The Fed roiled the markets this week announcing the end of QE may be near if… A few things to consider: we’ve heard this before, the “if” is a big “if” (see below for some insightful quotes from John Mauldin) and, remember QE was the extraordinary measure taken by the Fed after dropping rates no longer accomplished the Fed’s goals. This month, the Fed noted that the “downside risks to the outlook for the economy and labor market [has] diminished since last fall” while in May they noted that they “continued to see downside risks to the economic outlook.” Nevertheless, the markets responded. An interesting observation by a market strategist I spoke with this week was that we are in for a period of volatility and there is no way the Fed starts tapering until, the earliest, 2014. This sentiment was echoed by David Goldman, head of Macrostrategy in this week’s Barron’s where he highlighted the “lack of sources for growth.” Our advice, pay attention to the details and not the headlines.
In Sunday’s New York Times, there was an article discussing FEMA’s recent denial for full disaster aid to West, Texas, the town that suffered major damage and deaths from the fertilizer plant explosion. The reason for the denial is that Texas failed to demonstrate it lacked the resources to address the approximately $17 million in uninsured and underinsured damages to public building, equipment and utilities. So, Texas, which has taken steps to keep its fiscal house in order, is told to tap its stabilization fund while States that do not make the hard decisions to clean up their fiscal mess get to tap FEMA’s coffers when disaster strikes. For the record, couldn’t the same be said for North and South Dakota.
DIVER Analytics, Map Module; FEMA.
A House bill for farm aid did not pass this week. The bill included farm program like direct payments to farmers, crop insurance and disaster assistance for livestock producers. I’m not going to get into the politics of farm subsidies, but the defeat of this bill brings to the fore an issue we have commented on previously – drought conditions. In addition to the obvious, cattle and livestock producers will be hit pretty hard. Recall, last year was the worst drought in fifty years and many producers had to kill thousands of cows and other livestock. Hence, the need for disaster relief provided for by the farm bill. Absent a resolution, States hit hard by the drought and reliant on farming may see an impact on their revenues. While drought conditions are certainly better than they were a year ago, the impact of the drought may be felt in the months ahead.
State Employment Update and Job Growth
A couple of weeks back, the markets were focused on the monthly Household Survey, you know the one that focuses on 60,000 as opposed to more granular details. This week, without much fanfare, the State level data for May was released and the BLS headline read “Jobless rate down in 25 States, up in 17 in May.” Beyond the headline, we learn the growth (or lack thereof – whichever side of the argument you prefer) is month on month and we also learn that, according to the BLS, nonfarm payroll employment increased in 33 States and DC (good thing they don’t count far employment – see above). We decided to take a look beyond the month.
The below shows Job Growth over the one year period. Yellow, green and blue show growth with California and Utah leading the way with growth greater than 3%. By our count (for the one year period), 36 States saw Job Growth while 32 saw growth in their Labor Force. We encourage our readers to keep an eye on this week’s data when Personal Income is reported.
DIVER Analytics, Map Module; BLS.
Things seem pretty good on the job front, that is, until you look at Unemployment at the State level and realize we still have a long way to go and, to those who worry that the Fed won’t be able to keep their word (qualified word), some support for your case. States in red are at 7% or higher – 23 to be exact (of which 7 have a lower Labor Force than one year ago).
DIVER Analytics, Map Module; BLS.
All of which leads me to some interesting observations from John Mauldin’s June 15 “Thoughts from the Frontline.” In his weekly, he takes a look at the predictions of economists, the Feed and government. Really worth a read. Before you read on, if you are an economist, have any relation to one or are simply a fan of economists (apparently they have fan clubs too), I am merely passing on the thoughts of Mr. Mauldin (who I find to be very intelligent and astute) and present the same to make the point about last week’s market reaction to the Fed’s statement.
The problem is that economists take these predictions so seriously, and so do politicians and investors. I think you might agree that the statistical probability that we will not have a recession in the US for the rest of the decade is quite low, yet not one budget projection assumes a slowdown, let alone a recession, which would absolutely devastate any budget as far as deficits are concerned. “Economists Are (Still) Clueless”, Thoughts form the Frontline, 6/15/2013, p.4.
Think about that in the context of a State or local budget as well.
In one of the broadest studies of whether economists can predict recessions and financial crises, Prakesh Loungani of the International Monetary Fund wrote very starkly, “The record of failure to predict recessions is virtually unblemished.” He found this to be true not only for official organizations like the IMF, World Bank, and government agencies, but for private forecasters as well. They’re all terrible. Loungani concluded that the “inability to predict recessions is a ubiquitous feature of growth forecasters.” Most economists were not even able to recognize recessions once they had already started.
In plain English, economists don’t have a clue about the future.
If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.
Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions on 1990, 2001, and 2007 it also didn’t even recognize them after they had already begun. Id. at pp. 4-5.
Have a great week.
Gregg L. Bienstock
CEO & Co-Founder, Lumesis, Inc.
This Week’s Data :
- Job Growth, May 2013, State
- Unemployment and Unempl. Rank Change, May 2013, State
- Weekly Initial and Continued Jobless Claims, State, 6/8/2013
- Drought Intensity, County, 6/18/2013
- UPDATED: ARC as % of General Fund Revenue and Expenses, State, 2012
- UPDATED: Percent of ARC Paid, State, 2012
- UDPATED: Funded Ratio, Pension Plan, State, 2012
- UPDATED: Default Filings - Issuers, County, 2013
- UPDATED: Special Event: Tornadoes, County, 2013
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