Believe None of What You Hear, Half What You See
June 11, 2009 - Some good news hit the wire this morning; Jobless Claims Drop to 601,000; Retail Sales Rise says the Associated Press. Really? Not so fast.
Unemployment - Click Here for Full Government Report
Reading through the press release we find that the Labor Department announced initial unemployment claims fell by 24,000 to a seasonally adjusted level of 601,000. Reading closer you will see that people claiming benefits for more than a week rose 59,000 to more than 6.8 million, the highest level EVER since records have been kept. Does that not make it increasingly apparent, that although initial unemployment may have lessened, ongoing unemployment is actually getting worse?
Continuing through the press release we also find that the Labor Department adjusted its unemployment figures from last week. If you recall, at that time they said that continuing unemployment claims had fallen by 15,000. This decline ended an unprecedented 18 week run of increasing claims, sparked more discussion of an economic recovery, and helped the market to rally. However, today we found out that rally was for not as the Department of Labor has admitted those numbers were inaccurate. Today they recanted their figures and represented that last week claims actually increased by 6,000. What that means is that last week ongoing unemployment actually increased for the 19th straight week, certainly nothing to cheer about. It makes you wonder what they will have to say next week about this week's figures doesn't it.
If you have been reading my writing for any period of time you know that I do not believe the official unemployment number (known as U3) is accurate. There are several reasons I feel this way, but one of the major reasons is that it does not consider people who leave unemployment for underemployment. Accepting underemployment is one very real factor that can make initial unemployment claims drop, especially if ongoing unemployment claims are going higher. I'll digress on this point for today, but to make a long discussion short winded, following what is called U6 unemployment is decidedly more accurate than following U3 unemployment. From the Bureau of Labor Statistics ("BLS"), U6 is currently sitting at 16.4% and is defined by them as including:
"Marginally attached workers or persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule."
In layman's terms U3 does not include workers who have given up looking for work but still want a job, workers who have given up looking for a job all together because they feel they can't find one or were kicked off unemployment, or workers who have taken a lesser job that they normally would not hold because they cannot find suitable employment; U6 includes these people. All in all, U6 suggests a very different employment picture than U3 and today's headlines should be looked at with extreme caution. Especially since the Department of Labor has a history of "fudging numbers" and has represented that ongoing unemployment has continued to increase.
Lastly, let us not forget that a person cannot collect unemployment insurance forever. At some point in time a person's unemployment benefits eventually run out. That time frame varies from state to state, but most will only pay for 26 weeks. After that time, if unemployment runs out, under U3 a person is no longer considered unemployed. Does that make any sense?
Retail Sales - Click Here For Full Government Report
Reading through the AP press release one will find that retail sales rose for the first time in 3 months; that's great right? Again, not so fast. A closer look at the numbers reveals that the increase in sales was largely driven by demand at auto dealerships, for food, for clothing, and increased revenue at gas stations. In other words the sales numbers are being lead primarily by purchases on (mostly) essential goods and heavy discounting. Let's break that down.
The report shows that filling station receipts were up 3.6%; a misleading statistic as the figure is not adjusted for price increases. Fuel prices have gone up roughly 25% throughout most of the country over the last several weeks. This price increase has helped to improve revenues and ultimately retail sales receipts. Further, what is not discussed in the report is the demand situation for retail gas. According to the Energy Information Administration's report released yesterday, summer demand for fuel is off 2.9% from last year at this time. Considering how weak demand was for fuel last summer, this year's demand situation is alarming. Lastly, within the same retail spending report we see that if we were to exclude fuel receipts retail sales were up only .2%.
As for increased demand in auto sales, this one is a no brainer. Of course auto sales are going to increase when two of the largest auto manufactures in the country go bankrupt and fire sale inventory. Over the past several weeks Chrysler has announced that 789 of its dealers would be closing their doors. In similar fashion, during the same time period GM has announced that roughly 2,450 dealers would be going out of business. Is it not obvious what these roughly 3,000 dealerships have been doing? If you thought "having fire sales to reduce inventory" you got the right answer.
According to AOL Money and Finance many new cars have incentive discounts between 21 and 29%! When incentives are this high of course sales are going to increase. Further still, as if 25% off wasn't enough to increase sales, President Obama has also held a government carrot in front of car buyers faces. In particular he has been touting his "Cash for Clunkers" plan and has proposed a voucher for $4,500 to any buyer of a new vehicle who replaces a model which is not as fuel efficient. Taking that into consideration, discounts could potentially climb as high as 35% on some models. That means that at the average cost of a new car in the US ($26,000) a perspective buyer can potentially lop $9,100 dollars off the as stickered price. All in all if you exclude gas receipts and autos from retail sales, retailers gained .1% in the month of May. Is this amount even statistically material given the variability and margin of error within the retail sales figures? Should this report be enough to make the stock market rally? I think not.
Don't believe everything you hear
Now for a string of questions on retail sales: How long can auto discounts be sustained at their current levels? What will keep car sales rolling when discounts have to be repealed? How long will rising oil prices subsidize falling demand for retail gasoline? Perhaps most importantly, as retail sales are being propped up by fuel prices and auto discounts, how long will it be before they are once again negative with U6 unemployment at 16.3%? Given that 60 to 70% of our economy is consumer driven, my guess is not long.