Other than watching tennis, I spent the week tracking some other big stories. Namely the numerous mass layoffs, crumbling corporate earnings and some ill-timed protectionist rhetoric out of the Obama administration.
The week started off with what was termed "Black Monday." Not to be confused with any of the black mondays from last autumn. No, this one was about jobs. Caterpillar cut over 20,000, Pfizer cut 8,300, Sprint Nextel 8,000, Home Depot 7,000, and Texas Instruments 3,400. ING and Phillips cut thousands also in Europe. In total over 85,000 jobs were lost from major corporations; over 70,000 of them in the US alone. Now these aren't just any jobs. These aren't people that ask, "would you like fries with that" 100's of times daily. These are high-paying jobs. And there is very likely a mortgage and family behind every one of them.
But how many people really lost their jobs last Monday? We know that only a limited percentage of workers are employed by such large corporations. How many small or medium sized businesses cut their payrolls as well? How many self-employed real estate agents finally threw in the towel? We have no way of knowing that, but on Friday the 6th, we'll get a poorly calculated estimate.
However poorly calculated that estimate might be, it is one that I've had my eye on for some time. The nonfarm payroll data for January is the report when we get all of the poorly collected data for 2008 restated into a semi-useful number that serves as a representation of the previous year's jobs picture. All year, the Bureau of Lies and Shenanigans (BLS) uses what they call the "birth/death model" to attribute for new business creation. As their logic goes, when one business disappears (Lehman Brothers for example), another one opens it's doors to take its place. Therefore, when Lehman Brothers went bust, most of the ensuing layoffs did not get tabulated as job losses in the September report because the BLS assumed others were hired. The result of this was job loss numbers created in fantasy land.
On Friday, the BLS will look at how many businesses were actually created and will therefore restate it's numbers to reflect a more realistic picture of the economy. As it stands, 2.6 million jobs were lost in the US throughout 2008 (worst since 1945). Expect that number to be revised up substantially, and the rate of unemployment along with it.
However, even if this number is revised upward and the headlines talk about unemployment levels close to 9%, we still know that the numbers are far worse than that. If unemployment was counted like it was prior to the Clinton administration, we would be seeing numbers already up around 13.5%. That would include people who have simply given up on trying to find a job, those who are marginally employed and part-timers who want full-time work. See the chart below from Econompicdata:
And from what I've heard (reliable sources, but can't confirm), those numbers still overestimate the numbers compared to how they were measured during the Great Depression. We're closer to 17% according to them. Peak unemployment was 25% during the Depression. I'm expecting 10% U3 and 18% U6 numbers by the end of 2009. That could easily be optimistic.
Do note, that for anyone thinking about "playing" the Friday number that the BLS has a few little tricks up their sleeve. In the last report they promised to do some more tinkering with the numbers to reflect population changes. How this affects the numbers is anyone's guess.
And why are so many people being laid off? Look no further than plummeting corporate earnings. John Xenakis over at Generational Dynamics does a good job of following these numbers on a weekly basis. He keeps track of the weekly earnings estimate revisions once they disappear from cyberspace. Here is an updated version copied and pasted from his website:
Date 4Q Earnings growth estimate as of that date
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%
Jan 16: -20.2%
Jan 23: -28.1%
Jan 30: -35.2%
The previous 4 quarters look similar, but this quarter has been by far the worst. These clowns were still expecting gains in corporate earnings in December, something I called them out on at the time.
Folks, these are depression level numbers. There's no other way to explain them. A few months ago, readers were taking exception to my using of the "D" word. My response was that "depression" is what it felt like. It's how people were talking, acting, and the numbers were starting to show it.
How else can we tell this is a depression, rather than a simple recession? Protectionism is on the rise. Anyone who has studied economic history can tell you that depression and protectionism go together like beer and nuts. As Ambrose Evans-Pritchard reports from Davos,
The House has voted for a bill that prohibits the use of foreign steel in most infrastructure projects funded by Barack Obama's $820bn (£563bn) rescue package. The Senate is drawing up plans to widen that to all manufactured goods.
This is what happens when a country loses half a million jobs a month, and when the state becomes spender-of-last-resort. Taxpayers are tribal. They do not want precious stimulus to feed the foreigner.
Even so, this Dutch auction has the disorderly feel of the Smoot-Hawley Tariff debacle in 1930, though this time the collapse of commerce – if allowed to happen – will have very different consequences for the global balance of power.
Steel tariffs. How original. And what if American steel is twice as expensive? Heck, why don't the US steel producers all agree to charge 5x too much?
To be sure, like all tariffs, this one will result in more lost jobs than it protects. The US taxpayer will get a raw deal for it's production, which would otherwise have been used to consume, save or invest in something that would produce jobs elsewhere. This is such elementary economics, that only a politician (or a Keynesian) would propose it as possibly beneficial. Expect more to come. More from the article:
The penny is starting to drop that the US is not going to be the greatest victim of this slump. Other parts of the world are starting to suffer more. Those countries – China, Japan, and the Asian tigers – that have staked their fortunes on exports to the West risk being slaughtered. So too does the whole nexus of commodity states that lived off the boom. They are all leveraged to America.
Nor is the US about to suffer its condign punishment for years of hedonism. It is not facing the predicted dollar collapse or the mass dumping of US Treasury bonds – yet. The dollar has surged against sterling, Aussie, rouble, rupee, and real.
This is a theme that I have unintentionally arrived at as well. The US got so carried away with its consumption, that most other nations were falling over themselves to sell them stuff. Now that the party is over, the suppliers have less to fall back on than the consumers - who can simply choose to consume less.
In hindsight, it is astonishing that the "decoupling doctrine" still passed for orthodoxy in Davos a year ago. It was a given that the Brics (Brazil, Russia, India, and China) were strong enough to power ahead under their own steam. "What were they smoking?" asked Nouriel Roubini, the prophet of the crisis.
The evidence is in. Exports fell 42pc in Taiwan's last month of data. Japan's industrial output crashed 9.6pc. Korea's economy shrank at 21pc annualised in the fourth quarter. China is contracting on a month-to-month basis. "The decoupling dream has been shattered. China has hit a wall," said Stephen Roach, head of Morgan Stanley Asia.
Indeed. Asia is coming unglued.
The other penny starting to drop is that trade wars have asymmetric effects. The Great Depression taught us that they hit surplus states harder than deficit states. Britain avoided the worst of the 1930s, although – or should that be because? – it retreated into an Empire trade bloc. America has the strategic depth to do the same, should it wish to do so. It may conclude that this is the best way to rebuild the US industrial base (as Germany did from 1933 to 1938, with success).
So, as the world's leaders awaken to the danger that the sole superpower may turn its back on the open system that keeps us all afloat, they line up to plead for free trade.
China, India, and Russia were among the loudest in Davos, though all three have already taken steps to protect their own steel mills. Germany's Angela Merkel spoke darkly of "command economy experiments", and slammed US car-bail as a trade "distortion", even as she crafts a clever version for German cars.
Gordon Brown says we all face ruin if we "let the protectionists take over", yet UK banks under the state's thumb are being told to cut foreign lending. France's Christine Lagarde says – with refreshing candour – that protectionism has become a "necessary evil".
We are all mercantilists now.
Based on the ideology of the people mentioned above, I don't think many are surprised to see the "say one thing, do another" in action. Unfortunately, for us regular people, we know something else from studying economic history. And it is that just as sure as protectionism follows depression, military conflict follows protectionism.