether) actually rose to 16.9% from 16.8%. Temporary jobs (ex the census jobs) rose a strong 40,000. Overall a good report. The economy is moving in the right direction, but at a tortuously sluggish pace. Escape velocity this is not. Not yet anyway.

The Institute for Supply Management Index — ISM — rose again to 59.6, which is a tremendous number. Every component of the index improved except for order backlogs and employment. But these both stayed above the critical 50 level that separates expansion from contraction. Inventories at 55.3 is the highest figure for that segment since July 1984! But keep in mind manufacturing is about 13% or so of the US economy and we need to see a number like this in the non-manufacturing ISM.

Meanwhile, China's ISM-type indices show continued expansion. The official Federation of Logistics and Purchasing measure rose for the 13th straight month. Taiwan, South Korea, and Australia also showed manufacturing growth. Better than 2/3rd's of those countries that have recently reported have shown strength in manufacturing.

Winning a big game changes a lot of things. After President Obama's victory in the health care battle, international news started getting better. Now China looks like it's easing its stance towards both Iranian sanctions and its rigid stance on its currency. Last Thursday, after a one-hour phone call with President Obama, China's President, Hu Jintao, announced he will visit Washington in two weeks for the nuclear security summit. That is just before the deadline for declaring China a currency manipulator. No way does that happen so close to a visit. A deal is in place, I think, and it will be revealed over the next few months.

In recent days, statements in both Beijing and Washington hinted at a thaw. James Steinberg, the deputy Secretary of State, declared the US did not support independence for Tibet or Taiwan. At a reception last Monday for China's new ambassador to Washington, the President was generous in his praise of China. Mr. Obama's signals, and Mr. Hu's acceptance of those signals, indicate both sides realize their relationship cannot be allowed to deteriorate. They are indeed the G-2. David Rothkopf, author of "Running the World," says the "US and China are in a marriage from which there can be no divorce." China indeed seemed to throw its support behind new United Nations sanctions aimed at Iran's nuclear program. US diplomats said they expect China to try to water down the wording of the sanctions, but that is normal stuff. Getting both sides in the same room must be gratifying for the administration.

This follows last week's deal with Russia calling for both sides to cut their nuclear arsenal. Mr. Obama will sign that agreement with President Medvedev in Prague next week. The Comprehensive Nuclear Test Ban Treaty still needs to be submitted to the Senate where 67 votes would be needed. Still a long shot, it now takes on some possibilities. There is nothing like getting on a roll.

_______________________________________
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.