The Age of Hubris Comes to a Head

Despite collapsing earnings, shattered stock prices, ousted CEO’s, bankruptcies and quasi bankruptcies in the case of Citigroup, Bank of America and AIG, the hubris and arrogance of former financial masters of the universe continues.

As if Merrill Lynch rushing through bonuses before announcing massive losses was not enough, AIG has just upped the ante in the sheer arrogance stakes by taking US taxpayer money and paying bonuses to the very people who blew the place up. Not only that, it seems that some so-called retention bonuses are being paid to employees that are being dismissed, from the NYT:

Mr. Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

How’s that for hubris? Retention bonuses for people who weren’t retained. There goes the argument that you need to pay people bonuses to keep them. However it appears that AIG may have gone too far with this latest tactic. Outrage is being expressed by every politician up to and including the President. Public outrage is reaching a crescendo and to make matters worse, every time AIG makes a statement they just incite more loathing.

Take for example the latest justification for paying derivatives traders bonuses. “It’s in their contracts and the contracts cannot be reneged upon”, “if the American government starts interfering with contracts and changing the rule of law, the U.S. will be no better than a banana republic.” But hold on, isn’t the US government, aka U.S taxpayers, the majority shareholder?

Consider what would have happened if the government had not bailed out AIG . They would have gone into bankruptcy and then all contracts could be legally modified or completely voided. But for some reason we must obey the rule of law because the company whilst for all intents and purposes is insolvent, is not officially in the hands of receivers. Was it not Adam Smith who opined that an economic system that is allowed to operate without a moral foundation would soon lead to an amoral, if not immoral, society?

But why so much outrage over $165 million in bonus payments when we also now know that approximately $49.5 billion of taxpayer money was used to make counter-parties whole to CDS contracts written by AIG? From the FT.com:

AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

Can anyone really register surprise that Henry Goldman Paulson was in charge as Goldman Sachs became the biggest beneficiary of public funds injected into AIG? Tim Geithner is not without blood on his hands in all this either and if the policy of privatizing the profits and socializing the losses is to change, Geithner needs to go, simple as that.

Scandals such as Enron and Worldcom pale in comparison to the magnitude of what is currently unfolding. Whilst it is now obvious to all and sundry that the global financial complex grew too large and powerful, it is not yet obvious the extent to which public outrage will compel lawmakers to act.

It is no longer useful to talk about lack of transparency or poor risk management. From Countrywide to Bear Stearns, Lehman, Merrill Lynch, Citigroup, Fannie and Freddie and AIG there has been lies, obfuscation and outright fraud. The age of hubris cannot come to a close until the executives of financial institutions are held accountable for their actions. It remains to be seen whether the level of public outrage is sufficient and the political will exists to make that happen.

Full-time Jobs Getting Harder To Find For Aussies

Australian employment rose by a tepid 1,200 jobs in February but as always a grain of salt needs to be taken with these numbers in light of the sampling error that states the real number could lie with 60,000 either side of the actual number reported. of the actual number reported.

However the real story is the growing divergence between full-time and part-time employment. full-time employment decreased by -53,800 the biggest decline since November 1991, whilst part-time employment increased by 55,600.


Year over year full-time employment is now down -0.5% whilst part-time employment is up 3.6%. The chart above shows that in previous recessions and downturns there is a wide divergence between full and part time employment. This is obviously not a good trend if full-time jobs are being replaced by part-time jobs.


The unemployment rose to a 3 year high of 5.2% largely due to some 48,000 new entrants entering the workforce although it needs to be remembered the Australian economy needs to create 15 - 20k jobs per month just to keep up with the growth in the labour force and prevent the unemployment rate from rising.

Large drops in full-time employment is obviously not a good sign and serves to reinforce the more leading indicators of employment from the ANZ job ad series and the DEEWR Monthly Leading Indicator of Employment as well as the AIG industry surveys that have shown employment contracting for months.

From the abs data, the number of people employed in the Australian economy peaked in October, that is probably as good a time as any to date the start of the current recession from. The Australian unemployment rate looks set to blow through 7% by the end of the year and punch through 8% sometime in 2010. Where it peaks depends a lot on policy responses by governments both overseas and domestically.

However that is not to suggest that the government can prevent unemployment from rising significantly with any old fiscal response, such as throwing money at people so they can go a buy a flat screen TV for their 2nd bathroom.

ANZ Job Ads Show Biggest Monthly Decline Ever

Last month I noted that the increase in newspaper ads in December should be viewed with caution. That turned out to be on the money as newspaper ads fell -25.2% in February, wiping out all the gains in January and then some and are now down -55.4% from a year ago.

Internet ads which make up for 95% of all job ads fell -9.4% in February and are now -38.6% lower than they were a year ago. The combined total of ads from both internet and newspapers fell -10.4% in February, the biggest single monthly drop since the combined series began in 1999. Also the year over year decline of -39.8% is also the largest since the series began.

ANZ's Head of Australian Economics, Warren Hogan, had this to say:

The trends in job advertising in Australia suggest a substantial rise in the unemployment rate is likely. We have revised up our unemployment rate forecasts. We now expect the unemployment rate to reach 6½% by the end of 2009 and 7½% by mid 2010. These job advertisement numbers, based on historical relationships, suggests the risks to our forecasts are for higher unemployment.....

...Our assessment is that the latest job ad results are consistent with employment contracting at a 2% annualised pace over the second half of 2009. This in turn suggests that the current downturn in the economy is likely to last throughout 2009, with little prospect of a meaningful recovery before 2010. Recent trends in job advertising are consistent with other indicators which suggest that the Australian economy entered recession in late 2008 and remains in recession in early 2009.

Well fancy that, a mainstream economist is now playing catch-up with a deteriorating economic picture. Welcome to the recession camp Warren, you may be late but you won't be the last. Note that Hogan say risks to his unemployment forecasts are to the upside. I concur.

Also out today, NAB's monthly survey of business conditions which fell to -20, a reading not seen since 1992. NAB Chief Economist Alan Oster had this to say, from The Australian:

"There is little in the survey to suggest that activity levels might be bottoming with continuing falls in mining and manufacturing activity very prominent,"

"Nor is there much solace to be found in the employment, forward order and capex data in the survey."

The bank has lifted it forecast for the nation's jobless and now sees it at 6.5 per cent by the end of 2009 and 7.5 per cent in 2010

The NAB survey showed the employment index fell by 10 index points to minus 27 points in February, the largest fall in the survey's history to level last touched in December 1991.....

...."Our forecasts imply a moderate recession in 2009 - it would no longer be appropriate to classify these forecasts as a mild recession," he said.

NAB expects the Reserve Bank to cut the cash rate to 2 per cent by late 2009, from 3.25 per cent currently.

Seems Allan Oster and Warren Hogan are now smoking from the same hookah pipe (click the link if you don't know what a hookah pipe is). Yes I know, what use are economists in telling you what you already knew 3 months ago ? None, charlatans the lot of em.

The thing to note is that their forecasts continue to get worse, just 3 months ago, most thought we could scrape through and avoid a recession. a month ago it was maybe a mild recession and now its a moderate recession. Give them a few more months and it will be a severe recession with unemployment forecasts over 8% in 2010. But since you know that already, it won't be a surprise when the media excitedly announce it.

February Another Horrible Month for US Jobs

US non-farm payrolls shed 651k jobs in February. However, as usual the more interesting numbers are the revisiosn and they shoeed a continuation of an already bad trend. The trend in recent months is for revisions to be on the downside and this month was no exception.

December payrolls were revised from a loss of -577k to a loss of -681k whilst January was revised from a loss of -598k to a loss of -655k. Job losses are clearly worse than the headline number indicate. Revisions to January (each month undergoes two revisions) and February could easily push losses for those months in excess of 700k.

In the past 4 months, 2.6 million jobs have been lost, the most in any 4 month period since the 4 months from June to September 1945 when 2.8 million jobs were lost.

Of course that needs to be put into perspective. 2.8 million jobs in 1945 amounted to a massive 6.8% of the labor force whereas the current 4 month contraction amounts to 1.9%. That is not meant to minimize the current situation, the US economy is shedding jobs at an alarming rate.


The US unemployment rate leapt to 8.1% in February, surpassing the peak of the early 90's recession and reaching heights not seen since December 1983. If you include people who currently want a job but are not actively looking and those working part-time but that would like to work full-time, the unemplyment rate is 14.8%.



The US employment picture gets more grim with each passing month. Job losses are intensifying although an absolute peak in monthly declines may not be too far off. At current rates it is clear that the US unemployment rate is set to push through 9% by the summer and looks likely to hit double digits by the end of the year or early in 2010.

However, as employment is a lagging indicator of interest will be when the monthly declines peak and start getting smaller, that still appears to be a few months away and wll only be obvious after revisions come through to prior months.

Australian Economy Contracts -0.5% in 4Q08

Back in December in The Recession We Couldn't Avoid, I wrote the following:

"There is no doubt in my mind that the Australian economy is now in recession."

The evidence back then showed that the manufacturing, services and construction sectors had all been contracting for at least 6 straight months each and that surveys of business conditions confidence were at recessionary levels. Today we got more confirmation that a recession has been underway for a least a quarter with the latest GDP numbers.


After tepid GDP growth of just 0.1% in 3Q08, Australian GDP contracted for the first time in 8 years falling -0.5% in the fourth quarter. This would seem at odds with what the RBA announced just yesterday after their decision to leave interest rates unchanged at their March meeting:

"on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere".

True, Australia hasn't seen declines as big as Japan or the US, but the fact is demand is undergoing a significant contraction in the non-farm sector. Excluding the farm sector, GDP was down -0.8% in the fourth quarter.

Also of interest in the above quote is the phrase "currently available data", as noted yesterday, the RBA is a data dependent and therefore a backward looking gauge of the economy. Remember that less than a year ago, the RBA was still waffling on about the threat of inflation and last March actually raised interest rates.

The RBA's ability to forecast the future is no better than anyone else's and so whilst they may be able to formulate a coherent narrative of where we have been, their forecasts for the future should be taken with a large grain of salt.


Year over Year GDP growth rose a paltry 0.3% in 4Q08 the slowest pace since the -0.9% recorded in the 12 months to December 1991, not surprisingly occurring just after the end of the last recession.

Despite the Rudd Stimulus package in December and consecutive interest rate cuts the Australian economy has been unable to avoid a contraction in the fourth quarter of 2008. Whilst Rudd Stimulus mark II will get underway in March and April it is unlikely that these measures can do more than soften the decline in economic activity in 2009.

RBA Keeps Rates Unchanged

The RBA decided to leave the cash rate unchanged at 3.25% at their board meeting today. From the statement by RBA Governor Glenn Stevens it seems clear that the RBA wants to sit back and evaluate the effect of the interest rate cuts and fiscal policy to date.

As usual, the RBA is behind the eight ball. The Rudd Government throwing money at people so they can buy houses and other stuff they can't afford and the RBA cutting interest rates when monetary policy is all but impotent, is not a recipe for an economic recovery.

As the global and therefore Australian economy continues to deteriorate into 2009, the RBA's hand will be forced into cutting interest rates again. To be clear, I'm not arguing that the RBA should have cut rates. I beleive, as was borne out in the US recently, that interest rate cuts do very little in a deflationary debt unwind.

It's quite possible that the Australian economy could sail through to the middle of the year on the back of Rudd Stimulus mark II in relatively good shape. January's retail sales numbers out today were no doubt buoyed by Rudd Stimulus no. 1.


However, once it becomes clear that the second half of 2009 is going to be worse than the first half, (I think it's already clear but the RBA will wait for the data to tell them it is) the RBA will be cutting rates again.

Flat Australian Job Market in January

Growth in seasonally adjusted employment grew by 1,200 in January according to the abs. Reversing the previous months trend, the rise in full-time employment of 33,700 was offset by a fall in part-time employment of -32,600. If you want to take a positive out of this report it is that full time jobs have been added in January and job losses have been mainly part-time.


The unemployment rate jumped to a seasonally adjusted 4.8% from 4.5% in December, the highest level since June 2006. The jump in the unemployment rate was due mainly to the rise in the number of people looking for work.

That said it should be noted that the Australian economy needs to produce approximately 15 - 20k jobs per month just to keep the unemployment rate steady. So even if employment levels stay flat, the unemployment rate will continue to rise.

Still, with the unemployment rate at 4.8% the Australia economy looks relatively healthy compared to it's OECD counterparts. How long that will remain the case is yet to be seen.

Geithner's Farcical Non-plan Plan

Did anyone actually watch the farcical theatre that was supposed to be Tim Geithner's coming out party yesterday? Geithner was expected to give us a comprehensive plan for dealing with the current banking crisis, more specifically a resolution to the toxic assets on bank balance sheets.

What we got was, well we've been kicking around a few ideas but we haven't decided on anything yet. No specifics just some broad brush ideas that clearly haven't been fleshed out in any detail. I found the whole thing quite stunning and so did the stock market, promptly selling off about -5%. Yves at Naked Capitalism summed it up well.

Geithner Plan Smackdown Wrap

I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling....

....Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the "oh he has to work on the stimulus bill" is as close to "the dog ate my homework" as I have ever seen in adult life). What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed).

And in case you think I am being unfair, yesterday I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, "So what, exactly, is the plan?" and repeated questions from one persistent Senator got "absolutely no answers".

Click on the link for the full article, it is well worth a read. I don't envy Geithner's job, the task is enormous but this was a huge PR faux pas. This from the administration that ran the most flawless presidential campaign in history.

The troubling thing is that the current administration, just like the previous one, is too frightened to put down their foot, close some of these clearly insolvent banks, wipe out the shareholders and bondholders. Instead the government seems to want to sustain it's own version of the Japanese zombie banks of the 1990's.

Job Ads, Business Conditons Slip Further in January

The monthly ANZ job ad series was released today showing job ads fell a seasonally adjusted -6.3% in January after falling -10% in December. Total job ads are now -33.7% lower than the same time last year.

Newspapers ads increased 12.3% in January to following a -13.5% drop in December. Newspaper ads are currently -40.7% lower than in January 2008.

Internet job ads fell -7.3% in January after a -9.8% fall in December and are now down -29.1% from a year ago.

The rise in newspaper ads should be viewed with caution, the December numbers were extremely low so a bounce was not unexpected. The health of newspaper job ads is reflected better by the year over year numbers.

Also out today the Dun and Bradstreet business expectations survey, that not surprisingly shows a deteriorating Australian business environment in 2009.

From the report, expectations for the March 2009 quarter are as follows:

The D&B index for expected sales is down 17 points to -39, with 15% of executives expecting an increase in sales and 54% expecting a decrease. The profits index is down 16 points to -47, with 12% of executives expecting profits to rise and 59% expecting a fall.

Employment expectations are unchanged at an index of -14, with 6% of executives expecting an increase in staff and 20% expecting a reduction. Capital investment expectations are down one point to an index of minus seven,with 3% of executives expecting an increase and 10% expecting to cut spending.

More news on jobs will come with the monthly abs labour force data on Thursday.

January Jobs Disaster

The US economy shed -598,000 jobs in January according to a BLS report released on Friday. Also January is the month when the BLS does its annual revisions which covers the previous 5 years of data. The effect of the revisions showed that job losses in 2008 were -311k more than expected.


As you can see from the table above, it is important to pay attention to revisions. In the first half of 2008 I was forecasting 6 digit declines in employment, although it took until the middle of the year to see them. However after the revisions we can see that payroll was declining by more than -100k per month from February.

In the past 12 months since the recession began 3.6 million jobs have been lost in the US economy, half of that total happened in the last 3 months. The official unemployment rate jumped to 7.6% in January, the highest since May 1992.

As mentioned previously an alternative measure of unemployment is U-6 which takes into account all the people that want a job but gave up, all the people with part-time jobs that want a full-time job and all the people who dropped off the unemployment rolls because their unemployment benefits ran out you get an unemployment rate is of 13.9%.

At some point drops of half a million jobs will subside to smaller numbers but it is conceivable that we can get a few more months of such drops before things start to improve. With job losses expected to extend into 2010 the notion of the official unemployment rate breaking into double digits is becoming a larger possibility.

RBA Put's Lipstick on the Pig

The RBA released it's quarterly statement on Monetary Policy today. Amongst their usual waffle the RBA released significantly revised GDP and inflation numbers but of course stopped short of forecasting negative growth or recession. The table below comes from the report.


Again it should be remembered that the RBA is a reactionary institution, you should not look to the RBA for guidance on where the economy is headed only where it has been. Just a few months ago the RBA was dribbling on about inflation and forecasting just a moderation in growth.

As the RBA acknowledges, that private sector surveys of economic conditions have fallen significantly. The AIG surveys out this week showed that the manufacturing, services and construction sectors declined for the 8th 10th and 11th consecutive months respectively. NAB surveys show confidence levels are now weaker than in the early 1990's recession.

In the absence of a large nasty event we are unlikely to see another rate cut of the magnitude of the last 4. The market currently expects a 50bps cut at the next RBA meeting. As I said back in January my earlier prediction of the RBA cash rate bottoming at 3% now looks to be on the high side with the market pricing in 2.5% by the middle of the year. That still has risks to the downside in my opinion.

Hopes now rest with the pass through effects from significant rate cuts and the fiscal stimulus package to be implemented in coming months. My opinion remains to be that monetary policy will fail to be stimulative in a deflationary debt unwind as we saw play out in the US and can only cushion the severity of the decline.

That leaves Rudd's handouts which may prop things up for a while but investors banking on a second half recovery in the economy will be sorely disappointed.

ADP - Half Million US Job Losses in January

The ADP report released on Wednesday estimated that non-farm employment decreased -522k in January following a revised -653k in December.The ADP data suggests the peak of monthly job losses may have been in December.

However that may be thrown off by the survey week which has some seasonal anomalies around the early part of the year and the fact that the BLS does it's yearly revision with the January NFP report. Below is an excerpt from the ADP report:

January’s ADP Report estimates nonfarm private employment in the service-providing sector fell by 279,000. Employment in the goods-producing sector declined 243,000, the twenty-fourth consecutive monthly decline. Employment in the manufacturing sector declined 160,000, its twenty-eighth decline over the last twenty-nine months.

Large businesses, defined as those with 500 or more workers, saw employment decline 92,000, while medium-size businesses with between 50 and 499 workers declined 255,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 175,000. Sharply falling employment at medium- and small-size businesses clearly indicates that the recession continues to spread well beyond manufacturing and housing-related activities.

The emphasis in bold is mine. Also out on Wednesday, the monthly Challenger Gray and Christmas report showed 45% more layoffs in January than December with retailers announcing their biggest number of layoffs ever.

All data points to a nasty NFP report on Friday,economists are expecting around around -525k jobs lost with the unemployment rate rising towards 7.5%.

RBA Slashes Rates, Rudd Attempts to Stimulate

The RBA cut interest rates by a full percentage point to 3.25% at its board meeting today. The official cash rate is now at it's lowest level since 1964.

The accompanying statement didn't say much, not that it ever does, citing all the obvious events of the last quarter including a significant deterioration in global economic conditions and falling inflation.

The statement also made mention of the Government's fiscal stimulus package. It appears that if you know how to to install insulation you'll have a job for the next few years. Also you can expect to see a lot more of those fellas on the road holding lollipop signs as 10 of his mates stand around watching 1 bloke dig a hole.

Also the construction industry will get a boost from the upgrade of schools and a new community housing project. There are some small tax breaks for small businesses but of course they need to spend money to get a rebate.

Spend $2000 on a computer and you can get $600 bucks back. But then again, if you are a struggling small business why not keep your old computer and save yourself $1400?

If you thought that didn't sound too bad, this might change your mind. $12.7 billion or 30% of the whole package will go in handouts to low income earners and families. The government just can't fight the urge to be the redistributor of income in chief.

As Ross Gittins said in the smh today, at least there is no denial about the current economic predicament, the government and the RBA are taking action, but they can do little more than cushion the blow of a global recession.

Credit Contraction Continues

Data released by the RBA today showed that credit conditions continue to tighten in Australia. Private sector credit contracted in December by -0.3%, that is the first month on month contraction in private sector credit since Dec 1992. Year over year private sector credit rose 6.7%, the lowest year over year rise since April 1994.

The RBA attributed most of the contraction to a decline in business credit. That does not bode well for the Australian economy in 2009. My opinion continues to be that the Australian economy probably fell into recession sometime in Q4 of 2008 and we are only just getting warmed up.

Whilst the Rudd government makes forlorn attempts to prop up an over-leveraged household sector and the RBA talks up the prospects of the Australian economy with rose-coloured glasses on, the economy continues to deteriorate.

Serious changes are afoot with respect to the availability of credit and the willingness to lend. Businesses that have traditionally relied on foreign sources of credit will find it tough to roll when it becomes due. The idea that Australia will somehow avoid this fate is wishful thinking yet there seems to be a fair dose of denial still going around.

Expect the RBA to cut the cash rate to historical lows in 2009 as the spectre of deflation and a contracting economy become the focus of attention.

Recoupling Continues

One of the themes I outlined for 2009 was "China will NOT save us", here is what I wrote then:

The myth that Australia is somehow insulated from the global recession because it digs up rocks and sends them to the fast growing Chinese economy will be completely shattered if it hasn't been already. Economists are forecasting the Chinese economy to slow to a growth rate of around 7 - 8% in 2009, I find that far too optimistic giving the growing signs of a sharp slowdown in the Chinese economy.

The myth of decoupling has been replaced by the reality of recoupling. The Chinese manufacturing sector has contracted for five straight months, not a good sign for an economy that relies on manufacturing for more than 40% of its output.

How will a Chinese economy growing at 2 - 4% affect commodity prices and the Australian economy? That is the question that investors should be asking rather than clinging to the hope that China will plow through at an 8% run rate in the face of a global recession.

Indeed forecasts of 7 - 8% growth in the Chinese economy for 2009 seem farfetched given the latest GDP data on the Chinese economy today, From Bloomberg:

China’s Economy Grows 6.8%, Slowest Pace in 7 Years

China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.

Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.

Plummeting Chinese demand for parts and materials for exports is reverberating across Asia and the Pacific, driving Taiwan, South Korea and Australia closer to recessions and worsening Japan’s slump. Premier Wen Jiabao said this week that the government must work urgently this quarter to reverse the slowdown and maintain social stability amid a “very grim” outlook for jobs.

“It’s an astonishingly steep slowdown,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong. “We haven’t yet seen all of the pain.”

Click on the link for the full story. No doubt there is more pain to come. Economists will be ratcheting down their forecasts for Chinese growth and by implication their growth rate targets for the Australian economy.

It is widely acknowledged that Australia went into this economic downturn in better shape that most countries but does that necessarily mean it will whether the storm better given it's leverage to the Chinese economy? These are the questions investors need to ask rather than relying on the hope that things will turn out just fine.

Can You Say Deflation?

As repeated ad nauseum here, I believe as 2008 finished with a hint of deflation so that theme will continue in 2009. The latest TD Securities Melbourne Institute Monthly Inflation guage for December showed inflation fell -0.2% in December after falling -0.6% in November. Inflation is now up 2.2% from 1 year ago.

That is more than 1 year in advance of when the RBA had forecast inflation to come down to such levels. No doubt the RBA will be entertaining more rate cuts at their meeting in February. Presently futures are forecasting a 90% chance of a 100 bps rate cut at the February 4th meeting. That may be a bit too much, but you can expect at least another50 bps cut.

Australian Employment Declines in December

The abs reported today that Australian employment fell by a seasonally adjusted -1200 jobs whilst the unemployment rate rose to 4.5%. That might not seem too bad but remember that you need 15 - 20k new jobs per month just to prevent the unemployment rate rising.


A closer look at the numbers suggest some troubling trends. 44k full time jobs were lost in December whilst 42.7k part-time jobs were added. I mentioned this full-time part-time divergence back in November. Historically in recessions and slowdowns part-time employment continues to grow or at least holds up whilst full time employment declines sharply.


2008 finished with an unemployment rate of 4.5% in Australia, expect it to be somewhere around 6 - 6.5% by the end of 2009 and expect the Australian government to have egg on their face with their forecast of 5.0% by mid year with employment growth thereafter.

Job Ads Indicate Rising Unemployment

The ANZ job ad series was released today showing further slides in job ads across all categories in December. The total number of job advertisements fell -9.7% in December and are now down -29.9% from a year go.

The ANZ job ad series has historically been a good leading indicator of employment growth in the Australian economy. The Haed of ANZ Economics Warren Hogan had this to say:

“The rate of decline in job advertising intensified in the month of December, providing further evidence that the demand for new labour across the Australian economy is now at recession levels.

“Australia has no experience of recession since we started collecting internet job ads, so all our longer-term historical comparisons are based on the newspaper series. A 50% decline in newspaper job advertising in a year is historically consistent with economic recession within the next nine months and a rise in the unemployment rate over the following years.

Newspaper ads are now down -51.8% from a year ago. However to what extent this reflects the shift from newspaper to internet is unknown and therefore comparisons to pre-internet days should viewed with caution.

However, it is clear that the unemployment rate will rathchet up in 2009. ANZ are predicting an unemployment rate of 6% by the end of 2009, that sounds about right but the risk is that it goes higher by the end of year.

Biggest Yearly Jobs Loss Since 1945

Sounds like an alarmist headline doesn't it? It's actually not as bad as it seems. That might seem to be a strange thing to say as the US economy lost more jobs in 2008 than any year since 1945, but what isn't taken into account is the size of the labor force in previous periods.

But firstly, the December non-farm payroll report was a shocker, -524k jobs were lost in December as well as a further -167k downward revisions to October and November. The unemployment rose to it's highest level since 1993 at 7.2%.

Normally I'd give a breakdown of where all the jobs were lost but what is the point? They're being lost everywhere except in small parts of government and places like Healthcare and Education.

About the only other thing of note is that until recently job losses have mainly been in manufacturing and construction, however the service sector is now shedding jobs at a rapid rate meaning that the recession is full blown and just really kicking into to stride in the last few months.

Back to the point about putting the job losses into perspective. Take for example the -602k jobs lost in December 1974. That number is only slightly more than the last couple of months, however the total number of people employed in December 1974 was 77.7 million. Thus the number of jobs lost in that month represented approximately 0.8% of the total.

The worst month for job losses in 2008 was November (notwithstanding revisions to December) in which -584k jobs were lost. The total number of people employed in November was 136 million so the job losses in that month was 0.4% of the total.

Another way to look at it would be to say that we would need to see job losses of close to 1 million per month in current times to be as bad as some previous periods. The positive side is that, current job losses are only as bad as previous deep recession such as the early 1980's or the mid 1970's. The negative side is that they could get much worse.

The chart above shows total US non-farm employment over the last decade. As you can see, the downward trajectory of job losses in the current recession is much steeper than the previous one and is getting steeper. 2.6 million jobs were lost in 2008, You can expect that many to be lost in 2009 and thus the unemployment rate to go north of 9%.

Also be careful when comparing the unemployment rate to prior periods. We all know that unemployment reached 25% at the height of the great depression. If you want to compare to the great depression, you should use a number the BLS publishes called U6.

U6 is an alternative measure of unemployment that includes marginally attached workers and those employed part-time but that would like work full time. Another term used to describe these people is underemployed. That rate is currently at 13.5% as shown above and in my opinion headed closer to 18% before it peaks.

Australian Economic Roundup

If you want a quick gauge of economic activity in Australia it's worth visiting the Australian Industry Group's Economic sector survey's at the beginning each month. Firstly lets take a look at the Manufacturing sector:

• Manufacturing activity fell for a seventh month in a row in December, though at a slightly slower pace than in November. Capacity utilization fell to its lowest level in 16 years.

• The seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Australian PMI® rose, by 1.0 points, to 33.7, still well below the 50 point mark separating expansion from contraction.

• All components remained below 50 points indicating falls in the levels of each indicator. New orders and employment fell, though at a slower rate than in November, while production, inventories and supplier deliveries fell faster than in November.

Secondly the Service sector:

• Persistent weak demand led to a ninth consecutive monthly decline in services sector activity in December.

• The seasonally adjusted Australian Industry Group/Commonwealth Bank Performance of Services Index (Australian PSI®) rose marginally, by 1.5 points to 39.3, but remained below the key 50.0 level separating expansion from contraction.

• The slight moderation in the rate of decline in services activity was largely due to softer falls in the property & business services and transport & storage sectors. This largely reflected a marginal improvement in the property market; demand for transport services in the lead-up to Christmas; and lower fuel costs.

• Sales, new orders and inventories all decreased at a slower rate in December, with the pace of job-shedding remaining broadly steady. Capacity utilisation rose slightly, while input cost increases moderated further.

Finally the Construction sector:

• The national construction industry registered a further decline in December, as firms continued to be severely affected by the economic and financial crisis and deteriorating demand.

• The further fall in construction activity was attributed to poor demand conditions and a lack of new project work. This was mainly linked to the adverse state of economic and financial conditions and negative client sentiment. It was also noted that intense competition for new contracts had persisted, resulting in a high failure rate for tenders and diminishing order books.

• The seasonally adjusted Australian Industry Group/Housing Industry Association Performance of Construction Index (Australian PCI®) fell by 1.1 points to 30.9, to remain below the critical 50 points no-change level for a 10th consecutive month.
  

• The latest decline was underpinned by continued falls in activity across all major sectors. House building remained the worst performing sector (although its reduction was less marked than the previous month), while rates of decline picked up in engineering and commercial construction.

Manufacturing has been contracting for 7 straight months, the service sector for 9 months and the construction industry for 10 months. However the RBA and most goldilocks economists think we will avoid recession.....OK then.


Also out today, building approvals fell a seasonally adjusted -12.8% in November and are now -35% lower than they were one year ago. The level of building approvals has fallen back to levels last seen in March 2001. So what does all this mean? The recession train has clearly left the station folks.