Friday, October 2, 2009

Unemployment Rises as Car Sales Collapse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. jobs report this morning didn't indicate an economic recovery, it looked more like an economy mired in severe recession - and this is after more than $4 trillion dollars spent on bailouts and stimulus so far. The latest government stimulus program that was supposed to be saving the economy (as were all the others), Cash for Clunkers, seems to have had no residual effect on the auto industry. Data out yesterday indicate that sales fell right back to the worse levels of the recession the moment the program ended. The ISM Manufacturing report yesterday showed a drop in U.S. manufacturing activity from August to September. There is still some glow from the Clunkers program however and a bigger drop will likely be seen next month. If this is economic recovery, who needs a deep recession?

The jobs report can only be described as ugly all around. While the headline unemployment rate rose to 9.8%, the alternative measure which includes discouraged workers and forced part-timers reached 17.0% (that's the U.S. government's official number). Hours worked dropped to an all time low. The number or workers unemployed for over 6 months is also at a record. The number of job losses for July and August were revised upward by 13,000. The government further stated it might raise the total number of unemployed in its year end revision. The number of job losses this month was 263,000. Economists, almost all of whom think the recession is over, had expected only 180,000. Nothing, and I mean nothing, in the employment numbers indicates a recovering economy.

Auto sales in August and September illustrate quite clearly the impotence of government stimulus in reviving an economy with major structural weakness (Japan in the 1990s and 2000s had one stimulus program after another and is still recessionary). U.S. auto sales reached about the 14 million annual rate in August. The Clunker program ended on August 31st. September auto sales now look like they will be a bit over 9 million at an annual rate. This is as low as the lowest sales figures recorded last February and April. So once the stimulus was removed auto sales slipped right back to the bottom. Economic 'recovery' that only takes place if there is government stimulus is no recovery whatsoever.

The ISM manufacturing index was still above 50 (the point that divides expansion and contraction) this month, even though it fell from August. The index declined 18 months in a row before last month. Cash for Clunkers juiced up the numbers considerably in August. They could easily fall back into negative territory in October. Production, new orders, exports, and employment were all down in September. The item in the report that is expanding most rapidly? It's prices paid, which is a measure of inflation.

While continued massive government stimulus will not revive a structurally damaged economy, it can be very effective in creating out of control inflation. The more the economy doesn't budge, the more stimulus the government implements. In the current state of affairs in the U.S. that also means more money printing (the Japanese did not have to resort to this). Gold closed at $1004.30 today in New York - above its key breakout level of $1003.50. Some years from now, we will probably look back and wonder how gold could ever have been so cheap.

NEXT: Recovery? Don't Bank on It

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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