Crash in Spanish 2-Year Bond Yield; Monti Calls for More Crisis-Fighting Urgency; No Structural Problems Fixed

Yield on 10-year Spanish bonds remains stubbornly high near 7%, but yield on 2-year bonds is in the midst of a breathtaking crash.

click on any chart for sharper image

Spain 10-Year Government Bond Yield



Spain 2-Year Government Bond Yield



Of the two charts, the second is far more important. Spain will be rolling over short-term bonds, not 10-year notes.

As dramatic as that move in the 2-year yield has been, please note that German 2-year bonds yield a negative .05%.

Germany 2-Year Government Bond Yield



Monti Calls for More Crisis-Fighting Urgency

Bloomberg reports Monti Calls for More Crisis-Fighting Urgency in ECB Standoff

Italy’s Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a standoff over European Central Bank help for Italy and Spain hardened.

Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.

Spain and Italy, whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area, are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time today that Chancellor Angela Merkel supports Draghi’s proposals.

French President Francois Hollande is pushing Monti and Rajoy to request aid from Europe’s bailout fund to help ease markets and protect France from speculation, Italian newspaper la Repubblica reported, without citing anyone.

Italy Hung Out to Dry

“Italy has, to all intents and purposes, been hung out to dry,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., said in an e-mailed comment. “As far as Rome is concerned any external assistance would be the kiss of death. This puts Mr. Monti in an untenable situation.”

Draghi Misunderstood

Spanish Economy Minister Luis de Guindos told ABC newspaper at the weekend that his country awaits details of the ECB’s bond-buying proposals before deciding whether to request aid. Both Italian Bank of Italy Governor Ignazio Visco and Minister for Economic Development Corrado Passera said in separate newspaper interviews that the country doesn’t need a bailout.

Visco told La Repubblica that markets had initially misunderstood Draghi’s comments.

“Not only did the ECB not take any steps backward, but it took decisive steps forward to correct the functioning of monetary policy transmission, and therefore of the stability of the single currency,” he told the newspaper.

Sigh of Relief

For now, the markets are breathing a sigh of relief over lower yields in Spain. Draghi will likely wait now before announcing his plan, assuming he really has a plan other than to buy more time.

I suspect a key part of his plan is to hope he can placate the markets until the German constitution court gives a blessing on the ESM. The court rules on September 12.

Until then, Draghi has every reason to be purposely vague about what he will or will not do. Much will depend on the wording of the ruling. In the meantime, as we have seen previously, a month is a long time in Europe.

No Structural Problems Fixed

The market is cheering now, but no structural problems have been fixed. There has been no work rule reform in Spain, Italy, or Greece. Indeed, France has taken a major step in the wrong direction with president Francois Hollande's proposal to make it impossible to fire workers.

Taxes have gone up across the board in struggling countries, certainly the wrong approach with the unemployment rate in Spain near 25%.

In simple terms, policy moves have been ass-backwards. Good luck with that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Four Different Viewpoints on Employment; Reflections on Biased Reporting

The latest jobs report showing a Gain of 163,000 on the Establishment Survey, But a Loss of 195,000 Jobs on the Household Survey got me to thinking about trends in employment.

Much depends on your frame of reference. I can easily make numbers look good or bad, depending on how I want to present them.

click on any chart for sharper image

Civilian Employment Since 2011 



That certainly looks quite robust, but is that the real sustainable trend?
Here is another view.

Civilian Employment Since 2007




Which trendline is correct?

Civilian Employment Since 2007 - Different Perspective



If I want to emphasize how poor the recovery has been, I just might use the above view.

Notice that actual employment in 2008 was over 146 million. Employment fell to 138 million and has only taken back half of previous losses, making this the worst recovery on record.

Civilian Employment Since 2011  



Returning to the first chart, I just may want to emphasize that a trend change may be in the works.

Indeed, I do think that is the case based on collapsing new orders. I have made the case numerous times.

• Global New Export Orders Have Steepest Drop Since April 2009.
• US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected
• Eurozone New Business Sinks at Fastest Rate in 3 Years; Germany Composite PMI at 37-Month Low; Ass-Backwards Eurozone Policies
• Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless

Reflections on Biased Reporting

The point of this post is not about trend changes, it is about presentation.

I interpret the news and that introduces bias.

Indeed, any commentary whatsoever about the news, by anyone, anywhere, anytime, introduces bias (intentional or not). The only way to not introduce bias is to present data with no comments, no trendlines, and no anecdotes.

Who would read Calculated Risk, Big Picture, Zero Hedge, Naked Capitalism, Automatic Earth, Acting Man, Advisor Perspectives, Chris Martenson, or any other site if they did not offer opinions?

What a dull blogging world it would be without opinions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Zombified Cities Roundup: Detroit Becomes Dumping Ground for the Dead; Financial Urgency in Miami; Oakland Pension Time Bomb; How Pensions Crashed Stockton and San Bernardino

Space does not permit a complete discussion of zombified cities. Such a list would be in the many hundreds. Rather this post is about four cities in recent news that are among the walking dead. One is even a dumping ground for the dead.

Fourth Financial Urgency in Miami in Four years

The Huffington Post reports Miami Declares Financial Urgency For Fourth Year In A Row

Miami City Manager Johnny Martinez declared a state of financial urgency Friday for the fourth year in a row.

The move gives the city commission authority to restructure its existing contracts with police, general employee, and fire unions.

City commissioners agreed to not hike taxes in a budget meeting Thursday night, but instead will look to close a budget gap of tens of millions through union concessions. The $485 million budget must be balanced by September.

"The unions are not cooperating with the process," Mayor Tomas Regalado told the Miami Herald. "We need to have a balanced budget."

Martinez said in a statement that the city will be contacting union representatives to start up two weeks of negotiations. The declaration of urgency has likely incensed police and fire officials; according to Reuters, the latter group argued before city officials Thursday night that their pay has been cut 35 percent in the last 3 years already.

Click on link for a video.

Detroit Becomes Dumping Ground for the Dead

The Associated Press writes Vacant Detroit Becomes Dumping Ground for the Dead.

From the street, the two decomposing bodies were nearly invisible, concealed in an overgrown lot alongside worn-out car tires and a moldy sofa. The teenagers had been shot, stripped to their underwear and left on a deserted block.

They were just the latest victims of foul play whose remains went undiscovered for days after being hidden deep inside Detroit's vast urban wilderness - a crumbling wasteland rarely visited by outsiders and infrequently patrolled by police.

Abandoned and neglected parts of the city are quickly becoming dumping grounds for the dead - at least a dozen bodies in 12 months' time. And authorities acknowledge there's little they can do.

The bodies have been purposely hidden or discarded in alleys, fields, vacant houses, abandoned garages and even a canal. Seven of the victims are believed to have been slain outside Detroit and then dumped within the city.

"Detroit is a dumping ground for a lot of stuff," said Margaret Dewar, professor of urban and regional planning at the University of Michigan. "There is no one to watch. There is no capacity to enforce laws about dumping. There is a perception you can dump and no one will report it."

How Pensions Crashed Stockton, San Bernardino

Bloomberg reports Police Chief’s $204,000 Pension Shows How Cities Crashed

Stockton, California, Police Chief Tom Morris was supposed to bring stability to law enforcement when he was appointed to the job four years ago.

He lasted eight months and left the now-bankrupt city at age 52 with an annual pension that pays more than $204,000 -- the third of four chiefs who stayed in the position for less than three years and retired with an average of 92 percent of their final salaries.

San Bernardino, a city of 209,000 about 60 miles (100 kilometers) east of Los Angeles, is typical of the phenomenon. Its city council voted July 18 to approve an emergency bankruptcy filing, about six years after the panel unanimously lowered the retirement age for public-safety workers to 50 from 55.

The council acted in August 2006 even though Aon Plc, the city’s risk-management consultant, had warned it that such a change would add millions of dollars to San Bernardino’s long- term pension costs. In the fiscal year that ended in June, pensions consumed 13 percent of the city’s general fund, up from 9 percent in fiscal 2007.

“I knew it was going to be costly in the long run,” San Bernardino City Councilwoman Wendy McCammack said of the lower retirement age. “However, this city is one of the toughest to police. In order to attract and retain the kind of officers that it takes to police a city like this, that was a benefit that we had to negotiate.”

Notice the complete ineptitude of  San Bernardino City Councilwoman Wendy McCammack. She was willing to bankrupt San Bernardino by making untenable pension promises to "attract and retain" police officers. Did it work?

Pension Time Bomb Explodes in Oakland

The San Francisco Chronicle reports Oakland's financial time bomb: pensions

It was 1976 when the city of Oakland realized it had a major problem on its hands: A pension created 25 years earlier to benefit police officers, firefighters and their widows was proving too costly to afford.

So the city closed the plan to new employees and later passed a parcel tax to pay for the pension. Yet today, that pension remains the source of one of Oakland's biggest headaches.

It's a generous plan that awards its retirees and widows - who now number 1,086 - raises to match up to two-thirds of the pay of the current-day workforce. But the city's costs ballooned because it never adequately contributed to the pension fund, relied on borrowing for years to give itself holidays from pension payments and watched investments go south. The result of the borrowing is that the pension, known as the Police and Fire Retirement System, has cost Oakland taxpayers hundreds of millions of dollars more than it should have. In 2010, City Auditor Courtney Ruby found Oakland spent $250 million more on the pension than it would have if the city had simply paid into the pension - and that was just for one of its bond deals.

Last month, the majority of the Oakland City Council, at the urging of Mayor Jean Quan's administration, voted to borrow money once again to cover the pension bill - $210 million in new pension bonds that will cost another $105 million in interest over the next 14 years. But the loan will allow the city to avoid paying for the pension from its general fund for four years. If the city hadn't borrowed the money, it would have been forced to take $38.5 million from its roughly $400 million general fund to pay for the pension this year. Such a move would have required deep cuts to city services, which already have taken a hit due to the slumping economy, state budget cuts and redevelopment shutdown.

Wipe out parks, libraries

"If we had to pay this money this year and the next couple of years, the cuts would imperil our Police Department as well as completely wipe out our libraries and parks," said Councilwoman Pat Kernighan. "In a few years, we're going to be in a better position to make the payments."

Complete Idiocy by Councilwoman Pat Kernighan

As stupid as the decision was by San Bernardino City Councilwoman (and it was incredibly stupid), the position of Oakland Councilwoman Pat Kernighan is much worse. Kernighan learned nothing from Stockton, San Bernardino, Miami, or Detroit.

Nor did Kernighan even learn anything from prior history in Oakland. Borrowing has already wrecked Oakland and this complete dunce wants to do more of it.

The only solution that has a chance is for Oakland to declare bankruptcy. Instead Kernighan voted to kick the can down the road one more time.

Oakland Headed for Bankruptcy

Oakland will not be in a better position in a few years. I confidently predict bankruptcy.

Bankruptcy is the only method cities can use to correct absurd pension promises made to police, fire, and teachers' unions.

Advice to Unions

My beef is not with those lowest on the totem pole and their small $15,000 pensions.
Instead, I propose those with the largest pensions should take the bulk of the hit.

Police Chief Tom Morris lasted 8 months and will now receive a $204,000 annual pension. Morris deserves nothing, zero.

My advice to unions is to negotiate with cities in advance of bankruptcy or some judge will come along and do something like slash pensions across the board by 50% as happened in Rhode Island.

Across the board compromises give those like Morris far more than they deserve at the expense of hundreds of workers getting pensions barely enough to live on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan Services PMI Shows Sharp Decline in New Orders; Global New Export Orders Have Steepest Drop Since April 2009.

The global economy continues to weaken, but not in a straight line as China rebounded somewhat, with Japan deteriorating further.

HSBC China Services PMI™ rebounded with the first increase in manufacturing in five months.

July’s survey findings showed business activity (covering manufacturing and services) in China rising at the join-fastest rate in nine months. This was signalled by the HSBC Composite Output Index posting 51.9, up from 50.6 in June. Overall growth reflected an increase in manufacturing production – the first in five months – and a stronger expansion of service sector output. The latter was highlighted by a rise in the HSBC Business Activity Index from 52.3 to 53.1.

Behind the latest rise in service sector activity was a sustained increase in new order volumes. However, the rate of new business growth remained below-trend. This, coupled with a slower rate of decline in new orders placed at goods producers, meant that overall new business rose marginally in July.

Sub-par new order growth meant that capacity was little tested in China’s service sector, with backlogs of work falling for a sixth month in a row. A marginal rise in work-in-hand (but not yet completed) at goods producers was recorded by July’s manufacturing survey.

Jobs growth in China’s service sector also remained below trend in July, despite picking up from the month before. In contrast, the index measuring trends in manufacturing employment fell to a 40-month low, signalling a moderate rate of job shedding.

Commenting on the China Services and Composite PMI™ data, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“The modest gain in July’s HSBC services and manufacturing PMIs implies that the slowdown of the Chinese economy is likely to have stabilized. That said, the pace of expansion suggested by the composite PMI remained only modest and is not sufficient to warrant a meaningful recovery. To secure growth and employment, Beijing still needs to step up policy easing and fast falling inflation allows them to do so.”

Japan Services PMI™

Markit reports Japan Composite data show sharpest decline in business activity since September 2011

Key points:

Moderate declines in activity across both manufacturing and services
Total new orders fall for first time in six months
Service sector optimism the second-highest in 37 months



Japanese service sector activity decreased further in July, and at the sharpest rate in ten months. The latest decline largely reflected a fall in incoming new business, which in turn contributed to another month of backlog depletion.

Manufacturing PMI™ data showed factory output falling at the fastest rate in 15 months. Consequently, the Composite Output Index (covering manufacturing and services) dipped from 49.1 to 47.4 in July, and indicated the steepest reduction in private sector activity since September 2011.

Behind the latest reduction in service sector activity was a decline in new business – the first since January. The rate of reduction in new orders was only modest, however, and weaker than the long-run series average. This, coupled with a stronger decline in manufacturing new orders, meant that private sector new work fell to the greatest extent in 13 months.

JPMorgan Global Manufacturing & Services PMI™

Markit reports Global growth remains weak as manufacturing downturn continues

At 51.7 in July, the JPMorgan Global All-Industry Output Index – produced by JPMorgan and Markit in association with ISM and IFPSM – edged higher from June's recovery low of 50.3, to signal a modest increase in output. The rate of growth was nonetheless one of the weakest seen during the current three-year period of expansion.

The headline reading masked the contrasting performances of the manufacturing and service sectors. Growth of service sector business activity accelerated slightly, mainly due to a sharp bounce in the rate of expansion in the US. In contrast, the downturn in the global manufacturing sector gathered pace, with output falling at the fastest pace in over three years.

Economic growth in the US rebounded sharply following the steep slowdown witnessed in June. China, India, Russia and Ireland also saw all-industry activity increase during the latest survey period. The euro area contracted for the sixth straight month, with output falling across the big-four Eurozone nations of Germany, France, Italy and Spain. Meanwhile, the UK reported a reduction in output for the first time since April 2009.

The more worrying trends were seen for new orders and employment, as consumer and business confidence remained subdued. The onset of a softer phase in global demand meant that inflows of new orders stagnated in July, as a slight increase in new business at service providers was insufficient to offset the sharpest decline in manufacturing new orders for three years. International trade flows also weakened, with new export orders suffering the steepest drop since April 2009.

Once again, new orders are the key to hiring and GDP growth. In spite of the uptick in China, global new export orders had the steepest drop since April 2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone New Business Sinks at Fastest Rate in 3 Years; Germany Composite PMI at 37-Month Low; Ass-Backwards Eurozone Policies

With everyone watching and analyzing US jobs data on Friday, there were a number of other news reports showing steeper contractions in much of the world. Let's start off with a look at the rapidly deteriorating eurozone.

Markit Eurozone Composite PMI® – Final Data

Markit reports Eurozone downturn continues at start of Q3 2012

The Eurozone economy remained in a downturn at the start of Q3 2012. At 46.5 in July, little-changed from 46.4 in June, the Markit Eurozone PMI® Composite Output Index signalled a contraction in output for the tenth time in the past 11 months. The headline index came in slightly above the earlier flash estimate of 46.4.

Manufacturers and service providers both reported lower levels of output in July. The downturn was more severe in manufacturing, where production contracted at the fastest pace since May 2009. Service sector business activity fell for the sixth month running, though the rate of decline eased to its weakest since March.

The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for over three years.





Comment:

Chris Williamson, Chief Economist at Markit said:

“The final PMI data for July confirm the message from the earlier flash estimate that the Eurozone continued to contract at a quarterly rate of approximately 0.6% in July, suggesting the region looks set for a second consecutive quarterly decline.

“With incoming new business falling at the fastest rate for three years and service sector companies becoming the gloomiest about the outlook since early-2009, there seems little prospect of any improvement soon.

Markit/ADACI Italy Services PMI®

Markit reports Italy Service Sector New Work Drops at Fastest Rate Since March 2009

Key points:

• Activity falls markedly as a result of accelerated decline in new business
• 12-month outlook turns negative for first time in series history
• Rate of job shedding fastest for three months

Summary:

Conditions across Italy’s service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009. Activity and
employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year’s time than current levels. Another negative development for businesses was a slight rise input price inflation from June’s seven-month low.

Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months. Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs.

Comment:

Phil Smith, economist at Markit and author of the Italy Services PMI® said:

"July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the
height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery."

“Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”

Markit France Services PMI®

Markit reports Stabilisation of French service sector activity during July

Key points:

• Final Markit France Services Activity Index(1) at 50.0 (47.9 in June), 4-month high.
• Final Markit France Composite Output Index(2) at 47.9 (47.3 in June), 4-month high.

Summary:

French service providers reported that business activity was unchanged during July. That followed declines in each of the previous three months. New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels. Competitive pressures led to a further drop in output charges, despite another rise in input costs. Panel members signalled a weaker outlook with regards to future activity, with optimism falling to the lowest level for almost three-and-a-half years.

Manufacturers reported a steeper fall in output during July, with the rate of decline accelerating to the fastest since April 2009. Overall private sector activity was down for the fifth successive month, although the latest drop was the slowest since March.

The level of new business placed with French service providers fell for the fourth month running during July.

Manufacturers reported a further marked decrease in new orders during July, with the rate of contraction accelerating since the previous month. However, overall new business across the private sector fell at the slowest rate since March.
The rate of decline in service sector outstanding business also eased in July. The latest fall in unfinished work was the seventh in successive months, although the weakest since March.

Employment showed a deteriorating trend, with the pace of contraction accelerating to the sharpest since March 2010. Job losses were attributed by panellists to cost-saving strategies, often including decisions not to replace voluntary leavers.

With manufacturers also recording a steeper drop in staffing levels, overall employment across the French private sector fell at the fastest rate since January 2010.

Markit Germany Services PMI®

Markit reports Services activity rises slightly, despite sharpest drop in new work since June 2009

Key points:

• Final Germany Services Business Activity Index(1) at 50.3 in July, up from 49.9 in June.
• Final Germany Composite Output Index(2) at 47.5 in July, down from 48.1 in June.

Summary:

At 50.3 in July, up slightly from 49.9 in June, the final seasonally adjusted Markit Germany Services Business Activity Index posted back above the neutral 50.0 threshold. However, the latest reading signalled only a fractional expansion of overall business activity, and was well below the long-run survey average (53.0). July data indicated that growth was largely driven by Hotels & Restaurants and Renting & Business Activities.

July data highlighted by a marked reduction in new business intakes in the service sector. Lower volumes of new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009. Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception.

Meanwhile, overall new business intakes across the German private sector also declined at the fastest rate since June 2009.

Markit Spain Services PMI®

Markit reports New orders decrease at fastest pace since October 2011

Key points:

Further sharp falls in activity and new orders
Sentiment lowest in 38 months
Rate of job cuts accelerates

Summary:

The Spanish service sector continued to struggle at the start of the second half of 2012 as the ongoing economic crisis in Spain impacted negatively on business conditions. Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October. Furthermore, companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.

Activity has now fallen in 13 successive months, and the latest reduction was only marginally slower than seen in June. Hotels & Restaurants was the only sector to record activity growth, while the fastest reduction was recorded at Post & Telecommunications companies.

Respondents indicated that falling new business had been the main factor behind the drop in activity. In turn, new orders declined as clients were hesitant to embark on new projects given deteriorating economic conditions. New orders fell at a sharp pace that was the fastest since October 2011.

Companies worked through outstanding business in July as new orders decreased. Backlogs of work were depleted at a substantial pace, and the steepest in seven months.

Service providers continued to lower their staffing levels during July. Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June. Of the six monitored sectors, the sharpest fall in employment was posted at Renting & Business Activities companies.

Services companies expect activity to fall over the coming 12 months, the first time this has been the case since May 2009. The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.

Comment:

Commenting on the Spanish Services PMI® survey data, Andrew Harker, economist at Markit and author of the report said:

"Perhaps the most worrying aspect of the latest survey is the lowest business sentiment in more than three years, partly reflecting the negative expected impact on consumption of the forthcoming rise in VAT."

Eurozone New Orders

Eurozone GDP is going to decline rapidly and businesses will shed workers if new orders continue to decline. Let's look at the new orders, expectations, and employment components from the above reports.

• Eurozone Composite:  Incoming new business falling at the fastest rate for three years 
• Italy: Activity falls markedly as a result of accelerated decline in new business
• Italy:  12-month outlook turns negative for first time in series history
• Italy:  Rate of job shedding fastest for three months
• France: New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels. 
• France: The level of new business placed with French service providers fell for the fourth month running during July. 
• France:  Overall employment across the French private sector fell at the fastest rate since January 2010.
• Germany: Lower volumes of service sector new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009. 
• Germany: Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception. 
• Germany: New business intakes across the entire German private sector declined at the fastest rate since June 2009.
• Spain:  Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October. 
• Spain: Companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.
• Spain: Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June. 
• Spain:  Lowest business sentiment in more than three years
• Spain:  The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.

Wrong Approach

Countries struggling to meet budget targets have responded by raising taxes. The result of that stupidity can easily be predicted in advance: economic activity will contract further, causing budget target shortfalls.

Yet, Spain is hiking taxes to appease the bureaucrats in Brussels.

In France, prime minister Francois Hollande is about to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

I wrote that before socialists took over both houses in French parliament. Many suggested he would not follow through. Unfortunately he has. Please consider my July 16 post Peugeot Has 51% Chance of Debt Default; Hollande Says France Will Not Let Peugeot Lay Off Workers

Hollande is also raising taxes like mad and French businesses are likely to head to the UK and other places in response. Many wealthy have fled the country.

Correct Approach

The correct approach is to reduce taxes and make it easier for businesses to fire workers.  Logic dictates that if it's difficult or impossible to fire workers, businesses will not hire them in the first place.

Ass-Backwards Eurozone Policies

Most countries in Europe now have ass-backwards policies in place. The silver lining in this mess is those ass-backwards policies will accelerate the breakup of the eurozone, and that is a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Preposterous Falsehoods From Gary North Regarding the Inflation/Deflation Debate

When it comes to the inflation deflation debate it really would help if people would stop presenting complete falsehoods as facts. Here is a case in point:

Gary North writes Why the Deflationists' Argument Is Wrong in Both Theory and Historical Fact

Aug. 3, 2012

An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy.

A deflationist is someone who believes that deflation is inevitable, despite (1) monetary inflation and (2) central bank policy.

No inflationist says that price inflation is inevitable. Every deflationist says that price deflation is inevitable.

Obvious Falsehoods

Gary North does not speak for any deflationist, nor does he speak for all the inflationists. He acts as if he does.

Sustained price deflation is certainly not inevitable, nor is price deflation inevitable in the short-term either.

Since I am a staunch deflationist, and since Gary North is aware of my writing, it appears he is purposely making preposterous straw-man arguments just to be able to shoot them down.

Discussion of Definitions

As I have pointed out many times, before there can be a debate at all, one has to agree to definitions.

My definition of inflation is an increase in money supply and credit with credit marked to market. Deflation is the opposite.

Prices are clearly not part of my definition, and prices can indeed rise in a credit-deflationary period.

I cannot demand that people accept my definitions, but without an agreement of definitions, the likely result is people talking past each other.

Misguided Focus on Money Supply

I have given many reasons why a focus on money supply alone is complete silliness, but the condensed version is the total credit market is $54 trillion and base money supply is about $2.7 trillion.

If people think that $54 trillion can and will be paid back, or if they think that money supply is more important than credit, they will be wrong, but they are entitled to their opinions.

Money Supply vs. Credit

Gary North's definition of inflation obviously involves money supply.

Not every inflationist would accept his definition. Some would consider credit and some would include government manipulations irrespective of money supply. So that is a third thing North is wrong about.

Ignoring Time Preferences

North says "An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy."

With that, Gary North is wrong for the fourth time.

Non-monetary government interference in the markets can certainly affect prices.

More importantly, prices can rise or fall by changing time-preference for money even if money supply is constant.

For example, social trends and changing demographics can affect the demand for money, and thus prices. So even if there was no Fed and no Fractional Reserve Lending it is a mistake to believe there could not be general price increases for reasonably lengthy periods of time.

Likewise, because of continual advances in productivity, there is a general downward pressure on prices over time. Thus productivity can affect prices.

North misses all of those things in his blanket statements.

Credibility Issues

People really get into serious trouble using phrases like "no inflationist" and "every deflationist" when they clearly do not speak for everyone, especially when they also need a lecture about changing attitudes and time-preference as well.

Finally, it's easy to setup a straw-man debate that you can win. It's also easy to lose credibility doing just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Headline Jobs +163,000, But Household Survey Shows -195,000 Jobs; Unemployment +.1 to 8.3%

ADP got the headline job number correct, I certainly didn't. However, one look beneath the surface shows this was actually an anemic jobs report.

Unemployment was up, and the household survey shows a loss of 195,000 jobs. The household numbers are even worse because part-time employment went up.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +163,000 - Establishment Survey
• US Employment -195,000  - Household Survey
• US Unemployment Rate +.01 at 8.3% - Household Survey
• The Civilian Labor Force fell by 150,000. Otherwise the unemployment rate would have risen more.
• Average workweek for all employees on private nonfarm payrolls steady at 34.5 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls steady at 33.7 hours.
• Average hourly earnings for all employees in the private nonfarm workers sector rose by 2 cents.
• The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Quick Notes About the Unemployment Rate

• US Unemployment Rate +.1 to 8.3% 
• In the last year, the civilian population rose by 3,683,000. Yet the labor force only rose by 1,655,000.
• This month the Civilian Labor Force fell by 150,000.
• This month, those "not" in the labor force increased by 348,000 to 88,340,000, another record high. If you are not in the labor force, you are not counted as unemployed. 
• In the last year, those "not" in the labor force rose by 2,027,000 
• Over the course of the last year, the number of people employed rose by 2,770,000.
• Participation Rate was steady at 63.8%;
• There are 8,246,000 workers who are working part-time but want full-time work, an increase of 36,000
• Long-Term unemployment (27 weeks and over) was 5.185 million a decline of 185,000.
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

June 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) July 2012 Employment Report.

Total nonfarm payroll employment rose by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and business services, food services and drinking places, and manufacturing..

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted



Employment is above the total just prior to the 2001 recession, and about where it was in 2005.

Nonfarm Employment - Payroll Survey January 2008 through July 2012 - Seasonally Adjusted



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Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Since the employment low in February 2010, nonfarm payrolls have expanded by about 4.3 million jobs. Of the 8.8 million jobs lost between January 2008 and February 2010, approximately 48.8% percent have been recovered (not accounting for normal demographics growth)

Statistically, 125,000+- jobs a month is enough to keep the unemployment rate flat. For a discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

Thus far in 2012, job growth has averaged 151,000 per month, about the same as the monthly average for 2011 (+153,000).

The average employment gain over the last 29 months has been 138,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has fallen from 9.8% to 8.3%.

Current Report Jobs



Average Weekly Hours



Average Hourly Earnings vs. CPI



BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted, while the reported headline number is. In the black box the BLS combines the two, coming up with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



Birth Death Model Adjustments For 2012



Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data



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In the last year, the civilian population rose by 3,683,000. Yet the labor force only rose by 1,655,000. Those not in the labor force rose by 2,027,000 to yet another record high 88,340,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status



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There are 8,246,000 workers who are working part-time but want full-time work.

BLS Alternate Measures of Unemployment



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Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 15.0%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Duration of Unemployment



Long-term unemployment remains in a disaster zone.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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