Home » 2009 » July » 03

Daily Archives: July 3, 2009

Inflation or deflation?

The debate is still going on:

Understand labor market dynamics

What we will be witnessing may well be another jobless recovery, just like after 1991 and 2001 recessions.

With working hours of full-time workers being cut (see chart 1 below), and a lot of people on part-time-job roll (chart 2), when true economic recovery comes, employers will first increase working hours of existing full-time workers, then transfer people from part-time roll back into full-time. This means any new hiring will come very late and slow…maybe years after official recession ends. Measure of broader unemployment rate, including drop of part-time workers from full-time labor force, in fact now already reached over 16% (chart 3).

Chart 1.

(click to enlarge; graph courtesy of calculatedrisk)

Chart 2.

(click to enlarge; graph courtesy of calculatedrisk)

Chart 3.

(click to enlarge)

Here below is an analytic piece from WSJ yesterday on the same topic:

Jobs Data Mow Down ‘Green Shoots’

June’s payrolls numbers contradict the “green-shoots” thesis. Worse, the data suggest that when they do appear, they won’t exactly shoot up.

Since the U.S. officially entered recession in December 2007, 6.9 million jobs have been lost, on a seasonally adjusted basis. More bad news lies beneath Thursday’s headline numbers. The average workweek fell to 33 hours, the lowest ever on record and 0.8 hours less than before the recession began.

If Americans still were clocking those extra 48 minutes a week now, then the same aggregate amount of work could get done with 3.3 million fewer employees. The implication is that, were it not for shorter workweeks, the unemployment rate would be 11.7%, not the official 9.5%.

Stealth underemployment also is evident in the rise in the number of workers taking part-time jobs due to the slack economy. Their ranks have doubled in this recession, to about nine million, or 5.8% of the work force.

The likelihood is that when economic activity picks up, employers will choose to increase hours on existing workers and bring back part-time workers to full-time status before making new hires.

That sets up a recovery that could rival the previous upswing in terms of joblessness. The difference between any coming upturn and the one that ended in December 2007 is that struggling workers will have less credit available to maintain spending habits. Paradoxically, labor’s woes likely will enable many firms to beat near-term earnings expectations, as wage costs dwindle or stagnate. But the unavoidable conclusion is that the consumer-spending power needed to fuel a sharp rebound in the economy just isn’t there.

China’s strategic commodities buildup

I have voiced caution in using commodity prices, especially copper, as leading economic indicator. With new data coming out of China, it looks like China has been strategically building up commodities inventory and a good part of Chinese recovery story as reflected by commodities prices may have gone a bit too far.

The below chart from BoFIT looks at China’s crude and iron ore imports, at a 3-month moving average, dating back to 2001. The recent sharp jump at both imports can’t even be justified during normal economic times, let alone we are in the deepest recession since WWII.

There is only one explanation: China is buying commodities on the cheap.

More analysis from BoFIT:

China’s appetite for commodities driven by desire to build up inventories. Although the volume of Chinese imports overall is still down 6 % from last year (and down 25 % in value terms), import volumes have rebounded sharply in recent months due largely to a massive increase in commodity imports. Crude oil import volumes now exceed last year’s level and iron ore imports are up about a third from last year (see chart). Imports of pure aluminium and copper have skyrocketed from previous years.

The growth in imports of metallic ores and refined metals has been driven in part from of a revival in construction activity as a result of the government’s stimulus package. Increased construction, in turn, has helped steelmakers recover from last year’s production collapse. Carmakers are also driving metal demand. In May, China produced about 600,000 passenger cars, a third more than in May 2008.

Higher output, however, does not fully explain the increase. Companies appear to be taking advantage of a slump in global commodity prices to replenish depleted raw material inventories; energy prices are about half of last year’s peak and metal prices are off 40 % from their recent highs. There is also evidence that certain commodities are cheaper abroad right now than in China. For example, China’s own iron ore production is still well below the level of a year ago.

China’s building up of strategic commodity reserves is affecting global demand for crude oil and metals. Its recent aggressive purchasing of pure aluminium and copper may be related to the build up.