Memos to the FOMC:
The Invisible American Twenty-five million U.S. adults are invisible in media coverage of the widely reported 4.9% official unemployment rate.
by Jim Clifton, Chairman and CEO at Gallup
(…) The percentage of Americans who say they are in the middle or upper-middle class has fallen 10 percentage points, from a 61% average between 2000 and 2008 to 51% today.
Ten percent of 250 million adults in the U.S. is 25 million people whose economic lives have crashed.
What the media is missing is that these 25 million people are invisible in the widely reported 4.9% official U.S. unemployment rate.
Let’s say someone has a good middle-class job that pays $65,000 a year. That job goes away in a changing, disrupted world, and his new full-time job pays $14 per hour — or about $28,000 per year. That devastated American remains counted as “full-time employed” because he still has full-time work — although with drastically reduced pay and benefits. He has fallen out of the middle class and is invisible in current reporting.
More disastrous is the emotional toll on the person — the sudden loss of household income can cause a crash of self-esteem and dignity, leading to an environment of desperation that we haven’t seen since the Great Depression.
Millions of Americans, even if they themselves are gainfully employed in good jobs, are just one degree away from someone who is experiencing either unemployment, underemployment or falling wages. We know them all.
There are three serious metrics that need to be turned around or we’ll lose the whole middle class.
- According to the U.S. Bureau of Labor Statistics, the percentage of the total U.S. adult population that has a full-time job has been hovering around 48% since 2010 — this is the lowest full-time employment level since 1983.
- The number of publicly listed companies trading on U.S. exchanges has been cut almost in half in the past 20 years — from about 7,300 to 3,700. Because firms can’t grow organically — that is, build more business from new and existing customers — they give up and pay high prices to acquire their competitors, thus drastically shrinking the number of U.S. public companies. This seriously contributes to the massive loss of U.S. middle-class jobs.
- New business startups are at historical lows. Americans have stopped starting businesses. And the businesses that do start are growing at historically slow rates.
Free enterprise is in free fall — but it is fixable. Small business can save America and restore the middle class.
Gallup finds that small businesses — startups plus “shootups,” those that grow big — are the engine of new economic energy. According to the U.S. Small Business Administration, 65% of all new jobs are created by small businesses, not large ones.
Here’s the crisis: The deaths of small businesses recently outnumbered the births of small businesses. The U.S. Census Bureau reports that the total number of business startups and business closures per year crossed for the first time in 2008. In the nearly 30 years before that, the U.S. consistently averaged a surplus of almost 120,000 more business births than deaths each year. But from 2008 to 2011, an average of 420,000 businesses were born annually, while an average of 450,000 per year were dying. (…)
- The Daily Shot adds this chart:
The next chart shows the contribution to US job creation by company age. Newer firms have been big job creators but the trend is not promising (in part because there are fewer new firms).
Trucking Volumes Recovered in August Trucks handled more freight last month, though analysts cautioned it was too early to call an end to a months-long slump.
The American Trucking Associations’ seasonally-adjusted truck tonnage index rose 5.7% in August from a month earlier to 141.8, just below a record set in February. The report follows DAT’s estimate last week of an 11% year-on-year increase in North American truck volumes in August. (…)
Data from Cass Information Systems, which measures both truck and rail activity, showed U.S. freight shipments in August rose only 0.4% from the prior month, but declined 1.1% from August 2015. Cass analysts also highlighted increased volatility amid persistent weakness in volume and pricing. (…)
Here’s what Cass said:
August’s Cass Freight Index continued to signal that overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels. That said, there have been a few areas of growth, mostly related to e-commerce, with lower levels of expansion being experienced in transit modes serving the auto and housing/construction industries. All of this added up to slightly lower shipment volumes in August on a YoY basis, marking the eighteenth straight month of year-over-year decline. That said, at least on a seasonally adjusted basis, August volume was up sequentially, offering a glimmer of hope that the contraction in volumes may be getting closer to an end.
Unfortunately, the glimmer of potential reason for hope provided by the Shipments Index was not echoed by the Expenditures Index. Total expenditures were down 3.3% sequentially, and the YoY rate of contraction reaccelerated to down 6.3% (after appearing to ease a bit in July, which was only down 5.1%).
What specifically drove August volumes? It wasn’t rail volume. The Association of American Railroads (AAR) reported that August YoY overall traffic for U.S. Class 1 railroads declined, as intermodal units fell 5.3% and commodity carloads originated fell 6.7%. Rails have seen persistent weakness, with overall volumes being negative 82 out of the last 83 weeks. (…) No matter how it is measured, the data coming out of the trucking industry has been both volatile and uninspiring.
GDPNow ticks down
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.9 percent on September 20, down from 3.0 percent on September 15. The forecast of third-quarter real consumer spending growth ticked down from 3.1 percent to 3.0 percent after last Friday’s Consumer Price Index release from the U.S. Bureau of Labor Statistics. The forecast of third-quarter real residential investment growth remained at -6.3 percent after this morning’s housing starts release from the U.S. Census Bureau.
Markets Tighten Ahead of Fed While Federal Reserve officials have been wrestling with whether to tighten monetary policy in recent weeks, the financial markets may have already done much of the work for them.
Stock and bond prices have slumped and the dollar has strengthened. Since Labor Day, the Dow Jones Industrial Average has fallen 1.95%, while the yield on the 10-year U.S. Treasury note has climbed 0.08 percentage point to 1.698% and the WSJ Dollar Index has risen 0.95%. On Monday, the Dow dropped 3.63 points to 18120.17. (…)
The rising cost of borrowing dollars for brief periods is hitting financial institutions and other companies around the globe, a tightening of conditions that further limits already slim prospects that the Fed will raise interest rates at its meeting ending Wednesday.
Reflecting the tighter borrowing conditions, the three-month U.S. dollar London interbank offered rate—a borrowing benchmark—this month hit its highest level since 2009 and has been creeping higher in response to money-market changes due to be implemented next month. That lifts the cost of borrowing for the trillions of dollars of debt tied to the rate. (…)
Bank of Japan Sets Bond-Rate Target in Policy Revamp Japan’s central bank took an unexpected step, introducing an interest-rate target for 10-year government bonds as part of a new policy framework to stoke inflation.
Japan’s central bank took an unexpected step Wednesday, introducing a zero interest-rate target for 10-year government bonds to step up its fight against deflation, after an internal review of previous measures that fell short of expectations. (…)
The 10-year Japanese government bond yield had already been near zero in recent weeks. It was minus 0.06% just before the decision and was minus 0.03% in Tokyo afternoon trading hours after the decision. (…)
Mr. Kuroda said the new rate target makes it easier to respond flexibly to achieve his 2% inflation target. He said controlling bond yields was now the central pillar of his easing framework.
In an additional rhetorical easing step, the BOJ promised to keep the monetary base growing until after inflation “exceeds” 2% and stabilizes there. (…)
The revised “forward guidance” is tantamount to vowing to continue ultra-easy policy for longer than economists generally thought. (…)
The governor acknowledged his change of heart was partly owing to pressure from bankers and others who didn’t like the previous policy because it was hurting their profits—especially when the 10-year yield was deep in negative territory over the summer. Shares of financial institutions, which in recent months have complained of battered profitability by the flat yield curve, rose on average 6%. (WSJ)
Well, no-one quite knew what the Bank of Japan was going to do today, and now it’s done it, there’s also no consensus on what it all means. (FT)
The changes announced today effectively amount to QQE infinity. (Goldman Sachs)
But if the goal was to introduce a policy framework that might quicken the return to 2% inflation, the BoJ’s reluctance to introduce new tools or upsize existing ones makes today’s package seem weak. If the goal was to weaken the yen, today’s announcement also seems ineffective. (J.P. Morgan)
As it stands, markets seem a bit confused, and rightly so. The BoJ has reaffirmed its inflation target and will try to overshoot it. This in spite of the fact that it hasn’t hit its current inflation target, doesn’t seem likely to and hasn’t announced anything that might help it get there or beyond any time soon. (Aberdeen Asset Management)
The BOJ needed to shock and awe, and instead has just performed a simple act of illusion. The bank’s new policies will only create enough noise and distraction to postpone the inevitable conclusion that its actions have been insufficient yet again. The uninspiring new steps announced today are more like minor rule amendments instead of a switch to a whole new game in the contest versus deflation. (Bloomberg)
Two related charts from The Daily Shot:
The Bank of Japan will reduce investments in the Nikkei 225 Stock Average and buy more exchange-traded funds tracking the Topix index, following criticism its ETF buying is distorting the stock market.
The central bank said as part of its monetary policy review that it will allocate 2.7 trillion yen a year ($26.4 billion) to Topix ETFs, while the remaining 3 trillion yen will be spread out between the Topix, Nikkei 225 and JPX-Nikkei Index 400. Previously it had allocated the 5.7 trillion yen across all three measures in a way that favored the Nikkei 225. (…)
The heavy presence of the BOJ in the Nikkei 225 has raised concern among some investors. The central bank is on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 Stock Average by the end of 2017, according to estimates compiled by Bloomberg last month. The bank owned about 62 percent of Japan’s domestic ETFs at the end of July, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. (…)
Forecasts for what would be the first decline in total profits at China’s biggest banks in 10 years are raising concern in the bond market that lenders will need state help to clean up mounting bad debts.
The yield premium for Industrial & Commercial Bank of China Ltd.’s 6 percent Additional Tier 1 securities, which count as capital under Basel III rules, has widened 35 basis points to 311 basis points from the year’s low on Aug. 16. That for Bank of China Ltd.’s 6.75 percent notes rose 29 basis points in the same period. The turn in sentiment came after earnings reports from the largest five lenders last month showed the smallest increase in trailing 12-month profits in at least a dozen years. Both lenders saw the spread on their senior notes, which would be safer in any recapitalization, change little over the period.
Falling interest rates and flagging economic growth are eroding Chinese banks’ profitability just as bad debts mount. ICBC’s net interest margin, the difference between the rates it garners on loans and its funding costs, dropped to 2.21 percent at the end of June, from 2.53 percent a year earlier. (…)
Total profits for the top five Chinese lenders may decline 2 percent this year, snapping a rising streak in the past decade, according to analysts surveyed by Bloomberg. (…)
The spread widening may also reflect a flood of supply of similar securities at home and abroad. China Citic Bank Corp. last month announced plans to raise as much as 40 billion yuan ($6 billion) of convertible bonds. Since Aug. 1, European finance companies raised $14 billion in capital with bond sales marketed in Asia. (…)
Chinese banks’ foreign-exchange data shows that capital continued to leave the economy in August—the 24th straight month of outflows, according to Goldman Sachs’ gauge. And while at first glance the pace slowed from July, Standard Chartered said that when changes in foreign-exchange reserves are netted off against trade and investment flows, August turns out to have been the worst month since January. (…) Higher U.S. rates and a stronger dollar are powerful attractive forces for Chinese capital.