Manufacturing orders are still punk

Hoy GrimmBloomberg  headlines the decline of manufacturing last month. Halfway into the piece we get the meat of the story. The slowdown reduced manufacturing jobs by 5% from January:

The ISM’s U.S. factory employment index declined to 51.4, the lowest since June 2013, from 54.1 the prior month.

You have to go back to last July to record a positive increase in factory orders. In the past 15 years if new orders dropped this much, the economy was in recession:



A Simple Question for Janet Yellen

In her testimony before Congress this week Janet Yellen said that she expect the economy to continue to improve.

"if economic conditions continue to improve, as the committee anticipates the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting by meeting basis."

A few weeks ago, Goldman Sachs Chief US equity strategist, David Kostin highlighted that the consensus forecast for S&P 500 sales growth in 2015 is now zero. Most of the sales decline is due to falling energy prices but weren't consumers lead to believe that this would be good for the US economy? In fact, for the first time in 6 years the Consumer Price Index turned negative in January.



So our savings at the gas pump has yet to materialize elsewhere. What is materializing is layoff notices. Jobless claims jumped 31,000 this week.

My question for Ms. Yellen is simple and straight forward: Where is the demand that she expects to drive our economic improvement going to come from? Does she anticipate that consumers will leverage their tepid wage gains into more debt? Will big businesses ignore the earnings hit from the strong dollar? Please detail for us where you see demand materializing from to lift our economy from deflation to inflation so you can justify raising interest rates?

The Federal Reserve tapered and then ended QE last year. That was an effort to reduce stimulus-tapering is tightening. The rest of the developed globe is in deflation. Other than sub-prime car loans and student debt, end demand is nowhere to be found.


Bloomberg Ignores Underemployment

Hoy GrimmIn a breathlessly giddy post today, Bloomberg columnist Victoria Stilwell tries to connect the dots between the low unemployment rate for college grads (2.8% versus 5.7% for the populace as a whole) and a pending shortage of college educated workers:

That could mean the U.S. isn't far from a position that would have been crazy-talk not too long ago -- running out of those types of people to employ, according to Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Stilwell concludes:

That also has good implications for the wages of those workers. As those laborers become scarcer, companies will be forced to bid up their pay in order to attract the best and brightest.

I propose that an alternative force at work driving down unemployment for college grads- underemployment. The Washington Post explains it:

Why the poor showing for business majors? PayScale notes that in many cases, a simple bachelor's degree in business might not get you very far - a more advanced degree like an MBA might be necessary "in order to set up recipients for jobs in their fields."


Could it be that many college graduates are having enough difficulty finding jobs in their major that they are absorbing the lower paying jobs that other workers used to compete for?

To be fair, technical skills like programming and engineering are where demand and higher pay meet:

At the other end of the spectrum, STEM fields produced graduates with the least likelihood of underemployment. Engineering degrees accounted for six of the ten least underemployed majors. Law, physics, geology and mathematics made up the remaining four.

Unfortunately, Silicon Valley and Washington are conspiring to open the immigration floodgates to fill these desirable openings.

Today's unemployment report shows that while wages in January increased nicely, workers have only earned an average of 2.2% more in the past twelve months.

Jim Clifton at Gallup summarized the problem with Headline unemployment:

Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren't throwing parties to toast "falling" unemployment.

North Carolina calculates that their unemployment rate is over 12% when they add in the underemployed.

You might expect the UK or an African country like Rwanda to be grappling with underemployment, but it's odd that a search of turns up nothing on the issue.

It looks like the Middle Class Recession is alive and well.


An Update on the Middle Class Recession

Hoy GrimmLast year we shared our perspective on surviving the middle class recession of 2014. We argued that wages for the middle class were mired in a muck of government policy intervention that left them stagnant. We questioned the Fed’s timing in ending QE and beginning an ill-timed assault on “wage inequality”. A year ago we cited research by economist David Henderson that dispels the myth that poor people benefit from a minimum wage increase: 

  • Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor. 
  • A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more. 
  • Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

A year later 

Nothing about the government’s war on the middle class has changed. President Obama still wants to tax the rich and raise the minimum wage. Janet Yellen has ended QE (for now) and insisted that despite deflation (due to collapsing energy prices) being more likely than inflation this year, she is intent on raising rates which will likely end the barely measurable economic recovery that exists.

We now have evidence that the middle class has been in recession instead of recovery. Let’s examine the new jobs that are supposed to be leading us out of recession.

The President boasts that his economy created 10 million jobs:








Houston, we have a Problem

There is a problem with the President taking credit for this. 93% of the jobs the economy has created have been in the energy industry. An industry that Obama is hostile towards:


A Single Industry Recovery

The oil patch created 93% of the jobs during the recovery and a over  1 trillion dollars of GDP. The rest of the economy only created 7% of the jobs. It is hard to characterize these numbers as a robust, widespread recovery.  Unless you are in the oil industry, you have had to fight for scraps in this “recovery”.

Paying the Price

Falling energy prices are taking a heavy toll on the industry that created 9.3 million of the 10 million jobs during the recovery. In December Reuters reported that permits for new rigs dropped 40%. The drop in permits presages a 60-90 decline in rigs. Fewer rigs mean fewer people working these rigs.

Expectedly, the decline in rig permits was followed by layoff announcements this month from Slumberger (-9000) Baker Hughes (-7000 jobs), Halliburton (-1,000) and Suncor (-1,000) to name a few.

These lost jobs were paying considerably more than minimum wage and the crunch isn’t over yet. Domestically, crude inventories are running 11.5% higher than the five year average.  Companies are slashing their capital expenditure budgets to preserve profitability. This will have a longer term impact on the industry’s ability to grow once oil prices stabilize.

This has the folks at Standard & Poor’s scurrying to revise earnings estimates for the S&P 500:

Energy estimates have declined 53.04% for 2015 from June 2014. Energy was expected to contribute 12.40% of the S&P 500 earnings in 2015 (back in June 2014), and is now estimated to contribute 6.56%. Energy earnings are now expected to post a 39.07% decline in 2015 over 2014, with 2014 already being reduced for Q4:14.

Repeat after me, “Lower energy prices are good for the economy and the stock market.”


Everything is Awesome

Despite the rapid collapse in the one industry that has been a shining light in our economic recovery, the President announced in his State of the Union speech that “everything is awesome.”

“The verdict is clear,” Mr. Obama said. “Middle-class economics works. Expanding opportunity works. And these policies will continue to work, as long as politics don’t get in the way.”



The Presidents misplaced optimism was echoed by the Federal Reserve this week.

 “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.  On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.  Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power.  Business fixed investment is advancing, while the recovery in the housing sector remains slow.”

 Despite acknowledging that inflation is declining instead of increasing, the Federal Reserve insists on raising rates. The markets digested the Fed’s desire to raise rates in a deflationary environment and used the news on January 28th as another reason to sell stocks.


















The Fed statement was also optimistic that wages will increase this year in response to tight labor market conditions. That would truly be awesome news for the middle class.

The Death of Small Businesses

Jim Clifton, Chairman and CEO of Gallup updated his analysis of small business activity in America. Small business startup activity is an important engine for new jobs in our economy so new business activity is important to follow. He compares new business startups to businesses closures.













“There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years…

I don't want to sound like a doomsayer, but when small and medium-sized businesses are dying faster than they're being born, so is free enterprise. And when free enterprise dies, America dies with it” Jim Clifton, Chairman Gallup

The Employment Picture

Wage stagnation has persisted throughout the past decade (yes, even going back to the previous administration). Cheap financing from 2000 to 2007 provided consumers with the ability to leverage their stagnant wages into more economic activity than they could otherwise afford. Since the recession “ended” in 2009, sub-prime mortgages have morphed into sub-prime auto loans that have propped up the consumer spending numbers.

This consumer spending problem has been glossed over by population growth and inflation. Doug Short, (one of the few macro bloggers who keeps his politics out of his analysis), recently analyzed the impact of these two factors on consumer spending and the results are startling. On the surface, retail sales look like they are well into recovery mode:

















After adjusting this data to reflect population growth of about 25% since 1992 and inflation (CPI) we see a different story:
















Here is Doug’s conclusion:

The Great Recession of the Financial Crisis is behind us, a close analysis of the adjusted data suggests that the recovery has been frustratingly slow. The reality is that, in "real" terms — adjusted for population growth and inflation — consumer sales remain below the level we saw at the peak before the last recession.

The middle class desperately needs a pay raise, or more work hours to boost their income. The Fed argues that a tight labor market is on the verge of boosting wages in competition for workers. Let’s examine where these new workers are coming from.

At the end of 2013 a divided US Congress could reach agreement on renewing unemployment benefits so the benefits ended. This affected 1.3 million people who were receiving unemployment benefit checks. A new study from the National Bureau of Economic Research (NBER) makes a strong case that reducing these benefits pushed affected workers off the sidelines and back into the workforce. Interestingly, these unemployed workers, who were probably already looking for work, were forced by the loss of benefits to find any employment even if that meant at a lower wage that what they were previously pursuing.

The study estimates that half of the jobs created last year (1.8 million) could be attributed to this benefit cut. These workers didn’t reenter the workforce to accept the position of their dreams. They were forced into the workforce on their employers’ terms. This isn’t an environment that pressures employers to raise wages dramatically.

These benefit reductions helped reverse the trend in the labor force participation rate in 2014. The decline in available workers, those actively seeking employment lead to a number of theories about changing dynamics in our society. Most of these studies argue that our aging baby boomers will lead to lower participation in the labor force than previous decades and that we need to accept that fewer workers will be available. Again, Doug Short’s detailed analysis demolishes this theory:

“The percentage of elderly employment is hovering at its historic high -- now double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major cause, I would argue, is the often surprising discovery by many of the elderly that the "golden years of retirement" might be less personally satisfying than productive employment.” Doug Short


Without touching the tinder box of illegal/undocumented immigration policies, it is clear that our labor market remains suspect. Outside of a few technical industries that require specialized training (that Silicon Valley wants to import into the US) wages will do well to keep up with inflation/deflation.



Understanding reality is the first step to surviving this mess. If you are part of the middle class, you are not crazy to think that your situation is harder than what your political leaders want you to believe. The middle class has yet to recover its jobs, wages, benefits or wealth that it lost in 2008. If you’re not on a government, Wall Street or corporate executive suite payroll, you are waiting for the recovery to reach your family while you work harder than ever to get ahead.

You may need to move your family to another region with better job dynamics. You should broaden your skill set to make you more valuable to the workplace. Do what is necessary to save money so you have some capital to maybe start your own business someday.

This middle class recession might not end until the next recession hits our economy.


Revisiting your New Year’s Resolutions

kevin-painterThirty days into the New Year, you can already see the parking lots at the health clubs thinning out.  It happens every year:  we are resolute and committed that THIS year is the year we are going to lose weight, be nicer, eat better, read more or get our financial lives in order. According to University of Scranton psychologist Jon Norcross, nearly a third of those that made resolutions have quit at the end of January, and more than 55% fall off the wagon by the end of June.

All these resolutions center around changing our behaviors.  Some of these are learned, some innate, but we recognize that they cause stress, create potential health problems and can cause emotional discord with our family and friends.  We recognize that we need to change, but lack the discipline to make that happen.  There are fad diets promoted on social media, self-help books and financial organization apps for our iPad that promise to help you reach your goals.  The marketing pitches used by these companies and salespeople are masterfully worded to capture our emotions to make a purchase.

Yet, making a goal and staying focused to reach that goal are two totally different things. We are all a month older and 30 days closer to major life events.  Whether saving for college or retirement, those strategies require not only a plan, but behavioral discipline to meet those goals.  If you haven’t made a budget, developed a debt reduction plan, or saved for your child’s tuition, why is this year going to be different than the last?

Our practice specializes in recognizing, understanding and changing people’s behavior when it comes to their finances.     Keeping resolutions requires lifestyle change and a complete modification of your emotional and financial behavior.   Our role as counselor is to help you maintain focus during times when you’re tempted to revert back to the way you used to do things.

Thomas Edison said, “Vision without execution is hallucination.”   Make this year THE year that you stop dreaming about your financial future and take control of it.


College Aid- How to jump to the front of the line

jon-smallIf you have a college bound student in your home, odds are good that you’ve spent some time at the theme parks in Orlando. The secret to maintaining your sanity on those vacations is learning how to manage your fast-pass tickets so you can jump to the front of the line and avoid an hour plus wait in the cue. Competing for financial aid requires the same “fast-pass” mentality.

Each January, many of our clients ask me when they can file their taxes so they can complete their student aid forms for their children or grandchildren.  The Free Application for Financial Student Aid form (FASFA) qualifies families for a majority of Federal and State student aid as well as most institutional college aid programs.   You can file the 103 question form any time after January 1st, yet most people wait to complete the form after they’ve filed their tax returns in February or March.

Since most financial aid is offered on a first-come, first-served basis, filing the form earlier can make a big difference.  According to Mark Kantrowitz of, those that file prior to March 30th receive twice as much money on average than those that file later. Because many states and colleges have earlier deadlines, you may need to file earlier as well. Here in the Volunteer State, the cutoff varies based upon need and eligibility.  Prior-year recipients receive award must apply by March 1st while the deadline for lottery scholarships is September 1st.

Here are some tips for completing the FAFSA effectively:

  1. The early bird gets the worm.  The sooner you file, the more likely you receive benefits. I recommend completing the 2015-2016 FAFSA form using 2013 tax return numbers as an estimate, and updating that information when you’ve filed your 2014 tax forms.
  2. File the FAFSA online.  The website,  streamlines the process by eliminating the questions that aren’t applicable to your specific financial situation.
  3. Understand what assets and income to include.  The value of your retirement accounts and principal residence should not be included in your aid calculation number.  This will affect eligibility for various financial aid resources.

After completing the FAFSA form,  you’ll receive a Student Aid Report (SAR) that details how much you and your family are expected to contribute to the college education (also known as EFC, or expected family contribution).  This amount is not necessarily how much you will pay for college, but is used by the colleges to determine the amount of aid you are eligible to receive.  It is based on your household size, number of students in college, your income and your assets (not including the value of your retirement accounts or personal residence).

It’s important to file the FAFSA even if you don’t qualify for needs-based assistance because it allows you access to low-cost student loans and merit based aid.  The FAFSA does provide access to all financial resources.  Higher education can come at a high cost.  It’s important that students and their parents research and analyze all of the available funding options as they pursue their cap and gown.

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