Saturday, August 8, 2009

The Song of the Dead Black Swan

Historically initial jobless claims (i.e., applications to begin payment of unemployment benefits) have been a leading indicator of recessions when they go up, and recoveries when they go down. After peaking on a smoothed 4 week average basis at 659,000 in early April of this year, they delined slowly through June and then rapidly in July. The current reading is 559,000, or a decline of 15% from the peak.

But the BLS keeps statistics not just of initial claims, but also unemployment of less than 5 weeks duration, 5-14 weeks, 15-26 weeks, and finally, 27 weeks duration and up. And those statistics show a consistent pattern as recessions end: the initial claims peak first and are most leading; as you go longer out into the series, the data tends to get less "noisy" and smooths out, but it also becomes more and more lagging, until the 27+ weeks data always peaks well after recessions are over. In the graphs below, in which initial claims are in blue, unemployment for 5-14 weeks old are in red, an 27+ are in green, notice that blue peaks first, then very quickly afterward red, and with a significant lag, green.

The first graph is for the 1974-75, 1980 and 1981=82 recessions:

This second graph is for the 1991 and 2001 recessions and the "jobless recoveries" thereafter:

And this final graph shows our own recession:

During July, it was contended by some pessimists, including on a Receommended diary here, that the event was a "Black Swan"; that the decline only was because of early shutdowns of auto plants, so laid off autoworkers weren't putting in for benefits in July. It was further contended that once that seasonal effect wore off by about the third week of July, new jobless claims would rapidly rise again through their April highs. Unadjusted jobless claims were increasing, we were told, and were the "real" trend for those who wanted to tell the truth.

But instead of rising, non-seasonally adjusted claims (shown in red in the graph below) have declined by 200,000. Seasonally adjusted claims have also continued to decline on a smoothed 4 week basis (in blue):

Now let's go back to the previous graph. Note in particular the sharp decline in the red line in the graph of our current recession: that is claims that were between 5-14 weeks old in July. In other words, this is unemployment that began no later than June, and therefore cannot include the supposedly downward distortion by auto layoffs that didn't happen in July, and yet still steeply declined.. This data confirms that July's steep decline in new unemployment claims was the "real thing" and not just a statistical blip. In other words, the Black Swan is well and truly dead. It is not just pining for the Autralian outback. It has passed on. It is no more. It has ceased to be. It has expired and gone to meet its maker. It's a stiff. Bereft of life, it rests in peace. It's metabolic processes are now history. It's kicked the bucket, it's shuffled off this mortal coil, run down the curtain and joined the choir invisible. In short, THIS IS AN EX-BLACK SWAN.

But in its dying swan song, it has provided us with further information about what might be ahead. Because as I previously pointed out, unemployment data for the period of 5-14 weeks duration is still slightly leading, and also has less noise.

First of all, in the past, the most the 5-14 week average has ever declined without heralding the imminent end of a recession is 7.5% in 1970. It is now down 17.5%.

Secondly, go back and look at the graph covering the period 1974-82. Recoveries from those recessions, two of which were quite deep, were "V: shaped and featured strong job growth. Notice how the red line declined steeply and consistently.
Next, look at the graph of the 1991 and 2001 "jobless recoveries". Notice that the red line does not decline very steeply at all. In fact, the maximum it has turned down during the entire duration of those "jobless recoveries" was -11% and -14.5%, respectively.
Finally, look at the graph of our own recession. Note that the red line is again declining steeply, just as it did after the 1974-1982 recessions, already off 17.5%, just through the end of June. And because of those aforementioned auto plant closures and start-ups, it is almost certainly going to reported as having declined considerably further when the data is next released in a month.

In summary, the Song of the Dead Black Swan tells us not just that the recession is nearly over, but suggests that at least in the next few months, there could be actual job growth, more robustly than almost anyone suspects.

Friday, August 7, 2009

Weekend Weimar and Beagle

It's that time of the week.

See you on Monday.

July Leading Economic Indicators blow through important inflection points

- by New Deal democrat

As I have previously said, this week we did receive 4 very important new data points on Leading Economic Indicators. Including the late reports from June, here is my latest estimate for July Leading Economic Indicators:

The yield curve is still wildly positive +0.3
Stocks 3 month gain is worth +0.2
New home sales are worth about +0.1
Jobless claims are worth about +0.2

Durable goods subtract -0.2
Consumer sentiment subtracts -0.1
Real M2* has been trending slightly negative, so -0.1

*For someone who formally apologized to Milton Friedman about the Fed's role in the Great Depression, it is astonishing that Ben Bernanke has let real M2 turn negative in the last few months.

So far, that is a +0.4. Adding in this last week's new data points, we get:

average hours in manufacturing+0.2
ISM deliveries +0.1
consumer nondurables +0.2

That brings the net gain for June revisions and July to +0.9!

This means:
(1) 4 months of positive LEI in a row. Three in a row usually is enough to signal a turnaround.
(2) over a 6 month period, 7 indicators are positive, 2 are negative, 1 is unchanged. Unless catastrophe strikes, one of the two negative indicators will turn positive in the next two weeks. That will make it 8-1-1. In the past, 9 of 10 positive for 6 months has always coincided with economic growth.
(3) the LEI are now positive YoY. This also in the past has coincided with economic growth.

This is consistent with economic growth beginning possibly as early as last month.

The coincident indicators will tell us the turn has actually occurred. Of the 5 important ones, real retail sales is already positive. Aggregate hours worked was just reported as unchanged from June to July. Industrial production only fell 0.1 in June, and is projected to rise 0.1 in July. That leaves payroll employment, just reported today at -247,000, as the laggard. We will probably have to wait for actual payroll growth (which could start as early as September), to be confindent that the recession really is over.

Now that is a good way to end the week!

Payrolls Drop 247,000; Job Market Shows Improvement

From the BLS:

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent, the U.S. Bureau of Labor Statistics reported today. The average monthly job loss for May through July (-331,000) was about half the average decline for November through April (-645,000). In July, job losses continued in many of the major industry sectors.

In looking at the report, first note the unemployment rate has been steady now for three months:

In an of itself, that is an encouraging; it indicates there is a possibility the unemployment rate is topping. Adding further evidence the that theory is the general trend of overall job losses:

Note there are two areas. The first shows that maximum job losses occurred in the fourth quarter of last year and the first quarter of this year. However the trend since the beginning of this year is for a continuing decline in the number of job losses per month. As the chart above shows that trend has now been in place for six months, indicating we have a firm trend in place.

But there are other reasons indicating things are improving:

The number of persons working part time for economic reasons (sometimes
referred to as involuntary part-time workers) was little changed in July at 8.8 million. The number of such workers rose sharply in the fall and winter but has been little changed for 4 consecutive months.

This is good news as it indicates the level of people who are forced to work part time not because they want to but because they have to has been level for the last 4 months.

Let's combine this information with the initial unemployment claims information from yesterday:

Note that the four week moving average of initial claims continues to move lower. Also note that according to the Department of Labor the unadjusted (non-seasonally adjusted) numbers fell by 48,000 last week. This is on top of a loss of 90,000 two weeks age and 60,00 next week. In short -- the unadjusted number of initial unemployment claims has dropped by over 200,000 in the last three weeks.

Bottom line: this is a good report.

LEI #4: July Manufacturing hours worked up strongly

- by New Deal democrat

This morning we got the 4th of 4 readings of Leading Economic Indicators this week. In July, average hours worked in manufacturing increased 0.3 hours to 39.8 hours. This is a very positive reading, indicating that manufacturing is beginning a robust recovery (by contrast, last autumn during the collapse hours were declining as much as -0.3/month).

This means that all 4 readings of LEI's this week have been strongly positive:
- on Monday, the ISM manufacturing index showed economic expansion in new orders and deliveries.
- on Wednesday, nondurable (consumer) goods new orders increased a strong 2.7%, to the highest reading in over half a year.
- on Thursday, initial jobless claims declined to 550,000 the second lowest reading in over 6 months, and a data point completely unaffected by the "noise" about early auto plant shutdowns.
- today, hours worked in manufacturing likewise increased to the strongest reading in the last 6 months.

I will follow up later with a post on what the July reading for the aggregate LEI's is likely to be, but suffice it to say, this week's grand slam of strongly positive leading data bodes very well for a return to positive economic growth in the next 3 months.


In addition to the -247,000 loss of jobs in July (still the best reading in 11 months), which confirms the trend towards job gains in the next few months, the aggregate total hours worked in private industry in July held even (0.0). This is important since it, like nonfarm payrolls, is a coincident indicator used by at least one member of the NBER to delineate the end of recessions.

Update: Oh, and amid all the good news, I forgot to add that the unemployment rate actually dropped 0.1 to 9.4%.
A blowout good report!

Forex Fridays

The weekly chart shows the strength of the downtrend -- even when the dollar made a second top both the MACD and RSI printed lower. Also note that prices consolidated in a triangle pattern as they fell and then moved lower. Finally, the 10, 20 and 50 day EMA are all moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.

The daily chart shows the consolidation and fall in more detail. Notice the triangle consolidation pattern followed by the move lower. Also note the EMA picture -- the shorter EMAs are below the longer EMAs, prices are below all the EMAs and all the EMAs are moving lower. Also note the 20 day EMA provided upside resistance for prices last week.

Bottom line -- this is a bearish chart.

Thursday, August 6, 2009

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Prices are moving sideways after their strong move higher. Notice that prices and EMAs are still in a strong/bullish position -- prices are above all EMAs, the shorter EMAs are above the longer and all the EMAs are moving higher. However -- tomorrow we have the employment report which will be a very important number.

Stay tuned ....

From Invictus: I'm Not Convinced

Let’s get straight to the most recently updated charts of four critical NBER recession-dating metrics:

First up, Employment, on which we’ll get a new read Friday. If today’s ADP print is any indication, we’re still looking at a nonfarm jobs loss of roughly 300,000. Here’s the chart through last month’s print (including data on previous recessions):

Industrial Production is still declining, and has certainly not troughed or signaled any uptrend whatsoever.

Real Retail Sales are flatlining, probably about the best that can be said for any of the metrics the NBER looks at:

Real Income, which we just got, is not a pretty picture, as it continues

If we peel back the numbers a bit on Real Income, what we see is not encouraging. Private Wages & Salaries – the most important component of income – have declined by 6.1% year-over-year. Dividend income has been cut by one fifth, interest income by 4.5%. Proprietors’ income is down 8.0%. As we have seen previously, Personal Current Transfer Receipts (i.e. money from the government) has grown by 10.2% over the past year. Bottom line: No organic income growth. Is this the stuff of which sustainable recoveries are made?

Finally, let’s take another look at Aggregate Weekly Hours (professor Jeffrey Frankel’s favorite metric). Still declining, and at a record low last time it printed.

There can be little doubt that companies increase hours before they hire new employees. It’s just good business sense. There is HUGE slack in the labor market.

Some other things we know:

Q3 GDP will print positive, of that there’s little doubt. Could be 3% for all I know. Recall this, however (all data as recently revised by BEA): Q1 of 2008 printed -0.7%. President Bush signed his $150 billion dollar stimulus plan and Q2 printed +1.5%. When the adrenaline wore off, Q3 printed -2.7%, and we all know what happened after that. The point is that much of what is happening now – cash for clunkers, for example – is simply pulling forward future sales into this quarter and consequently weakening future quarters. Similarly, the $8,000 first-time home buyer credit has the same effect. How much can we pull forward, and what happens if/when these programs end (which they will eventually have to)?

We also know that the consumer – 70% of GDP – is still under significant strain and will likely remain so for quite some time to come (delinquencies, defaults, foreclosures, bankruptcies all still at troubling levels). We know that there are six applicants for every job opening. We know that unemployment is headed to double digits (lagging, yes, but problematic nonetheless). We know that there’s a huge overhang of housing inventory. Lastly, we know that Capacity Utilization is at an all-time low.

I still remain unconvinced that the recession has “officially” ended, and would certainly not draw that conclusion solely on positive Q3 GDP. There’s a reason the NBER analyzes a host of data, and through my lens most of it has not yet signaled a trough. In any event, it will certainly not feel like a recovery for most of America.

Note on recession tracking charts: The charts plot four main economic indicators tracked by the NBER dating committee [I added Aggregate Hours]; each series is indexed to 100 at the start of the recession. For industrial production, employment, and real retail sales, the average series includes the 10 recessions starting with the November 1948 business cycle peak. For real income, the average starts with the April 1960 peak. For additional information, see the Federal Reserve Bank of St. Louis Economic Synopses, 2009, No. 4.

LEI #3: Initial Jobless Claims were ...

- by New Deal democrat

This morning's initial jobless claims report is the 3rd of 4 reports on leading economic indicators this week. The first two, ISM manufacturing and manufacturers' nondurable goods orders, were strongly positive.

Most commentators think the continuing declines in the 4 week moving average of new jobless claims means the recession is close to ending. Some pessimists insist that July's numbers were an aberration and that economic Armageddon will resume, starting with today's number.

Since I will be unavoidably unavailable when this figure is reported, here is a guidebook for what the initial jobless report means:

Today's Initial jobless claims number was:

Very good. The 4 week moving average is continuing to fall. It is getting close to the point where in the past net jobs have increased in the economy, and would be consistent with the recession being virtually over.

Here is the actual report:

In the week ending Aug. 1, the advance figure for seasonally adjusted initial claims was 550,000, a decrease of 38,000 from the previous week's revised figure of 588,000. The 4-week moving average was 555,250, a decrease of 4,750 from the previous week's revised average of 560,000.

Better yet -- here is the unadjusted number:

The advance number of actual initial claims under state programs, unadjusted, totaled 463,062 in the week ending Aug. 1, a decrease of 48,296 from the previous week. There were 382,792 initial claims in the comparable week in 2008.

That means in the last three weeks we've seen an unadjusted drop of 200,000.

Thursday Oil Market Round-Up

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The main question on the weekly chart is are prices forming a double top? While the MACD is still rising prices are still below the previously established levels from earlier this year.

And as the daily chart shows, the current rally has been weak the last few days as prices have formed very weak candles. In addition, prices have already dipped below the trend line once (although they have since risen above it). Finally, it is nearing the end of the summer and with that comes the end of the summer driving season. This could lead traders to start selling positions.

Wednesday, August 5, 2009

Today's Market

I will post this in the morning. I'm in an all-afternoon meeting.

Personal Income Drops 1.3%

However -- there's a bit more to that headline.

Personal income in June fell back heavily due mostly to an end to a specific fiscal stimulus program. Meanwhile, spending and inflation were up. Personal income fell a sharp 1.3 percent after jumping a revised 1.3 percent in May. The drop was worse than the consensus forecast for a 1.1 percent decrease. June's fall was primarily due to a 5.9 percent fall in transfer payments which had spiked 8.0 percent in May from one-time payments under the American Recovery and Reinvestment Act of 2009. In the latest month, the wages and salaries component dropped 0.4 percent after dipping 0.1 percent in May. Consumer spending jumped 0.4 percent after edging up 0.1 percent in May. However, June's gain was price related from higher gasoline prices.

Over the last few months the only thing increasing personal income has been transfer payments from the government. But last month the end of a program led to a drop in income.

Here is a chart of personal income:

The chart better shows the big increase followed by the decrease. If also shows that we've had some severe swings over the last year -- again largely due to transfer payments. Considering the high rate of unemployment it's difficult to see salaries rising anytime soon. However, an extended period of decreasing income will lead to a drop in spending. And on that note, consider this chart of real PCEs:

On a year over year basis (the brown line) we're still moving horizontally which is good. However, we've had three decreases in the last five months on a real (inflation-adjusted) basis:

That is not good as it indicates there is still a fair amount of caution from consumers regarding spending.

Incomes won't increase until we deal with unemployment - and that is going to take awhile. As such, this area of of GDP is going to be touch and go for the foreseeable future.

An Inventory Build Story?

Consider the above chart. Notice two things. First, inventories have been dropping since the second quarter of 2008. Secondly, inventories have contracted at a sharper rate then the 2001 recession. Let's play out a hypothetical: let's assume that demand increases sharply. What happens?

With the U.S. Senate considering a vote on putting more money into the government's "Cash for Clunkers" program, some auto dealers are raising concerns about a new threat to the incentive program: tight inventories.

The clunker program, which offers subsidies of as much as $4,500 to consumers who trade in older vehicles and buy new, more fuel-efficient models, sparked a surge in sales in late July, leaving many dealers with lean stocks of cars and trucks on their lots.

"We've got an inventory issue," Mr. Kelleher said.

Chrysler's stocks are tighter than those of most other auto makers because the company shut down all its plants while it reorganized in bankruptcy court in May and part of June, and shipments to its franchises ground to a halt.

Still, Toyota Motor Corp. only had enough Prius hybrids in stock at the end of July to last 13 days at the current rate of sales, according to Autodata Corp. It had a 34-day supply of Corolla compacts and a 37-day supply of Camrys.

Auto makers consider a 65-day supply optimal, and frequently stock dealers with enough vehicles to last 80 or more days. Inventories have been declining in recent months because auto makers reacted to a deep downturn in sales by slashing production.

LEI #2: June nondurable goods up sharply

- by New Deal democrat

As I indicated at the beginning of this week, the Index of Leading Economic Indicators appears to be at a crucial inflection point. Two of the four reports on LEI data for this week are now in, and both are strongly positive.

On Monday we got the ISM manufacturing index, the coincident part of which is a hair shy of expansion, and the leading parts of which are already showing expansion.

This morning we got June nondurable goods (and durables, which almost exactly tracked factory orders down last week, as usual). Manufacturers' orders for nondurable goods came it at +2.7%. This is a sharp increase, and the best report since the "Black September" panic of last year. Nondurable goods had been the gloomiest data of the 10 LEI's, but with June's number, are now positive for both the last 3 and 6 months.

Under the circumstances, this is an excellent number.

Wednesday Commodities Round-Up

Industrial metals are in a clear and strong uptrend that started in early March. the MACD is rising as is the RSI. The RSI is just starting to approach overbought territory. However -- the RSI can stay pegged over 70 for quite some time. Notice the 10 and 20 week EMA are moving higher and the 10 week EMA has crossed over the 50 week EMA.

The daily chart shows a good advance. First notice along the way we've seen consolidation in the form of pennant and flag patterns. Also notice the very bullish orientation of prices the EMAs -- prices are above all the EMAs, the shorter EMAs are above the longer EMAs and all the EMAs are rising. Prices recently broke through areas of key resistance and are moving higher.

This is fascinating chart. First, prices broke below the lower trend line a few weeks ago. Then they consolidated below this level. This led me to thing prices were going lower. However -- and here's the key point: that was based only on the information available from the chart; it did not take the fundamental backdrop into consideration. And that is what has moved the market higher. Commodities rallied earlier this week in anticipation of a recovery.

And that increase is seen very clearly on this chart -- notice the upward gap accompanied by the rising MACD and RSI. In short, earlier this week traders saw the economy improving.

Tuesday, August 4, 2009

Today's Market

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Here's an interesting point to consider. There are two gaps on the SPYs daily chart. However, they don't conform to the basic description of exhaustion or continuation gaps which usually require high volume. The high volume is not always necessary, but it does help.

Simply put, this rally looks like it is getting long in the tooth and needs a pullback to move higher.

A Market Break-Down by Sectors

The market has rallied from its early March lows. Let's take a look at the various index components to see how they have done. We'll look at them from the largest percentage of the S&P to the smallest.

Information technology represents 18.3% of the S&P 500.

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This is a good looking chart -- it has rallied 51% from it's March low. Prices are above the 200 day EMA, indicating a bull market. This is a standard rally, controlled sell-off that forms a pennant pattern followed by a further rally pattern. Prices are currently above all the EMAs, all the EMAs are moving higher and the shorter EMAs are above the longer EMAs. In short, this is a bullish chart. The only major drawback is the strenght of the latest rally; no market can maintain that type of trajectory for an exended period of time.

Health Care represents 14% of the average.

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Like the technology area, this is a good looking chart as well. Prices have been in a clear uptrend since the beginning of March. We've seen some controlled/disciplined market sell-offs, but in general the trend is clearly higher. Also note that prices are above the 200 day EMAs. The 10 and 20 day EMA have crossed over the 200 day EMA and the 50 day EMA has as well.

Financials represent 13.6% of the S&P 500.

Prices just crossed the 200 day EMA, although the shorter EMAs are still below the 200 day EMA. However, prices are still in a clear uptrend. We have a strong rally, followed by a disciplined sell-off followed by a further rally. The shorter EMAs are all rising and the shorter EMAs are above the mose of the longer EMAs (with the exception of the 200 day EMA). In short, this is anlther great looking chart.

Energy represents 12.4% of the average.

This is not a bullish chart. Like the others, it rallied from the beginning of March. However, after it sold off it has yet to retake its previous highs. The chart is still in an upswing from that level and could still make it. And with oil in a new upswing anything is possible. In addition, this is not a bearish chart; it's neutral with prices vascilating in a 10 point range between (roughly) 44 and 54.

Consumer staples represent 12% of the average.

Prices are above the 200 day EMA, indicating a bull market. In addition, the shorter EMAs are above the longer EMAs, all the EMAs are rising and prices are above all the EMAs. Also note that we've had a strong rally followed by a disciplined sell-off followed by a rally. In short, this is a bullish chart.

Consumer discretionary comprises 9% of the market

This sector started to rise in early March. It formed a double top in early May/June then sold-off in a disciplined downward sloping pennant pattern. Since then it has rallied to new highs. Notice that prices are above the EMAs, all the EMAs are moving higher and the shorter EMAs are above the longer EMAs. This is a bullish chart.

Utilities comprise 4.1% of the average.

Utilities are in a clear uptrend. Notice that along the way the average has had some standard bull market pennant patterns (think standard sell-off). However, prices have continually moved higher. Prices have just crossed the 200 day EMA as has the 10 day EMA. In addition, all three shorter EMAs (the 10, 20 and 50) are all moving higher.

Materials comprise 3.5% of the average.

Materials rose from their march lows, reached a high in early June and then sold-off in a disciplined way. They next rose again, crossing the 200 day EMA indicating a move into a bull market. The shorter EMAs have also crossed the 200 day EMA.

Conclusion: With the exception of the energy sector all of the subsectors are in strong chart formations. This indicates that one sector is not driving this market, but all sectors are participating. In short -- it's a very encouraging sign.

Treasury Tuesdays

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It's important to get a historical perspective on where the market is. While there is concern about the recent sell-off, notice that prices are about where they were in 2008. Also remember that 2008 was the middle of a recession -- a time when people naturally move toward the safety of the Treasury market. This means 2008 prices were not historically representative -- they were to high.

On the 3 month chart, first notice that prices are below the 200 day EMA. This indicates we're in a bear market. Also notice that all the EMAs are moving lower and the shorter EMAs are below the longer EMAs. Finally, prices are below all the EMAs -- the most bearish alignment possible.

And just as a point of comparison, notice the money is still flowing into high-grade corporate bonds and the junk bond market.

In short, these charts demonstrate that the risk appetite is moving back into the market.

Monday, August 3, 2009

Today's Markets

The SPYs continue to move higher. Notice that today's candle was strong, although on weaker volume. In addition, the trend further extends the rally. While today I previously said the market can't continue this upward trend, I still maintain that statement. Simply put, the trajectory is still too high. I would be far more comfortable if the market was moving sideways right now. However....

The transports moved higher today in a big way. That is good news for the rally as this adds confirmation of the trend.

More Signs of Strengthening Manufacturing

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The above chart is from the Chicago PMI index released last Friday. Here is the general trend as reported on the website:

Chicago Business Barometer™ Improved

The Chicago Purchasing Managers reported theChicago Business Barometer improved as the rate of decline slowed, with the highest reading since September 2008.

Business Activity:
  • Prices Paid and Order Backlog indexes declined;
  • New Orders index jumped, while Employment rate of decline slowed;
  • Inventories index was the lowest since mid-1949.

The above charts bear this information out. Like all the other charts from the manufacturing sector (see below) it appears we formed a bottom in the earlier part of this year and have been digging out of the hole since then.

The above chart is from the Richmond Federal Reserve's manufacturing survey. Here is an overview of that report:

In July, the seasonally adjusted manufacturing index — our broadest measure of manufacturing activity — jumped to 14 from June's reading of 6. Among the index's components, shipments leaped 14 points to 16, new orders rose eight points to finish at 24, and the jobs index edged up one point to end at −5.

Other indicators also suggested mostly stronger activity. The orders backlogs index eased four points to 4, while the measure for delivery times edged up two points to 2. The capacity utilization index doubled, adding seven points to 14, while our gauges for inventories grew at a considerably slower pace. The finished goods inventory index retreated 14 points to 26, and the raw materials inventory index moved down 10 points to 8.

And today we had a good report from the Institute for Supply Management:

Manufacturing contracted at a slower rate in July as the PMI registered 48.9 percent, which is 4.1 percentage points higher than the 44.8 percent reported in June. This is the 18th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the third consecutive month in the overall economy, and continuing contraction in the manufacturing sector. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (40.6 percent) corresponds to a 0.2 percent decrease in real gross domestic product (GDP). However, if the PMI for July (48.9 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually."

Here is the chart:

The bottom line is things are looking better.

Will We Have Structural Unemployment

From Reuters:

From auto workers in Detroit too old for retraining, to Hispanic migrants in Arizona with no homes to build, to new college graduates competing with experienced workers for scarce jobs, more and more people are facing long-lasting unemployment.

Since the recession began in December 2007, the jobless rate has climbed 4.6 percentage points to 9.5 percent, the biggest jump since the Great Depression. Worse, the mean duration of unemployment is now almost 6 months, the highest on record.


In the current recession, economists say high unemployment is likely to persist at least another four years. In Michigan, home to the battered U.S. auto industry, nearly 13 percent of jobs may be wiped out, according to research firm IHS Global Insight, and the state's labor market probably won't return to its pre-recession strength until after 2015.


Retraining is the usual prescription, but pay and benefits in new careers are often far worse. Ex-auto workers who once made $28 an hour can now expect more like $9.

"The hardest thing for many auto workers who've been doing the same job for 25 years or so to accept is that instantly, permanently, their standard of living has been ratcheted down 80 percent," said Douglas Stites, chief executive of Capital Area Michigan Works, a career center in Lansing, Michigan.

The housing crisis has worsened the situation for job seekers because areas with high unemployment also have high foreclosure rates, making it hard to sell up and move on.

This is going to be the primary issue coming out of the recession and there is no easy fix. The auto industry went through bankruptcy to shed its problems. As a result, they cut a lot of workers who won't be coming back. In addition, there probably aren't any jobs requiring a similar skill set. Also note the massive amount of construction workers that are now unemployed. Housing is not going to come back in such a degree that all of these people will be able to find jobs.

The only way to cure this problem that I can think of is to find the next big thing. What made the 1990s so beneficial for everyone was there was a new technology that created a ton of good paying jobs which were attractive. That's what we ultimately need here -- the next big thing. The question is will we find it soon enough?

LEI #1: July ISM manufacturing comes in strong

- by New Deal democrat

The first of 4 reports on leading economic indicators due this week is in, the ISM manufacturing report for July, and it is a strongly positive report.

Both leading components, new orders (at 55.3) and supplier deliveries (at 52.0), showed not just slowed contraction, but actually showed robust expansion. Prices (at 55.0) also firmed. (Readings over 50.0 on this report indicate expansion; under 50.0 indicate contraction.)

The overall index came in at 48.9, beating expectations, and while technically still showing ever-so-slight contraction, the ISM states:
A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the third consecutive month in the overall economy, and continuing contraction in the manufacturing sector

Continued readings even at July's level are consistent with future GDP growth in excess of the 2% necessary to create job expansion.

Under the circumstances, this is a very strongly positive report.

Market Mondays

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The SPYs are a bit overextended right now. They have crossed over the 200 day EMA and are also above all the EMAs. The 10 and 20 day EMA have crossed through the 200 day EMA and are moving higher. The 50 day EMA is about to do the same. However, the recent price trajectory is extremely sharp and won't last -- actually, can't last.

The QQQQs have also covered a lot of ground in a short period of time. Prices are above the 200 day EMA indicating a bull market. Prices are also above all the EMAs, the shorter EMAs are above the longer EMAs and all the EMAs (even the 200 day EMA) are rising. While prices are over-extended at current levels, that simply means they have moved up quickly and will probably pull back from these levels.

Like the other two averages, the IWMs are also over-extended. However, notice the EMAs are taking on a very bullish orientation as well -- the shorter EMAs are above the longer EMAs, all the EMAs are rising and prices are above all the EMAs. Also note the 50 day EMA is just crossing the 200 day EMA.

The transports are confirming but there are two technical points that raise concerns. The first is the 50 day EMA is lagging the 50 day EMA of the other averages. In addition, prices have not advanced as strongly as the other averages. However, these are minor points.

Ideally what the bulls would want here is for the averages to consolidate for a few days. The -- assuming a good jobs report on Friday -- again moving higher after a few days of consolidation.