Food Stamps and The Un-Adjusted Economy

The number of Americans on food stamps just hit an all-time high. During January and February 2008 (latest data available) an average of 27,675,000 Americans participated in the program, 1.4 million more than at the same time last year (see chart below, click to enlarge).

Data: USDA

What is troubling is that the number rose and remained high, though six years passed since the official end of the last recession. It is now rising again as the economy weakens. The comparison with the 1991-92 recession and subsequent expansion is quite disturbing.

While food stamps are clearly a lagging economic indicator, the continuous rise in recipient numbers during 2002-2008 causes me to conclude that real GDP growth in previous years was not as robust or widespread as the headline numbers suggested. Unlike other data, I believe food stamp numbers are not greatly "adjusted" and thus provide a truer picture of the economy - or, at least one aspect of it: how difficult it is for real people to make ends meet. As opposed, say, to those phantom employees created by BLS models. (I guess they don't need food stamps because, if we are to believe the official inflation figures, they don't eat.)

For example, after adjusting and re-adjusting, the BLS reported that the economy added a net 800,000 jobs in the 12 months to February 2008. And yet, in the same time food stamp participation increased by nearly double that number. While the two statistics are not necessarily mutually exclusive, which one provides a better "feel" for what is actually happening in the "un-adjusted" economy?

Looking at the entire 2002-07 period, the economy added a net 8 million jobs and 10 million more people went on food stamps.

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Retail and food service sales were reported today (-0.2% from the previous month) and the media spin machine immediately went into overdrive to cushion the bad numbers. The favorite ploy is to exclude autos and various other sectors to come up with "core" retail sales. (It's a bit like core inflation that excludes food and fuel, also known as inflation without the inflation...).

Today's spinning involved the exclusion of auto sales, since they dropped by a very sharp -2.8% in April. So, without the drag of such a terrible figure, "spun sales" become a much more palatable +0.5%, supposedly signifying all kinds of "robust core spending" nonsense. Only problem is, at $72 billion/month auto sales are by far the largest segment, accounting for 20% of all retail and food service sales.

Since two can play at this game, how about total sales minus gasoline, food stores and restaurants? After all, these are exactly the items most impacted by rising food and fuel prices and rising sales there are not exactly a sign of higher discretionary spending. This total was down -0.4% from March.

Robust..not!

Glaringly Wrong, Or ..?

The post's title refers to an article in the January/February 2000 issue of Foreign Affairs about the price of oil.

But before delving into that, a current Reuters news story about GE Money ceasing to finance motor homes and recreational boats. Sales of such pricey toys have collapsed: year-to-date motorhome shipments are down 24% and sales at the nation's largest boat retailer are down 28% in the first quarter. Along with Starbucks overpriced lattes, these are additional signs that the US consumer is hitting the brakes hard.

And while peripheral, highly discretionary items are feeling the impact hardest, overall spending is down significantly, too. According to SpendingPulse, retail sales excluding gasoline and autos were down 0.7% in April versus March.


OK, back to the Foreign Affairs article from 2000. You can read a 500 page preview here (or the entire article if you are a subscriber).

This is a part of the first paragraph:

But contrary to much received wisdom, the energy problem looming in the early 21st century is neither skyrocketing prices nor shortages that herald the beginning of the end of the oil age. Instead, the danger is precisely the opposite; long-term trends point to a prolonged oil surplus and low oil prices over the next two decades [emphasis added].

The writers predicted oil would remain in the $12-20 range for another 20 years.

Instead, we got this:
The purpose of this post is not to scoff at a glaringly wrong prognosis by two experts - anyone can make a mistake. Indeed, it is sometimes far easier for "experts" to make mistakes than rank novices (ever heard of beginners' luck?). Instead, this post is about a different interpretation of the what, why and when of the article, one that may also shed some light at current oil prices.

First, some background: by 1998-2000 oil prices were scraping the teens and low twenties for over a decade. The national economies of crucial Arab allies like Saudi Arabia, plus Russia (a.k.a. "Upper Volta with nukes") were essentially bankrupt. Populations in Arab oil producing nations exploded upwards while oil income collapsed, threatening the socio-political stability of the authoritarian regimes. Massive subsidies for everything from food, fuel and higher education, medical care and even wedding dowries were no longer possible. Agitation by young, restless populations was on the rise...

I remember reading the article when it first came out. My first reaction was surprise at the truly parlous state of finances in the Gulf region. In Saudi Arabia alone, real GDP per capita had slumped from $11,450 in 1984 to $6,750 in 1994. The country's budget had swung from $140 billion in surplus revenue in 1982 to consecutive deficits that eventually ran up a national debt of $130 billion. Other oil producers - most obviously Russia - were in even worse shape.

My second thought, then, was that "they" wanted oil prices to go higher in order to prevent major geopolitical upheaval ("they" being the loose term employed when referring to the US establishment, for which Foreign Affairs is the recognized house organ). The article's purpose, therefore, was not to predict low oil prices but to warn that low prices were dangerous and no longer desirable. Indeed, after a brief pause due to the shallow recession following the dotcom bubble, prices climbed inexorably higher.

Well, things have now come full circle. The latest issue of Foreign Affairs carries an article ("Blood Barrels") that is in the exact opposite direction of the one that appeared eight years and $100 ago. The summary reads:

Oil wealth often wreaks havoc on a country's economy and politics, helps fund insurgents, and aggravates ethnic grievances.

From cursing very low oil prices in 2000, "they" have now gone to "..the so-called oil curse", "Dutch disease" and armed conflict by internal insurgencies. In the 3,000 word article "conflict" appears 17 times, "war" 11 times, insurgent/insurgency 7 times and violent/-ence 4 times. Get the message?

Now, all of the above is not meant as my prediction that oil prices will move lower - I am just pointing out the ebb and flow of the establishment's views on the subject. In any case, readers know that I prefer pricing energy on a like-for-like basis (EROEI), instead of artificial dollar terms that can expand or contract with monetary policy.

One final observation.

President Bush is to visit Israel, Saudi Arabia and Egypt between Wednesday, May 14 and Sunday, May 18. This is the schedule:

Wednesday - Israel
Thursday - Israel
Friday (until abt. noon) - Israel
Rest of Friday - Saudi Arabia
Saturday - Egypt
Sunday - Egypt

If you are familiar with diplomatic protocol you can immediately "read between the lines". A visit to Saudi Arabia lasting just a few hours scrunched between Israel and Egypt is the equivalent of expressing severe displeasure, i.e. the White House is flipping Saudis the finger (or is it the other way around?). The cause for such displeasure is easy to guess: despite repeated US entreaties to raise oil production and lower prices, the Saudis are staying put. They blame record prices on the lower dollar, speculative frenzy in futures markets and high demand from Asia, but the US administration is clearly not satisfied.

There are more aspects to this story, most prominently the possibility that Saudi oil production has peaked (see Simmon's Twilight In The Desert). But "they" are very far from acknowledging any such possibility, at least publicly, choosing instead to view high oil prices as a deliberate choice by Arabs bent on maximizing current gain and "buying up the world" through sovereign wealth funds.

My view is that we will find out very, very soon what is really going on.

Data To Die For

How can we realistically trust the data that come out of the various US departments anymore? Even given the benefit of the doubt, i.e. assuming model massage was originally established to provide a clearer picture of the US economy, the ultimate result now looks more like an elaborate GIGO * contraption designed by Rube Goldberg.

Case in point: the Net Birth/Death model of the Bureau of Labor Statistics. During the most severe downturn in the real estate and homebuilding sector since the Great Depression, the model keeps creating phantom construction jobs (see chart below, click to enlarge).


Not only did the model spew out a total of 98,000 net additional construction jobs in the 12 months to April 2008, it produced more such jobs in April 2008 than the same month last year (45,000 vs. 37,000, or +21%). In other words, new construction businesses that were established in that period supposedly created many more jobs than those lost from businesses shutting down.

The first casualty of war is the truth - Aeschylus. Problem is, who's the enemy?


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*Garbage in, garbage out

Slow Crunch Time

No wonder consumer confidence is in such a sorry state.

Americans are now forced to spend a large and rising portion of their disposable income on necessities: food, fuel and debt service. Such expenses now require 31.5% of disposable personal income (DPI), the most in 25 years. While outside factors may also affect consumer sentiment (red line), it closely tracks spending on necessities (blue line). As prices for such items rise faster than income, less money is left over for everything else and confidence drops.

Both measures are now back to levels last seen in 1982-83 (click to enlarge).

Unless retail prices for necessities soon reverse dramatically (unlikely), or incomes rise faster than food and fuel inflation (even more unlikely), consumers will stay on the defensive. They will continue to cautiously reduce discretionary spending and thus pressure the overall economy, which is now running on "slow crunch time". All those expecting a quick turnaround in 2008 had better adjust and learn to be patient.

There is an added dimension to this picture: the possibility for increasing demands for higher wages and salaries, to make up for lost purchasing power. If this situation continues unchecked for several more months, I wouldn't be surprised to see a resurgence in union activism, particularly in sectors where lower incomes predominate, e.g. retailing, food service and social services.

Therefore, crunch time applies to the Fed, too. The threat of structural inflation, not seen in a very long time, is already posing a serious challenge to the Fed's current policy. Highly negative real interest rates (Fed Funds at -2.00% now) may facilitate the salvage of the shadow banking system, but they also create inflation where it is felt the most by those that can afford it the least: essential food and fuel goods.

Tough choices ahead for the Fed.

Of Lifestyle Jobs and Gasoline Taxes

It seems that I keep coming back to the subject of jobs; yesterday's post on Las Vegas prompted a reader (thanks "thai") to ask what percentage of the economy is "leisure". Well, 12% of all private sector jobs are now classified as leisure and hospitality - incredibly, the same percentage as manufacturing. By comparison, in 1950 manufacturing jobs accounted for 36% and leisure for 6%. In other words, within a very short time, as history goes, the US gutted its industrial labor force by an astonishing two thirds while doubling "bread and circuses".

Adding healthcare to the jobs picture, employment in what I call the "lifestyle" sector jumped from 12% to 28% in the same period (private education, included in the chart below, is a minor 2%).

Type of Jobs as a Percent of Total Private Employment

The process of "dumbing-down" and reducing the value-added of the economy has been ongoing for a long time, but it accelerated further after 2001. Between 2001 and today the US shed 4 million manufacturing jobs and added 2 million leisure jobs, plus 3 million healthcare and social assistance jobs. This does not make for a vibrant, innovative economy and certainly not one that can quickly rise to the technical challenges posed by resource depletion and environmental degradation.

One of America's most attractive attributes has always been its economic adaptability. It came at the cost of a smaller social safety net versus other developed nations, but its benefits were also plain to see. A skilled and mobile labor force kept moving laterally and vertically to grasp opportunity as it arose. The labor force is still mobile, but how skilled is it?

As I have said before, manufacturing is key because it generates tremendous add-on benefits in technological R&D, education and competitiveness. Many claim that everything is still OK because we have Harvard, Columbia and MIT, to name but a few top-notch colleges. But how long will they remain world-class if we keep creating bartender jobs while China and India staff their factories and R&D departments with local graduates? Note that 60% of all engineering PhD's in the US are awarded to foreign nationals who can and do go back home to further enhance their nations' colleges and technological capabilities.

Until just a few months ago finance (+500,000 jobs since 2001) was also viewed as a sector where America held a comparative advantage and one that could serve as a substitute to manufacturing. How many still think so?

And, finally, what better sign of the decline in the once proud blue-collar sector than the populist pandering of McCain and Clinton, who keep pushing for a summertime repeal of the federal gasoline tax? Clinton mentioned it twice in her Indiana speech last night. How can anyone claim that 18.4 cents will make a difference with pump prices at $3.60? That's $10 per month for the average car, a difference that could be made up in half an hour by someone with even a semi-skilled job in manufacturing vs. a waiter on minimum wage.

If $30 or $40 dollars per year is such an important amount to the average American that it becomes a major campaign issue, then we have far more serious problems.

Viva Las Vegas!

Nothing proclaims "AMERICA!" more uniquely and loudly than defiantly gaudy Las Vegas. From dusty desert to "America's Playground" within just a generation, it has arguably become an economic thermometer, a neon sign (what else?) of flashing green or red, following the state of the Union's lucre. After flashing green for several years, the latest color is a light amber: The famed Tropicana just filed for bankruptcy.

Photo: Las Vegas News Bureau/LVCVA

The Las Vegas Convention and Visitor's Authority compiles a jackpot-ful of data on the number of visitors, conventioneers, gaming revenue, etc. stretching back to 1970. The following chart (click to enlarge) plots the gaming revenue of all casinos located in Clark County.

Data: LVCVA

Gaming revenues were up an anaemic +2.2% for the whole of 2007, while the first two months of 2008 are -4%. Obviously two months do not make a trend, but BINGO! it isn't, so far.

Meanwhile, after holding pat at roughly 130,000 rooms for several years, the Strip's casino operators are (belatedly?) betting on rollicking good times. Construction planned and under way is scheduled to increase hotel and motel rooms 29% to 171,000 by 2010. Convention space is also set to increase by 4.8 million square feet. Other proposals with as yet undetermined completion dates could add another 33,000 rooms and 8,000 time-share units.

Data: LVCVA

(Off The) Cliff Notes

We all know that new house sales have dropped off the cliff. The most common picture of the bubble's end is the chart below: the seasonally adjusted annualized rate of sales per month (click to enlarge). Looking at this chart alone we could be tempted to conclude we are close to a bottom and may soon see a rebound. Is this likely?

Data: Census Bureau

Dramatic as the above picture may be, it does not tell the whole story. The housing boom started in 1991 and lasted for an unprecedented 15 years, during which more houses were built and sold in the US than any previous cycle. Therefore, we need to include a longer view in our picture. Looking at the blue SAAR line above we observe that housing booms before 1991 lasted ~3 years. The next chart, then, includes a 3-year rolling total, i.e. how many new houses where actually sold in any three year period (red line).

Data: Census Bureau

We see that by this measurement the housing market is still far above historical lows. If 3-year total sales are to revert to the historical 1.5 million low, annual sales must stay at 500.000 per year for three years, or dip well below that before rebounding. The 15 year boom apparently created more housing supply than demand for shelter could realistically absorb, eventually leading to a speculative bubble. It will take a significant time to work off the excess physical supply of homes. How long will the downturn last?

For additional insight, let's look at home vacancy data: Homeowner vacancies are currently at an all-time high of 2.9% and of those vacant homes, a record 2.28 million units are for sale only, up from 1.39 million in 2005 (see chart below). That's another four years worth of supply at the current pace of sales, up sharply from one year's worth in 2005.

Data: Census Bureau

This additional supply of vacant homes for sale is now acting as a lead weight pulling down new home sales further. If annual sales stabilize at current levels, then housing could be in for another 6-7 years of sub-par activity before all the excess supply is absorbed.
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P.S. I noticed that Michael Klare has a new book out: Rising Powers, Shrinking Planet: The New Geopolitics of Energy. I consider him one of the most thoughtful and analytic writers on the topic of resource conflict and, unlike many others, he is an acknowledged academic expert in this field. In this book he focuses on the rising tensions between the US and other global powers - China in particular - stemming from access to energy resources. There is an accompanying article in The Nation.

I constructed the following chart of total energy use (million tons of oil equivalent per year) in the US and China. The developments after 2000-02 are quite revealing: a sharply narrowing gap in the energy demanded by the two superpowers may lead to a collision course. Unless we start changing our energy regimes very soon, conflict over scarce resources cannot be ruled out.

Data: British Petroleum

Peak Oil

This is not a peak oil blog and I do not wish it to become one. But as a finance professional educated in chemical engineering and one who worked on the design and construction of a couple of synfuel plants (way back when..), I have an appreciation for the connection between money, credit, energy, the economy and how our society's current model (Permagrowth) puts it all together into a complex whole - in my view increasingly unsustainable.

Money does not drive energy, but energy does drive money (and everything else). Thinking in terms of dollars per gallon is useful when going to the pump for a fill up, but unless we interpret price signals properly and comprehensively, it is likely that we will make profound mistakes in planning our future. When marking the price of oil in dollars we easily fall prey to notions about manipulation, political jiggery, terrorism, profiteering and a host of other "explanations", instead of hard facts.

In fact,then, the proper way to evaluate energy pricing is EROEI (Energy Returned Over Energy Invested). If the ratio is declining then energy is getting more expensive in real, BTU for BTU terms and eventually this situation finds its way into "dollar pricing", though things can get mightily muddled because money supply is artificially created and theoretically unlimited. Fiat money does not follow or depend on physical laws but "trust", a very dicey and evanescent measure of human psychology.

What do oil sands, drilling in very deep oceans, corn ethanol and resource wars (Iraq, Afghanistan..) have in common? They are very low EROEI energy sources compared to the rapidly declining high EROEI sources (e.g. Texas and Mexico). The fact that we have to increasingly depend on them to meet demand is the surest proof that "cheap" oil is rapidly becoming a thing of the past. And this, ladies and gentlemen, is as good a definition of Peak Oil as any.

In closing, you may wish to read this article from UK's The Daily Telegraph: Oil Is Expensive Because Oil Is Scarce.

For those not familiar with British politics, The Telegraph is a conservative-leaning newspaper. It has the largest circulation of any "quality" newspaper.

Unemployed Part-Time

Payrolls declined by 20.000 in April, lower than expected (-100.000). However, looking just below the surface of the headline data reveals a fast deterioration in other job measures.

The number of people employed part-time for economic reasons, i.e. those that could not find full-time jobs or had to work part-time because business was slow, swelled sharply by 306.000 in April to a total of 5.22 million. This is the highest number since 1994 (see chart below, click to enlarge).

Number of people employed part-time for economic reasons (chart: BLS)

Such part-time employment now accounts for 4.52% of all private jobs, the highest percentage in 13 years and up from 3.4% two years ago (see chart below).

The Bureau of Labor Statistics counts everyone who worked 1 to 34 hours per week as employed and includes them in the headline payroll numbers, even though such employment clearly results in fewer hours and lower pay.

Taking this analysis one step further, part-time employment for economic reasons, i.e. forced part-time, accounts for 21% of all part-time jobs. This is also the highest level since 1994.

In summary, while the headline employment numbers are not declining as fast as during previous slowdowns, the qualitative job measures are worsening and are already at multi-year points.

The most likely cause is that employers, particularly those in the service sectors, are hoping the economy will rebound soon, so instead of fully laying off people they are cutting costs by forcing employees to work less, for less pay, i.e. forcing them into part-time un-employment.

What does this mean for the economy? Let's combine the poor employment picture with sharply higher costs for necessities such as food and fuel, the zero/negative saving rate and record high debt: the result is most likely going to be a continuing curtailment of discretionary personal spending. With personal consumption accounting for nearly three quarters of GDP, I believe we are in for a prolonged period of weakness.

Looking at just the headline BLS numbers is currently pretty misleading and may cause misplaced optimism.

The Real Cost Of Black

A reader (thanks M3ANON) had this to say, by way of criticism to yesterday's post:

"To top it off you all seem to be in favor of rebuilding society on alternative energy methods that, at present, are not efficient or even self-sustaining. It might be a different matter if the alternative energy methods you all propose were actually efficient and capable or maintaining society as we know it..." (bold added).

I would like to address the two points highlited above, because I believe many people have similar concerns.

• Alternative energy methods are not self sustaining or efficient.
  

Well, obviously solar energy is self-sustaining - for several million years more, anyway. Solar energy includes direct (i.e. solar panels) but also energy derived from the wind, waves, salinity differences, marine temperature gradients and biomass (am I leaving anything out?). Geothermal and tidal energy depends on the Earth's core and the Moon respectively and is also likely to last another few million years - unless a big asteroid hits.

Efficiency is measured by EROEI and all of the above energy sources now likely exceed "black" energy, when all costs are included. For example, the cost of maintaining the enormous US and other nations' military machines and occasionally fighting wars. Or the cost of environmental change caused by greenhouse gases. And how about geopolitical cost, to account for the very real risks arising from the increasing concentration of "black" resources in a handful of nations?

• Maintaining society as we know it.

Can we actually maintain society as we know it? Society's ability to consume ever more (i.e. Permagrowth) was made possible with the enormous energy boost of fossil fuels. They are running out and are destroying our habitat, besides. So we have no choice but to change our society to better fit whatever energy is available. If we plan ahead wisely, changes will come with few major disruptions. But if we keep on pushing on the gas pedal we will just fly off the cliff.

Oh, we may maintain our society as we know it, allright. But what about our children's society? Are we willing to consume their future so we can maintain our present?