As I stated in a previous market update video several weeks ago; it would not surprise me if the December 4th unemployment data notched back down to 10.0%. Well I was correct, the unemployment report released this morning put the official unemployment rate at 10.0% which is down from 10.2% last month.
The number of job losses reported in this data was the lowest of the year thus far (- 11,000 ), although the U-6 unemployment data (17.2%) is still at historic levels.
The reasoning behind my statement of not being surprised if the unemployment data dropped a notch in today’s report is extremely simple. The nation needs to feel better about the economy at the most important time of the year; the holiday shopping period. With November comps already pointing to weaker sales, and the outlook for the remainder of the holiday shopping season projected to be even worse than in 2008 something had to be done to save Christmas.The nation needed a confidence booster so people will open up their wallets and purse strings.
The Bureau of Labor Statistics (BLS) uses the black box ‘birth/death’ adjustment each month to alter upward or downward the actual data by an estimate of the number of businesses that have been newly opened or ones that have died. This birth/death adjustment for November was a net add of 30,000, and estimation that the BLS believes more businesses were opened vs. were closed in the previous month.
The birth/death adjustment is based in part on previous business trends and not as estimation of current realities. If you have been a long time reader of this site then you already are aware of the birth/death model as it has been discussed in great detail. The application of any black box modeling data that offsets the actual data remains a major issue for us who follow the employment situation closely. It remains my view that the BLS birth/death table is still extremely over optimistic and the real data will not be reflected for some time to come.
This mornings report is still missing the 824,000 benchmark revision that had been previously announced by the BLS. The benchmark revision; when applied, will increase the unemployment rate as the 824,000 revision is a negative number. At this time it appears that the benchmark revisions will not appear in the data until the release scheduled for February 5, 2010.
Reasons for having little faith in the birth/death model accuracy are many, such as the still rising corporate bankruptcy rate, credit contraction for main street businesses and consumers, and leading economic confidence data. The leading indicator of small business confidence dropped 13.6% from just last month.
Economic confidence among America’s small business owners plummeted in November, as more owners cited serious concerns about cash flow and saw economic conditions for their own businesses getting worse. The Discover Small Business Watch index fell 12 points in November to 76.5 from 88.5 in October. [...]
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- 52 percent of owners say they have experienced cash flow issues in the past 90 days, up from 44 percent in October. Forty-one percent of owners say they have not experienced cash flow issues, which is the lowest response in this category since the Watch began. The remaining 6 percent said they weren’t sure.
- 53 percent of small business owners see conditions getting worse in the next six months, up from 43 percent in October; while 19 percent report that conditions are improving, a sharp decline from 29 percent in October; 23 percent see conditions as the same, and 5 percent weren’t sure.
- 62 percent of small business owners rate the economy as poor, an increase from 55 percent in October; 30 percent rate it as fair, and 8 percent say it is good or excellent. (Source: Discover Market Watch)
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If business owners are more pessimistic about the future then they will not be hiring any time soon. Even large companies will be facing more layoffs in the future. Take for example the situation facing large (and small) utility companies as the winter arrives and the ‘no cut off’ rules go into effect. Utility companies are facing the same crisis as the banks and credit card companies with delinquent or non payment on accounts due to the extremely high unemployment rate and credit contraction.
In the winter months many utility companies have policies in place that forbids them from cutting off gas and electricity due to the cold even when the account is delinquent or has not paid at all. As such, the utility companies will be eating the cost of providing services while revenue intake declines and as such staff reductions will be forthcoming to adjust for those imbalances.
I will have more over the weekend on the market reaction to today’s data and what may be in store for next week.
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