Tuesday, January 4, 2011

Leading indicators: Statistics, lies, and half truths

There are a number of issues that I have with media, and the simple fact that I am writing this is going to perpetuate the problem.  What I am writing is not news.  Its my opinion, based on the facts as I see them, and I am going to spin the facts to convince you of the conclusions that I have already independently reached.  Media does the same thing, even though we call them "news" outlets that should be reporting truth that we then interpret for ourselves.

This last week I had a conversation with a good friend about our outlooks on the market in 2011.  He is bullish based on an economic forecast of strengthening job markets and I am bearish based on a weakening housing market. We are both getting our information from the media about these two very different sectors of our macro-economy but ones that have significant impact on our financial futures.  Both are related in certain respects, the higher the wages, and the more people employed, the higher demand for homes, the higher the prices for homes, requiring ever increasing wages to buy the homes.  You can see how those two indicators can spiral each other upwards and if you look at the inverse how they could spiral each other right down the toilet.

So in order to understand his position, I had to take some time to research his side.  At the same time I am going to look at some information that is contrary to his position and something that I think some pundits are neither including nor required to include but the exclusion of such information skews the outlook.

My primary example is a small but growing town here in Washington.  Lynnwood.  Now, Lynnwood has a growing retail market, although some recent tax changes may alter that, but as a typical American town, I will use it as an example.  In September, the city announced to its workforce or nearly 400 that in 2011, nearly 1/4 of its employees could be laid off. Then, this last week it was announced that Lynnwood laid off 24 individuals and 7 open positions would not be filled.  This was done in order to help fill a $20 million dollar budget short fall.

Last month, Olympia announced that Washington state is suffering from a budget shortfall that has ballooned to over $5 billion. That wasn't really news.  Any person that has resided in Washington for the past 4 years could tell you that budget shortfalls have been a part of the last two gubernatorial races.  So, if we go back to September we see notices from DSHS showing cuts of 6.3 percent, mostly through layoffs.  A quote from that news flash is instructive, "Secretary Dreyfus...emphasized that this will not be the end of budget reductions for the Department or the state. 'Our budget staff are already working on further reductions that will be required to balance the 2011-13 Biennial Budget to be developed by the Governor and the Legislature this winter.'" That quote was from when the projected budget shortfall was only $3 billion.

If you will excuse me for extrapolating, but you have a city with a budget shortfall of $20 million, with an "M" cutting 24 jobs.  Now you have a state that has a $5 billion, with a "B."  That is a bigger short fall by a a factor of 250.  So, if the state were able to trim its budget in the same manner as the city, which is quite a logical leap, but bear with me, then the State would cut 6000 jobs.

In January of last year, Microsoft announced it would lay off 5000 but in May it still had some further possible cuts..  At least with those announcements, there was a hint of silver lining in that Microsoft was moving more assets into high growth areas and would be expanding workforce in those profit centers by 2 to 3 thousand.  The State government doesn't have any high growth centers, at least not in the same terms.

In addition to the lagging data from the government, this week's paper had a note in regard to unemployment actually being up in November in most major metropolitan areas despite the claim that retail was making a comeback.  Read the link here.  Private sector jobs showed a vast increase in December, but the data seems to be a statistical anomaly.  In the post, a man is quoted as saying "If we add 200,000 jobs a month, it would still take 42 months" to recover those losses.  Additionally, a Gallup Poll on unemployment and underemployment showed that in actuallity, unemployment and underemployment increased by the end of December and that the report on private sector jobs is tempered substantially by the public sector layoffs.

The problem is that coupled with our mounting personal debt as Americans, an increased number of jobless is only going to speed the process of foreclosure.  In a recent post, it was noted that Americans will shed some $1 Trillion of housing debt this year.  That is in no small part due to lost wages.  These things are connected and both have to be fixed to get us out.

There may be those that say that the recession is over, there is nothing but birds singing and blue skies ahead, but there are heavy indications that there is still quite a bit of stuff to come.  I am not saying it won't get better, I'm just bearish on housing, and I don't believe jobs will overcome that any time soon.

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