Mass Firings Soar at Fastest Pace Since 2010; What's the Impact on Unemployment?

In precisely the kind of news president Obama does not want heading into the election, Ford (F), Dow Chemical (DOW), DuPont (DD), and Advanced Micro Devices (AMD) all announced mass layoffs this past week as Firings Reach Highest Since 2010.

North American companies have announced plans to eliminate 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011.

"Companies are saying, ‘Let's not build up inventories, let's be lean and mean until we know until we have a better idea of what 2013 is going to look like,'" said Janna Sampson, who helps manage more than $3 billion for Oakbrook Investments in Lisle, Illinois. "There is a fear now as companies see that the economic recovery is not picking up."

So far, out of 204 S&P 500 companies that have released third-quarter earnings, 120 have reported sales that trailed analysts' estimates, according to data compiled by Bloomberg.
More Cuts

Those results, similar to the S&P 500's second-quarter performance, signal employers may increase firings over the next two quarters, according to John Challenger, chief executive officer of Challenger, Gray & Christmas Inc., a human resources consulting firm based in Chicago.

Sales misses are "a sure prescription for layoffs starting to heat up as companies take immediate action to show their shareholders how responsive they are," Challenger said yesterday by telephone.

Firing Details

• Ford is closing its first European car-assembly factories in 10 years
• AMD, the second-largest maker of processors for personal computers, said last week it will cut 15 percent of its staff, or about 1,665 jobs, after forecasting fourth-quarter sales that fell short of analysts' estimates.
• Dow Chemical will close 20 plants in the U.S. and abroad to eliminate about 2,400 jobs
• DuPont plans to trim 1,500 jobs after third-quarter profit trailed analysts' estimates
• Cummins Inc. (CMI), a Columbus, Indiana-based engine maker, said it expects to erase as many as 1,500 jobs by the end of 2012 and lowered its forecasts for sales and profit.
• Kimberly-Clark Corp. (KMB) said this week it plans to cut manufacturing and administrative operations as it exits the diaper business in western and central Europe

What's the Impact on Unemployment?

In isolation, one would expect the unemployment rate to rise. However, Obamacare is having some peculiar effects on number of hours part-timers can work, which in turn led to a spur in hiring.

For details, please see Obama Slashes Four Hours Off Definition of "Full-Time" Employment.

Seven Forces at Play

1. Obamacare reduced the number of hours part-timers can work, thus increasing the need for more workers.
2. Seasonal hiring may have been early this year because of Obamacare, skewing the latest job results. Thus part of the recent rise in hiring will likely be revised away
3. The global slowdown reduces the need for workers
4. To combat the contraction in earnings corporations are firing workers, thus the recent mass layoff announcements
5. Companies are also worried about the fiscal cliff and its effect on consumer purchases. The reality is a fiscal cliff is needed and will occur at some point anyway, but no one wants to address the budget now.
6. Forced Retirement
7. Disability Fraud

Once the Obamacare effect plays out (perhaps in a month, perhaps it already has), the net effect of the first five forces is for the unemployment rate to rise.

However, we still have the issue of "forced retirement" which I describe as people who want a job and need a job but are of retirement age and decide to collect Social Security just to have some money coming in.

Forced retirement causes a drop in participation rate, artificially lowering the unemployment rate. Disability Fraud does the same thing.

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

Fed and ECB Smokescreens to Print Money

Fresh on the heels of ECB president Mario Draghi's Lies In Defense Bond Purchases, Including a Warning of Deflation comes news of an unexpected rise in Eurozone price inflation.

Economists had expected price inflation to drop, instead Eurostat reports Euro area inflation estimated at 2.7% up from 2.6% in August.

Looking at the main components of euro area inflation, energy (9.2% compared with 8.9% in August) is expected to have the highest annual rate in September, followed by food, alcohol & tobacco (2.9% compared with 3.0%), services (2.0% compared with 1.8%) and non-energy industrial goods (0.8% compared with 1.1%).

Euro Area Inflation



click on chart for sharper image

Smokescreens to Print Money

As with the Fed, apparently the ECB does not consider the two key things people need (food and energy) as important. Instead the ECB appears to be worried about deflation in non-energy industrial goods.

Appearances are deceiving. All this talk of inflation and deflation is nothing but a smokescreen for the ECB and the Fed to do what they want to do: print money.

Both central banks can and do bend their words at will, to make whatever policy decisions they want.

ECB president Mario Draghi even went so far as to proclaim fighting deflation gave it a mandate to break the treaty under which it was formed.

Draghi's stance has nothing to do with prices or price stability but rather everything to do with the implosion of the eurozone economy, the implosion of eurozone credit, the sorry state of European banks, the rise of radical movements in Greece and Spain, and of course the very existence of the euro itself.

He can't come out and say "the ECB does not care about prices right now", and he certainly cannot spout out the reasons as noted in the above paragraph, so instead he spouts outright lies hoping someone will believe him.

Source of Inflation

While claiming to be "inflation fighters"  the fact of the matter is the true source of inflation is fractional reserve lending and central bank policies.

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

Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France

This morning Markit released Eurozone, France, and Germany preliminary PMI reports. All show further deterioration.

Germany

Markit Flash Germany PMI® shows Manufacturing weakness behind moderate drop in German private sector output during October.

Summary

At 48.1 in October, the seasonally adjusted Markit Flash Germany Composite Output Index was down from 49.2 during September and signalled a further moderate reduction in overall private sector business activity. The index has now posted below the neutral 50.0 value for six consecutive months. With the latest reading close to the average for Q3 2012 (47.9), the latest survey suggests an ongoing lack of momentum across the German private sector economy.

Lower levels of output were recorded in both the manufacturing and service sectors during October, with the former indicating the sharper decline over the month. The slight drop in services activity followed signs of stabilisation during September, while the sub-50 index reading for manufacturing production was the seventh in as many months.

Manufacturers pointed to a sharp and accelerated decrease in new orders intakes during October, thereby extending the current period of decline to 16 months. Reports from survey respondents overwhelmingly cited weakness in export markets, especially southern Europe. A number of firms also mentioned subdued demand from the automobiles sector. Some panel members pointed to signs of a slowdown in Asia, especially for investment goods. Overall levels of new work from abroad in the manufacturing sector dropped at the second-fastest rate since April 2009 (only exceeded by the fall this August).

Comment

Commenting on the Markit Flash Germany PMI® survey data, Tim Moore, Senior Economist at Markit said:

“Germany’s private sector suffered a disappointing lack of momentum in October, reversing the signs of a step in the right direction during the previous month. The ‘flash’ output index fell back from September’s four-month high largely in response to a sharper drop in manufacturing production.

France

Markit Flash France PMI® shows further marked contraction of French private sector output at start of Q4.

Summary

The performance of the French private sector economy remained weak in October. The latest Flash PMI® data signalled only a slight easing in the rate of decline of output from September’s three-and-a-half year record. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 44.8, showing only a small rise from the previous figure of 43.2.

Although moderating since the previous month, rates of contraction remained considerable for both services and manufacturing output.

Panellists generally attributed lower activity levels to a further drop in incoming new business. The index measuring overall new work was only marginally above September’s 41-month low, and remained indicative of a steep pace of decline. Anecdotal evidence pointed to weak demand conditions amid a difficult economic climate. There were reports that clients, especially some firms in the autos sector, had postponed orders and reined in investment due to a lack of confidence in the outlook. Manufacturers again recorded a particularly steep drop in new work, primarily reflective of domestic weakness but also affected by the fastest fall in export sales since May 2009.

The rate of decline in employment in the French private sector remained marked in October, holding steady from September’s 33-month record. Job shedding was broad-based across the manufacturing and service sectors.

Eurozone Downturn Deepens, PMI at 40-Month Low

Markit Flash Eurozone PMI® shows the Eurozone downturn deepens at start of fourth quarter as PMI hits 40-month low.

Key Points

• Flash Eurozone PMI Composite Output Index at 45.8 (46.1 in September). 40-month low.
• Flash Eurozone Services PMI Activity Index at 46.2 (46.1 in September). Two-month high.
• Flash Eurozone Manufacturing PMI at 45.3 (46.1 in September). Two-month low.
• Flash Eurozone Manufacturing PMI Output Index at 44.8 (45.9 in September). Two-month low.

Summary

The Markit Eurozone PMI® Composite Output Index fell for a third successive month, down from 46.1 in September to 45.8 in October, according to the preliminary ‘flash’ reading based on around 85% of usual monthly replies. Output has fallen continually since September of last year with the exception of a marginal increase in January.

Output continued to fall in response to a further marked contraction in new orders. The rate of decline in new business eased slightly since September, which had seen the largest drop since June 2009.

PMI vs. GDP



Comments

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

"The Eurozone has slid further into decline at the start of the fourth quarter. The survey is running at a level which is historically consistent with the region’s economy contracting at a quarterly rate of over 0.5%. Official data have shown surprising resilience over the summer compared to the survey data, but the underlying business climate has clearly deteriorated markedly in recent months. While GDP may decline only modestly in the third quarter, a steeper fall looks to be on the cards for the fourth quarter."

"The financial markets may have cheered the positive developments from policymakers in seeking to resolve the region’s debt crisis, notably the promise of bond market intervention by the ECB, but business appears to have been less impressed. Sentiment about prospects for the year ahead are now the gloomiest since early-2009,
when the post-Lehman Brothers crisis was in full swing."

"In addition to worries about the health of domestic markets, companies are also seeing demand weaken further afield, notably in Asia and, to a lesser extent, the US. Worries about the outlook have translated into further job losses, suggesting companies are moving increasingly into cost-cutting mode. Even Germany is not immune, with October seeing the first back-to-back monthly fall in employment since early-2010."

Agreement with Markit

For a change, I am in 100% agreement with Chris Williamson. European GDP has been resilient but do not expect it to last. Germany has been resilient and do not expect that to last either.

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

Draghi Defends Bond Purchases With Warning of Deflation; Lies From Draghi on ECB Mandate and Mopping Up Liquidity

If you are going to tell a lie, make it as big and credible as you can by wrapping the lies with a platitude of half-truths. ECB president Mario Draghi did just that today with a spirited defense of bond purchases, coupled with a warning about deflation.

Paragraphs in italics below are from the above Bloomberg link. My comments follow immediately.

The ECB’s so-called Outright Monetary Transactions “will not lead to inflation,” Draghi told lawmakers in Berlin in a closed-door session, according to a text provided by the ECB. “In our assessment, the greater risk to price stability is currently falling prices in some euro-area countries,” he said. “In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it.”

The problem with such nonsense is you cannot break the law while screaming you are upholding it. Draghi now sounds and acts like hypocrite US presidents of both political parties.

Both president Bush and president Obama (as well as the treasury departments under each administration) have shown little concern for the law. Increasingly presidents are of the mind "we have to destroy capitalism to save it" or as President Bush stated (and Obama practices)“I’ve abandoned free-market principles to save the free-market system.”

For further elaboration, please see The Most Redeeming Feature of Capitalism is Failure.

“OMTs will not lead to disguised financing of governments,” Draghi said. “All this is fully consistent with the Treaty’s prohibition on monetary financing. Moreover, they will focus on shorter maturities and leave room for market discipline.”

Translation: The OMT is disguised financing of governments. Moreover, should "market discipline" get out of line with what the ECB wants, rest assured maturities will be extended on the "whatever it takes" mandate.

Draghi explained that the ECB’s intervention is necessary “because confidence in the euro has been disturbed,” said Priska Hinz, the Green party’s budget spokeswoman.

Confidence is disturbed because the euro is fundamentally flawed and it's too late to fix it. Certainly one huge nanny-state led by Brussels is not going to fix anything. The nanny-state will only make things worse.

Draghi said the program won’t compromise the ECB’s independence because it requires governments to agree to conditions. The program doesn’t create “excessive risks” for euro-area taxpayers, he added, according to the ECB text.

“Such risks would only materialize if a country were to run unsound policies,” Draghi said.

Unsound policies, like the ones they are running now?

Bond purchases won’t fuel inflation because the ECB will absorb the liquidity created by those interventions, Draghi said.

That is a direct lie as is his opening gambit of claiming that breaking the treaty is within mandate. Yes, the ECB sterilizes the bonds it buys. However, the ECB will also accept those bonds right back as collateral for cash, thereby pumping up base money supply. The ECB has no intention of absorbing liquidity in actual practice.

Real Problem is Not Deflation

By the way, I would be remiss if I failed to point out the problem is not "deflation". Rather, deflation only seems bad because of the excess leverage that the Fed and the ECB allowed to build up.

The real problem is unsound money and fractional reserve lending coupled with misguided policies of central banks and out of control budgets everywhere one looks.

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

Romney Way to Left of Paul Krugman, Erza Klein, and President Obama on Trade Issues; An Idea Whose Time Never Was; Half-Right Better Than All-Wrong

As amazing as it may seem, alleged conservative Mitt Romney's position on trade with China is now way to the left of that taken by leading liberal Democrats including Erza Klein who writes for the Washington Post, and Paul Krugman and his New York Times "Conscience of a Liberal" blog

Paul Krugman comments on An Issue Whose Time Has Passed written just prior to the debate on foreign policy between Romney and Obama.

Chinese currency manipulation may come up in tonight’s debate — and as someone who wanted the US to take a tougher line back in 2010, I guess I should weigh in.

Basically, as Ezra Klein says, this is an issue whose time has passed.

In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:



At the same time. China’s surplus has come way down:

Odd Times Indeed

The conclusion of Krugman's article is most amusing.

Krugman stakes out a claim that Romney's position is based on politics: "This is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough."

On that score, Krugman may very well be correct. I can even spell out the politics in four simple characters "OHIO".

However, it is also possible Romney is not the economic wizard most Republicans think he is.

Certainly, when it comes to trade, Romney is no conservative or even a moderate. Rather Romney has staked out a claim that has union "progressives" cheering. Either he is a free-trade dunce or he is playing politics. I leave it to the reader to decide.

Amusingly, this seems to be an equally "odd time" for Krugman and Klein to come out of the blue to be more tolerant of free trade. Had Obama been threatening to label China a currency manipulator and Romney supportive of free trade, would Krugman and Klein have chimed in?

An Idea Whose Time Never Was

I seldom agree with anything Klein writes but his Washington Post article Five Facts You Need to Know About China’s Currency Manipulation is well written and basically but not entirely correct.

My problem with this debate is simple: free trade is always a good idea. It was a good idea in 2000, 2004, 2008, and now. There was never a good time to start a trade war with China.

Also note that Klein and  Krugman are merely way more tolerant of free trade, not exactly free trade advocates.

In Praise of Cheap Labor

In Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All? I laid out a claim why free trade is always good.

Please read the article if you haven't already, it contains a nice surprise in regards to my stated position.

In that article, I also asked another question "Are Paul Krugman and Mitt Romney On the Same Page?" On that score I erroneously concluded they were. Apologies offered to Paul Krugman.

Half-Right Better Than All-Wrong

Even though free trade is always good, at least Krugman and Klein see no compelling reason to start a trade war with China now. Romney on the other hand does.

Thus, (politics or not) the current positions of Krugman and Klein are far more reasonable than the pro-union position of Romney.

Whether Romney hopes to appease Ohio union voters or he is a free-trade dunce, the essential point is Romney is simply "all wrong" when it comes to China.

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

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Spanish Home Loans Plunge 28.5% to Record Lows; Brussels Revises Spain’s Deficit Upward to 9.4% of GDP

The implosion in Spain continues, with the budget deficit heading in reverse, now revised up to 9.4% of GDP. [Correction: 9.4% was upward revision for 2011. The upward revision for 2012 is "only" 7.3%]

Spain's original deficit target for 2012 was 4.4%, then revised to 5% then 5.3%. Yet another revision brought the target all the way up to 6.3%. So how is Spain doing? A few flashbacks will explain.

On April 10 I optimistically wrote Inconsistencies in Spain's Budget Suggest Deficit will be 7% not 5.3%

"I have been saying for what seems like forever that Spain would not makes its budget. It won't, and we have a starting point for how bad it might get."

Indeed "starting point" was the operative phrase as 7% was reached by June.

On June 26, I wrote Spain Has Budget Deficit of 3.41% of GDP Through May (Not Counting Regional Governments); Target for Entire Year was 3.5%

That brief moment of 7% did not last long.

On September 21 I wrote Spain's Fiscal Deficit 8.56% of GDP in First Half; Impossible Second Half Targets.

That did not last long either.

Brussels Revises Spain’s Deficit Upward to 9.4% of GDP

Today we learned from El Pais English edition that Brussels Revises Spain’s Deficit Upward to 9.4% of GDP

The European Union’s statistics office, Eurostat, on Monday said it had revised Spain’s public deficit for last year upward from 8.5 percent of GDP to 9.4 percent to reflect state injections of capital into nationalized banks.

That put Spain on a par with Greece and only behind Ireland, whose shortfall was 13.4 percent of GDP, in the EU. In contrast the average deficit in the EU fell to 4.4 percent of GDP, down from 6.5 percent in 2010, while the shortfall in the euro zone declined to 4.1 percent from 6.2 percent. Seven countries in the EU had deficits above the bloc’s ceiling of 3 percent of GDP.

Eurostat also revised the deficit for Spain for 2010 upward from 9.3 percent to 9.7 percent to reflect unpaid bills by the public administrations. “The increase in the deficit for 2010 is mainly due to the previously unrecorded unpaid bills in the state and local government sub-sectors,” Eurostat said. “The increase in the deficit for 2011 is mainly due to the reclassification of capital injections by the central government in Catalunya Caixa Bank, NCG Bank and Unnim Bank.”

Optimistic Nonsense

The article continues with blatantly optimistic nonsense from the IMF and even more absurd statements from Spanish officials.

"Given the weak state of the Spanish economy, which is expected to contract 1.5 percent this year and 1.3 percent next year, the IMF has thrown doubt on the government’s ability to meet its deficit-reduction target for this year and the following, which is 4.5 percent of GDP. The IMF believes Spain will not be able to meet the 3-percent target until 2017, although the government has pledged to do so by 2014."

The IMF targets are ridiculous enough, but Spain's likelihood of achieving its government pledge of 3% by 2014 are simply laughable.

Spanish Home Loans Plunge 28.5% to Record Lows

Also from El Pais English edition, please consider Home loans granted drop to record lows

The number of home loans granted by lenders in Spain fell to their lowest levels on record in August as tight credit conditions and high unemployment continued to depress the mortgage market despite a fall in prices.

According to figures released Monday by the National Statistics Institute (INE), the number of loans disbursed fell 13.1 percent from July and 28.5 percent from August 2011 to 21,106, the lowest figure since the INE began compiling the current series in 2003.

According to official figures released last week, house prices have fallen 25 percent from their peaks at the start of 2008. Experts reckon they will have to fall more to clear an estimated pile of 670,000 new housing units built up over a decade-long boom that came to an abrupt halt around the start of 2008.

Apart from a lack of liquidity, the country’s banks are also grappling with a jump in loan defaults as the country slipped back into recession. Non-performing loans in the banking sector hit a record high of 10.5 percent of total lending in August.

Reflections on Non-Performing Loans

With non-performing loans at 10.5% expect more bank bailouts while noting that Spain's injection of capital into banks is the reason for the latest jump in debt-to-GDP ratios.

The sane thing to do would be to simply let failed banks fold, but instead governments bail out the banks at taxpayer expense.

Finally, the official stats of a mere 25% drop in home prices since the peak, are a believable as the tooth fairy.

Addendum: 

That 9.4% was an upward revision for 2011.
Reader Bran informs me that 2012 is only up to 7.3% but various officials still claim for 6.3%.

From Libre Mercado: Montoro contradicts the compliance deficit in 2012

"Finance Minister Cristobal Montoro claims in Congress that Spain will reduce the deficit to 6.3% of GDP in 2012, but communicates to Brussels to be located at 7.3%."

With first-half deficit of 8.56% the target of 6.3% is of course impossible.

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

Saturated Fat: McDonald's to Revisit 'Dollar Menu'; Reflections on Same Store Sales and Commercial Real Estate

McDonald's is facing lean times, not just in the US, but globally.

Earlier this year, McDonald's shifted from a 'Dollar Menu' to an "Extra Value Menu" which Chief Executive Don Thompson said didn't "resonate as strongly" with consumers.

One reason? There was no value in it, except for McDonald's.

The Wall Street Journal reports Amid Falling Profit, McDonald's to Revisit 'Dollar Menu'

McDonald's Corp. reported a 3.5% decline in third-quarter earnings as sales slowed more dramatically than expected because of a sluggish economy and a disappointing marketing campaign.

"We face softening demand, heightened competition and rising costs in many of our markets," Chief Financial Officer Pete Bensen said. In a weaker economy, customers tend to stop getting extras like drinks and desserts and premium items like Angus burgers, which all offer higher profits to McDonald's. Plus, they may not go out to eat as frequently.

Wall Street analysts were expecting an increase in per-share profit for the quarter, not a decline.

"We're going back to talk of the Dollar Menu," Mr. Thompson said.

He said the chain is losing momentum world-wide, with sales at restaurants open at least 13 months falling so far in October compared with the same time last year. Such same-store sales are a key indicator of restaurant chains' strength, and McDonald's hasn't seen declines by that measure since April 2003.

"It's been very rare that we've ever seen all of our major markets experiencing the impact of these kind of global economies at the same time," the CEO said.

Saturated Fat

The entire fast food industry is loaded with saturated fat. I am not talking about the food itself (which of course much of it is fat and nutritionless carbs), but rather the sheer saturation of restaurants everywhere you look, all competing for the same customers.

Over the years, I have frequently asked a question that goes something like this: "How many more Pizza Huts, McDonald's, nail salons, WalMarts ... do we need?"

My conclusion long ago was not many. Nonetheless, stores kept going up. And as long as they were, they hired workers (even if most of them were part-time).

Reflections on Same Store Sales 

Now what? Now cannibalization of same-store-sales from each other is the norm.

With part-time jobs becoming more-and-more the norm (for a detailed discussion, please see Obama Slashes Four Hours Off Definition of "Full-Time" Employment), with kids graduating from college with no jobs but monstrous debt, and with boomers retiring with insufficient savings, where is the store growth going to come from?

Heck, where are customers going to come from to support existing stores?

McDonald's cautioned that its margins are being hit with the effects of higher food and business expenses, and lower consumer confidence, and that its rivals in the U.S. are turning up the heat with revamped menus and marketing campaigns.

With cannibalization and intense competition the norm, with stores everywhere you look, is it any wonder companies are struggling with same store sales? I think not (and I am talking industry-wide, not just McDonald's). Actually, the only wonder is why this did not happen before.

Commercial Real Estate

Here are some questions to ponder: Where else is there to build, that makes sense to build from a risk-reward scenario? Will more stores result in more jobs or will cannibalization of jobs follow cannibalization of customers? What about store overall profit levels?

I think the answers to those questions are pretty obvious. One only need think of the questions to have serious doubts about job and earnings growth going forward.

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