Adjusted Monetary Base Goes Vertical

Adjusted Monetary Base Goes Vertical

Tyler Durden's picture

Just in case there was any confusion in the interpretation of the M2 chart, here is the latest just released Adjusted Monetary Base.
A succinct reminder from Mises Institute: "The Adjusted Monetary Base is the one monetary component completely under the control of the Federal Reserve." As we expected a month ago when predicting the end of the SLP program, look for this chart to surge to about $2.7 trillion as the combination of SLP unwind and another $500 billion in UST purchases adds another $600 billion to the BASE. The increase of $142 billion in the last two weeks is the 5th largest Adjusted Monetary Base expansion in history. The ongoing verticalization of this chart may result in some further acuteness of inflationary expectations.

The Weekly Chart That Needs No Introduction Or Explanation

Tyler Durden's picture


What's the Real Unemployment Number?


Posted 11:00 AM 02/09/11,
Last week's surprisinglysharp decline in the unemployment rate from 9.4% to 9%and equally surprising anemic job growth -- 36,000 new jobs -- left a lot of investors scratching their heads. How could the unemployment rate plummet so significantly while a such atrivial number of new jobs were created?

If we simply extrapolate those numbers, we get some nonsensical results. If adding 36,000 jobs to the 139 million jobs in the U.S. economy lowers the unemployment rate by 0.4 percentage points, then adding just 720,000 jobs should lower the unemployment rate by 8 points -- from 9% to only 1%.

Yet theBureau of Labor Statisticsdata shows that 812,000 jobs were added in the year from January 2010 to January 2011 (138,511,000 vs. 139,323,000). Based on the unemployment rate announced last week, we could expect that those 812,000 additional jobs would have lowered the unemployment rate to near-zero. But of course, we know they didn't.

What gives?

The basic reason why the numbers don't add up is that the BLS is constantly adjusting the variables of this basic equation:

Number of people in the workforce (civilian labor force) – number of people with jobs (employed) = number of unemployed people.

The BLS tracks the "civilian noninstitutional population" -- everyone not in the Armed Forces, school, prison, etc. -- and the "civilian labor force." The category "not in labor force" includes everyone else, including "discouraged workers" who want a job but who have stopped seeking one.

This ongoing adjustment of who gets counted as part of the labor force leads statisticians to lower the unemployment rate -- even though the number of employed people has barely ticked up.

To understand this, let's consider a labor force of 100 people, of which 20 are unemployed. The unemployment rate is 20%. But if 10 unemployed people drop out of the labor force, that reduces the total labor force to 90, and the number of unemployed to 10. As if by magic, the unemployment rate is now only 11%, even though the number of people with jobs remains unchanged.

This is the "magic" behind last week's astonishing decline in the unemployment rate.

Using the BLS data, we can reconstruct exactly what has happened over the past few years of recession and mild recovery.

The U.S. gains about 2 million new residents every year from births and legal immigration. For instance, the civilian noninstitutional population rose from 236.5 million in October 2009 to 238.5 million in October 2010.

Given this substantial increase in population every year, we might reasonably expect the civilian labor force to expand proportionally, as students graduate and new immigrants enter the workforce.

Yet according to the BLS, the civilian labor force was 153.8 million in January 2008 and 153.2 million in January 2011 -- a decline of 600,000 while the population increased by some 6 million. And the not-in-labor-force category expanded by 2 million from January 2010 to January 2011, from 83.4 million to 85.5 million.

How is this possible? When unemployed people stop looking for jobs at their local unemployment office, the government no longer counts them as unemployed. That's how the number of unemployed can drop from 15 million in November 2010 to 13.8 million in January 2011, a decline of 1.2 million, even though the economy created only about 400,000 jobs in those three months.

Over a longer time period, the not-in-labor-force group rose from 78.8 million in January 2008 to 85.5 million in January 2011 -- an increase of almost 7 million.

How do you drop the unemployment rate? Simple: remove 7 million people from the labor force.

The Real Unemployment Level Is. . .

If the labor force reflected the growth in population, then we might expect it to have increased by almost 2 million people a year. Rather than decline by 600,000 over three years, the labor force should have increased by 6 million to about 159 million.

If we take the number of unemployed as roughly 15 million (the BLS number from November 2010) and the true labor force as 160 million (out of anestimated total population of 310 million), then the true unemployment rate would be about 9.4% -- right where it was before the recent adjustment to 9%.

Other government statistical adjustments make equally little sense. Analyst Mike "Mish" Shedlock hasrevealed the inconsistencies of the BLS "birth-death model,"which guesstimates the number of jobs created by small businesses being "born" and "dying." Depending on what the "black box" issues every month (the BLS does not reveal its methodology), the government may report that the economy has created hundreds of thousands of new jobs -- that are often revised away in estimates a few months later.

Job Growth Is Still Weak

For context, let's look at some other employment numbers. According to the ADP National Employment Report, which I reported on forDailyFinancein late December, the economy lost about 9 million private sector jobs during the recession --about 7.75% of all private -sector jobs.

Rather than get bogged down in the legerdemain of the BLS unemployment, birth-death model and not-in-labor-force numbers, we can assess U.S. job growth just by looking exclusively at the number of jobs. Isn't that the meaningful gauge we all seek?

According to the BLS, the U.S. had 138.2 million jobs in October 2009, a few months after the official end of the recession. Sixteen months later, the country had 139.3 million jobs -- a gain of 1.1 million. That's a growth rate of about 880,000 new jobs a year. While that's certainly encouraging, this rate of job growth lags far behind those of previous post-recession recoveries as this chart depicts.

Bottom line: The numbers that matter in the U.S. economy are the total number of jobs and the number of jobs created, not the constantly massaged unemployment rate and not-in-labor-force numbers.

See full article from DailyFinance:

Hosni Mubarak's Economic Achievements


Posted 10:00 PM 02/10/11,

Hosni Mubarak, who ruled Egypt with an iron fist since 1981, became aynonymous with despotism and corruption. Despite weeks of recent protests, he refused to hand over power. But on Friday, Egypt's vice president announced that Mubarak was stepping down and turning power over to the military. While much of the attention has focused on Mubarak's dictatorship, most Americans don't realize that he'd actually won international kudos for his handling of the economy.

Economic improvement has been a long, slow process. Since 1991, Mubarak's policies have reduced the size of the government and increased the size of the private sector.

Two years later, he promisedJudy WoodruffofThe PBS NewsHourthat change was coming slowly but surely: "At the same time we are making reform to the economy with another two, three years. There will be stabilization. At the same time we are working hard to raise the standard of the people who have been affected, but we can't do it overnight."
Reform, however, languished during the rest of the 1990s. The economy took another hit in 1997, when terrorists massacred 58 foreign tourists in Luxor, sending the country's$11 billion tourismindustry -- which represents 11% of Egypt's gross domestic product -- into a tailspin. But tourists began returning in subsequent years, although they're now staying away in droves because of the recent political turmoil. (Experts sayit's costing the country $300 million in lost business.)

Improving the Egyptian Economy
Mubarak began undertaking reforms in earnest in 2004. As theU.S. State Departmentnoted, Mubarak's team "simplified and reduced tariffs and taxes, improved the transparency of the national budget, revived stalled privatizations of public enterprises and implemented economic legislation designed to foster private sector-driven economic growth and improve Egypt's competitiveness."

The policies did yield some benefits. GDP grew around 7% between 2005 and 2008, although it then dipped below 5% as the global economic crisis unfolded. Officials from the International Monetary Fund and World Bank were impressed.

"Sustained and wide-ranging reforms since 2004 had reduced fiscal, monetary, and external vulnerabilities, and improved the investment climate,"according to a 2010 IMF Report. "Investors' confidence in Egypt and appetite for risk have improved since March 2009, and the stock market reversed course, capital inflows resumed, and official international reserves have been rising."

The World Bankspoke of the "reform path" that the Egyptian government began in 2004, arguing that it " established a solid track record as one of the champions of economic reforms in the Middle East and North Africa region." Officials praised the Mubarak regime for its business-friendly policies such as lowering taxes and tariffs.

Improvements Didn't Trickle Down
The Egyptian government, like its U.S. counterpart, has boosted spending and slashed interest rates to restart economic growth in the wake of the Great Recession. It has had some limited success. According to the World Bank, real GDP grew 5.3% in the 2010 fiscal year, up from 4.7% in 2009, but still below the rates recorded during the economic boom.

Still, many Egyptians continue to live in grinding poverty, with 44% either illiterate or semi-literate. According to the CIA's The World Factbook, about 20% of Egyptians live below the poverty line. And those that are educated often are underemployed and working multiple jobs to sustain themselves, says David Schenker, Director, Program on Arab Politics at the Washington Institute for Near East Policy, in an interview withDailyFinance.

Inflation was an astounding 12.8% in 2010. Corruption is rampant, and sweetheart deals are common. The country's education system has been such as disaster that businesses often hire foreigners, claiming that they are better trained than Egyptians.

'The economy is doing great in a wider sense," Schenker says. "There was no trickle-down. ... Your average Egyptian guy on the street did not see" the benefits.

See full article from DailyFinance:

Consumer Sentiment Jumps to Highest Level Since June

It was another decent week for the U.S. economy asinitial jobless claims fell below the psychologically significant 400,000 level and the consumer sentiment index rose to a slightly better-than-expected75.1 in February (preliminary)-- its highest level in eight months.

The consensus of economists surveyed byBloombergwas that the preliminary February sentiment reading would rise to 75 from 74.2 in January. The index was 74.5 in December, 71.6 in November and 67.7 in October. At the start of the recession in December 2007, the index stood at 88.9.

"2011 has started with a couple factors that were completely absent in 2010, and one of them is confidence," Tom Porcelli, chief economist for RBC Capital Markets in New York, told Bloomberg News Friday. "Nowconfidence is starting to come back," which is supporting the U.S. economic recovery.

In February, the current economic conditions component of the sentiment survey surged 5 points to 86.8 in February from 81.8 in January -- its highest reading since January 2008. However, the consumer expectations component dipped to 67.6 in February from 69.3 in January.

Better Days Ahead

Consumers' outlook on inflation remained the same in February. The one-year inflation outlook was unchanged at 3.4% in February; the five-year inflation outlook, unchanged at 2.9%.

Economists, business executives, and policymakers monitor the consumer sentiment index because, historically, consumers' attitudes have correlated with their decisions to spend. In general, rising sentiment leads to increases in consumer spending, or the maintenance of a level of spending, while falling sentiment predicts the reverse.

February's preliminary consumer sentiment report is a win for the economic bulls, showing that since last autumn, Americans have become more confident that better days are ahead for the economy, and for their personal financial situations. Consumers are encouraged by rises in the stock market, by better-than-adequate corporate earnings growth and by other economic data that indicate that the 18-month recovery is gaining momentum.

The missing piece, as it has been throughout the recovery, is sustained, adequate job growth of more than 200,000 jobs per month. If that occurs, it will increase Americans' job security -- something that, at least historically, has encouraged them to commit to major financial decisions such as buying homes, starting or expanding small businesses, or buying new cars.

See full article from DailyFinance:

Will Rising Interest Rates Won't Break the Bull's Run?

Rising interest rates don't usually mean good things for economic growth or stock prices. The yield onthe benchmark 10-year Treasury noteclosed at a nine-month high Wednesday and, sure enough, the following day, Freddie Mac revealed the average rate on 30-year fixed-rate mortgages hit its highest level since April 2010. The 10-year then ticked up again on Thursday, closing at 3.70%.

Homebuyers and CFOs alike know that higher rates mean lower borrowing and less spending. That acts as a drag on theeconomy, corporate profits and, by extension, share prices.

But the yield on the 10-year still has a way to go before interest rates start to hurt the stock market, reckons Jeffrey Kleintop, chief market strategist atLPL Financial. Indeed, for the time being, rising bond yields are actually good news for the stocks.

"The yield on the 10-year Treasury note has risen by about 1.25 percentage points to 3.65% from 2.39% four months ago," Kleintop writes in his most recent report to clients. "With yields now climbing towards 4%, investors are beginning to wonder when rising interest rates may start to negatively affect stock prices."
At the current rate, the yield on the 10-year note, which serves as the benchmark for everything from credit cards to home mortgages, could reach nearly 5% by the summer, a level last seen in July 2007. But it just so happens that rising yields should mean rising stocks prices, Kleintop says -- at least in the near term.

That because, historically, whenever the yield on the 10-year Treasury was below 5%, stock prices and bond yields rose together, Kleintop notes. It's only when bond yields hit 5% that stocks start to suffer (see chart).

"The reason for the different relationship above and below 5%, and why rising yields are good news for stocks right now, has to do with economic growth and inflation," Kleintop writes. "When yields were rising from a low level, they reflected improving growth and low inflation which was a favorable environment for stocks."

By the same token, when yields were rising above 5%, economic growth was accompanied by higher inflation, which threatened future growth. That hurt the present value of futureearnings, which in turn tamped down share prices.

"As economic data continues to reflect solid growth in the coming months, bonds yields and stock prices are likely to continue their climb," says Kleintop. "The tipping point of 5% is still a significant distance away."

For now, the bullish case on stocks can be found in a seemingly unlikely place: a bearish-looking bond market.

See full article from DailyFinance:

Labor Force Participation Rate at 26 year Low

Labor Force Participation Plunges To Fresh 26 Year Low

Tyler Durden's picture

At 64.2%, the labor force participation rate (as a percentage of the total civilian noninstitutional population) is now at a fresh 26 year low, the lowest since March 1984, and is the only reason why the unemployment rate dropped to 9% (labor force declined from 153,690 to 153,186). Those not in the Labor Force has increased from 83.9 million to 86.2 million, or 2.2 million in one year! As for the numerator in the fraction, the number of unemployed, it has plunged from 15 million to 13.9 million in two months! The only reason for this is due to the increasing disenchantment of those who completely fall off the BLS rolls and no longer even try to look for a job. Lastly, we won't even show what the labor force is as a percentage of total population. It is a vertical plunge.

Where are we Relative to Full Employment?

What's Really Ailing Employment: Lack of Demand

Posted 11:00 AM 02/04/11,,

These may be the two most important economic policy questions of our time: What's causing America's high unemployment rate, and what can be done to lower it?
One camp, which includes many supporters of supply-side economics, argues that the problem is largely "structural": Too many Americans don't have the right skills or training, or are living in regions of the country that aren't creating enough jobs.
From this perspective, the solution to lowering the nation's unemployment rate --now 9% with the January report just out-- is fairly straightforward: Americans should retrain, or where additional training isn't required, simply change careers to fields that need workers. And unemployed Americans in job-poor areas should consider moving to where employers are hiring.
It seems like a plausible analysis, with a rational solution. Unfortunately, the evidence doesn't support it.
Is There a Skills Mismatch?
What the evidence does show is that America's high unemployment rate isn't structural but due to a lack of demand.
To be sure, some sectors now have a surplus of skilled workers, many of whom probably won't be employed again in their old fields. For example, many unemployed construction workers -- hit hard by the busted housing bubble -- will probably have to change careers. Two other categories that are likely to need fewer employees in the future: real estate agents and mortgage loan officers.
But that doesn't make America's unemployment problem structural. If it were, we would see high unemployment in only a few sectors, and the problem could be solved by the jobless changing tracks and finding work in other fields.
The reality is, however, that there's a job shortage in almost every sector. And whilethe labor market is slowly healing and should continue doing soas long as the recovery remains intact, job growth is still too tepid -- especially for the millions of Americans trying so hard to find work.
The Economic Policy Institute (EPI), a liberal Washington, D.C., think tank, has analyzed Bureau of Labor Statistics data and found thatjob cutting was "pervasive" during the Great Recession: Almost every sector did it. The institute also found that:
  • During the first 12 months of the current recovery, there were 32 million job openings, more than 10 million fewer than the first 12 months of the 2001-2002 recovery -- itself deemed a "jobless" recovery.
  • As of September 2010, there were between five and six unemployed workers for every job opening since mid-2009, "clearly suggesting a shortage of jobs," the EPI said. The job-seeker ratio is roughly double what it was following the last recession.
  • Since the recovery began, hiring has exceeded openings in the private sector by a larger ratio than it did during the 2007-2009 recession or during the last recession, which refutes the notion that companies are having more difficulty filling jobs, the EPI said.
"There has been little evidence to support the claim of extensive structural unemployment and. . .the pattern of employer behavior regarding job openings, layoffs and hires does not support such a claim,"the EPI wrote.
A $1 Trillion Output Gap
So if the problem of high unemployment isn't a lack of skilled workers in the right sectors, what's causing it?
If you guessed a lack a jobs overall, you're correct. The recession's 8 million-plus layoffs mean not enough jobs are available for all Americans who want full-time work. And all that job-cutting has contributed to a significant output gap -- the difference between actual U.S. GDP and its potential growth rate if the nation were running at what economists consider "full employment."
As the EPI report explained: "The economy is operating far below its potential output because of a shortfall in demand caused by an extreme loss of financial and housing wealth, and the reduced consumption that resulted."
A chart in MarketWatchcolumnist Rex Nutting'slatest article shows the huge extent of the output gap: The U.S. economy, as measured by GDP, is more than $1 trillion below its potential. The size of the U.S. economic pie has shrunk -- substantially reducing the number of jobs available.
American Business Is Already Competitive
Figuring out the true cause of today's high unemployment isn't just an academic exercise: Finding the answer will (one hopes) help guide public policy and private sector decisions.
Critics of the reasoning above will counter that what's needed are public policies designed to increase the competitiveness of U.S. businesses. Again, though, the evidence suggests otherwise: Overall, U.S. corporations are already very competitive and very lean.
Critics also argue that the country needs a lower corporate tax rate or tax code changes that increase investment and help businesses attract needed capital. The evidence to the contrary is overwhelming: U.S. corporations aren't short of capital -- they're sitting on$2 trillion in cash.
Policies Need to Spark Demand
Supply-siders further suggest that what's needed is a large cut in federal spending to reduce the government's role in the economy and make it more dynamic. Indeed, deficit reduction is necessary, in the long term. But cutting federal spending now will simply decrease demand further, pushing unemployment higher in what could become a vicious circle.
What's needed now is just the opposite: Increases in both public and private spending designed to increase demand. Because, as the EPI's analysis makes abundantly clear, America's high unemployment rate isn't due to a lack of skilled workers, but to a lack of jobs caused by a shortfall in demand.
The sooner policymakers and business leaders of all stripes accept that reality and implement policies that increase demand, the faster more jobs will be created, and the sooner America will return to healthy full-employment economy.

Return on Home Improvements

Each year, Remodeling Magazine does a “Cost vs. Value” report to determine which projects pay off the most at resale. In its latest edition, replacement projects remained at the top of the list.
Homeowners looking for the best bang for their buck can look up just how much they might recoup from their kitchen remodel or how smart it is to build that backyard deck. View the “Cost vs. Value” report on Remodeling Magazine’s website.

Unemployment rate falls to 9 pct., lowest since April 2009

See below links regarding the latest unemployment report.

Food Inflation

Why Global Food Price Inflation Really Matters

Posted 9:50 AM 02/04/11,,

See full article from DailyFinance:

Perhaps central bankers are like potted plants, able to subsist on little more than water and sunlight. That would help explain Federal Reserve Chairman Ben Bernanke's statement Thursday that -- rising commodity prices notwithstanding -- overall inflation remains "quite low." As for folks who eat food, well, global food prices hit an all-time high last month, in both nominal and inflation-adjusted terms, according to the U.N.

True, wildfires in Russia last year, drought in the U.S. and flooding and a cyclone in Australia have helped cause price spikes for wheat and sugar. But the longer-term trend is still the same. Global food prices have increased for seven straight months, the Food and Agriculture Organization of the U.N. said Thursday, as its closely watched food price index hit its highest level ever in January.

Food Commodities Rising

"Prices of all the commodity groups monitored registered strong gains in January compared to December, except for meat, which remained unchanged," theFAO said in a release. Indeed, the index topped its prior peak set in mid-June 2008, when the global food crisis set off riots around the globe. Sugar, which has reached all-time highs, has been the main culprit this time around, but prices for cereals and oils also have gone nearly vertical since June. (See the chart below.)

So-called core inflation excludes volatile food and energy prices in an attempt to give a more accurate picture of long-term inflation. That's why Bernanke can say inflation remains muted. Take out food and gas prices, and inflation really is pretty low.

But even some bullish economists aren't buying it, like Ed Yardeni, president of Yardeni Research. He's starting to fret that Bernanke may have unleashed a global inflation beast with his second round of quantitative easing.

"Governments are scrambling to purchase more grains to quell food riots," said Ed Yardeni, president of Yardeni Research, in a Thursday note to clients. "The idea was to avert deflation and to bring back just a tiny bit of inflation. The unintended global consequences seem to be hoarding, hyper-inflating commodity prices, food riots and revolutions."

See full article from DailyFinance: