Capital Insights with Jack Kern: There’s Something Happening Here

"There's something happening here
What it is ain't exactly clear"
© Buffalo Springfield

The recent employment situation report from the Bureau of Labor Statistics released today show a decline in payroll employment of over 530,000 jobs in November, the ugliest report since 1974. Major revisions to earlier releases including September and October suggest that in the past three months combined, the U.S. has lost 1.256 million jobs. The unemployment rate increased to a staggering 6.7%. According to some analysis of the Mortgage Bankers Association data, about 10% of all U.S. households are in default in one way or another on their mortgages. With home sales at their lowest levels and car sales almost non-existent, the economy is clearly in the midst of a recession. Even oil prices have declined from the shocks of over $140 per barrel to a more understandable $41.65 per barrel. While that might drive OPEC nuts, it is good news for tightly strapped American consumers. It might even help the auto makers a bit, but not enough to get a bailout.

Is all of this the good news?

I'm not a fan of economic disruption and failing Fed policies but something amazing happens once everyone starts to recognize the calamity that is our current economy. We're now finally far enough into the NBER definition of a recession, for almost a year now, that reality has taken hold and now the necessary adjustments in the workforce, the economy and the industrial base can take effect. For the longest time, we've been staring down the barrel of an impending slowdown, snug in the belief that somehow we were going to avoid taking a hit. The shared common view that we were going to have a shallow recession has given way to the expectation that we're looking at a long, defined trough. I share that view.

My forecast for you is complicated by the lack of public policy from the new administration, so piecing this together as best I can, let's examine a couple of key points. First, with respect to unemployment, the true unemployment rate is actually 19.3%, not 6.7% and the reason is that the way the Household Survey works doesn't provide an accurate view of the total workforce. This much larger number is simply indicative of the greater number of people who want jobs that can't get them, and counted among these are future renters, recently minted MBA graduates and many Gen Y members not in the workforce yet. Additionally, the vast number of unemployed lost positions due to mergers, function dissolution and industry disruption. Let's keep these numbers in mind for a moment and go on to services employment.

Construction, retail, financial, professional and business, leisure and hospitality services lost 417,000 jobs. Of these, I estimate that approximately
340,000 are normal, not seasonal or temporary positions. Out of the total, perhaps half of them are current or prospective renters, based on ages, income and probable seniority, so if we count about 170,000 lost as renters, we can begin to see why absorption and site traffic is down so much, way above what would be expected for this time of year.

Where does that leave us?

We're looking at home prices continuing to decline for another year, probably bottoming out in September or October of 2009. We're looking at unstable consumer confidence as the new administration takes over and tries to work out coherent policies. We're expecting that the bulk of the recession based stresses will take approximately 3 to 5 years to be worked out, with the more positive indicators appearing in early 2010 (probably around the week of March 21st) and lastly, we're expecting to see foreclosures, house price failures and slow employment to accelerate for about 4-6 months before it gets better. Work outs take time, and as the employment base is re-engineered for the future, U.S. global competitiveness will increase and jobs will come back.

Certainly the press coverage of the housing crisis, the auto manufacturing debacle and mortgage madness (the Treasury Department wants to see 4.5% mortgages for new purchasers) isn't helping.

Did anyone notice that Bob Nardelli, CEO of Chrysler, was formerly with Home Depot? Hammers, aisle 2, Hemis, aisle 3?

Based on my viewing commentary on Fox News recently:

"Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away"
©Buffalo Springfield