The U.S. Begins an (Un)employment Experiment

Observations on the Capital Markets – Week Ended January 3, 2014

Extended unemployment benefits stopped for 1.3 million people at year-end. This doesn’t change their employment status . . . they just stop getting unemployment compensation. Extended benefits (of up to 99 weeks) was part of the recession-fighting fiscal stimulus package. A question was: did this create a dis-incentive to find a job (aka “funemployment”).

We’re about to find out: will those people continue to look for work (remain unemployed), take whatever job they can get (potentially becoming employed part-time for economic reasons) or just drop out of the workforce (no change in their job-hunting behavior, just no longer saying they’re unemployed and collecting benefits)? I think we’ll learn a lot about the U.S. labor force from watching the impact of this change.

Last week’s economic news was generally strong

  • Initial jobless claims were 339K . . . normal for this point in the cycle.
  • The ISM manufacturing index was strong again at 57 (above 50 means expansion. Below 50 means contraction). New orders were above 60 for the fifth consecutive month.
  • The Markit manufacturing Purchasing Manager’s Index (PMI) ticked up to 55.
  • Construction spending rose again in November. Total construction spending is up 5.9% year over year . . . almost all of the growth is coming from the residential segment.
  • Consumer confidence rose.

A down day on the first day of the year is not a bad omen

  • The S&P 500 posted its first opening day decline since 2008. According to Howard Silverblatt at S&P, the day and full year have moved in the same direction 50.6% of the time and in different directions 49.4% of the time.

More mixed news on housing

  • Pending home sales were essentially flat month over month in November, after falling 5 months in a row. They’re down 1.6% year over year.
  • The Case-Shiller Housing Index ticked up in October; it’s up 13.6% year over year, a cycle high rate. (It’s a moving average, released with a delay and is more heavily weighted to the big bubble/bust/rebound cities than the national average.)

Bernanke’s speech at the American Economic Associating Meeting was predictably upbeat

  • “The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in the coming quarters . . .” Comment: One would hardly expect him to say: “well, I’m leaving you with a big mess.”

Asia watch: signs that Chinese growth is continuing, but slowing

  • Official Chinese as well as HSBC manufacturing PMI releases showed factory activity slowed month over month in December but remained in expansionary territory.
  • A government report showed local Chinese government debt is up 67% since end-2010; not sustainable.
  • Japanese manufacturing PMI ticked up. The Bank of Japan indicated it wasn’t letting up on its monetary policy.

Europe watch: things continue to improve slowly

  • Latvia joined the Eurozone on Jan 1, becoming its 18th member country.
  • Country-level manufacturing PMIs generally ticked up.
  • Portugal’s president signed an austerity-oriented budget.
  • Greece took over the rotating presidency of the European Union.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg.

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