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The Spaghetti Western of Employment

Takeaway: The unemployment rate is down to 7.8% driven by participation, or lack thereof.

As many of you know, my colleagues and I at Hedgeye are fans of the legendary actor Clint Eastwood.  We say this despite his less than stellar performance at the Republican convention.  One of his most well known movies is The Good, the Bad and the Ugly.  In terms of film genre, this movie is in the category of Spaghetti Western.

 

The title of the movie itself is likely the best description of the employment data today – which we will touch on in more detail shortly – but the genre of the movie probably best describes the manic commentary around this report.  Republicans from Jack Welch on down are claiming there is some grandiose manipulation of the numbers ahead of the election. 

 

Meanwhile, Democrats are using this as a data point that validates the Obama economic plan and justifies his re-election.  Just as we should be a little reticent letting Italians make Westerns (or Canadians make operas for that matter), let’s take a look at this report outside of the partisan lens.

 

The Good

 

The headline unemployment is positive for Obama and perhaps positive on the margin for confidence (very marginally). This comes despite consensus misses across the board on month-over-month non-farm, private and manufacturing payrolls, but because the focus for much of the punditry is on the actual rate.  On the positive, total employed did rise by 873,000 which is the first meaningful increase in three months (although 600,000 of these were part-time jobs).

 

At 7.8%, the unemployment rate is now the same as when Obama took office and down from the 8.1% rate of August.  It also deflates, at least partially, a key refrain from Romney’s debate strategy which is to highlight that unemployment has been above 8% for the duration of the Obama Presidency.  The political analysis from the manic media on the jobs report is as simplistic as can be expected with the headline on USA Today currently being a prime example:

 

“Political analysis: Jobs report boosts Obama”

 

We will go into detail shortly as to why this employment number is actually far from stellar, but the sentiment is what it is and this will marginally benefit Obama.  This is already being reflected on Intrade where the Obama contract has rallied about four points from 65 to 69.

 

The Bad

 

In the bad category, there are a number of favorable items that were one time in nature that may have made this number look better than reality.  Specifically, the government uses a seasonal adjustment that we have touched on numerous times.  As our Financials Sector Head Josh Steiner wrote last week:

 

“We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year.”

 

The point is that there is some manipulation in these numbers.  This isn’t a partisan fact, but simply something we’ve observed based on looking at this data for the past three years.  So, this “positive” report shouldn’t surprise anyone or be considered a panacea of economic recovery.  The chart below outlines this seasonality.

 

The Spaghetti Western of Employment - 1

 

The Ugly

 

The ugly is related to not just this jobs report but the economic environment in the U.S. that has Americans leaving the workforce in mass.  In the chart below we’ve adjusted today’s labor report for the 10-year average labor force participation rate (LFPR).  Given this analysis, the unemployment rate in September would have been 10.8%.  This would have been a decent improvement over the adjusted August number of 11.3%, but is still very elevated.

 

Interestingly, if you adjust the headline figure for the LFPR on Obama’s first day in office, the SEP unemployment rate would have been 11.1% – substantially elevated from the comparable 7.8% figure he inherited from Bush. What this suggests is that, over the last four years, President Obama has seen the U.S. unemployment rate tick up +330bps when accounting for all the disgruntled civilians who’ve completely given up looking for work since the president took over the leadership reigns of the U.S. economy.  The first chart below shows the trend of the participation rate over the past decade, which is down and to the right.

 

In the short run, this report will likely be positive, at least for the President’s re-election chances.   In the long run, U.S. employment remains solidly in the bad to ugly category. 

 

 

Daryl G. Jones

Director of Research

 

Darius Dale

Senior Analyst

 

The Spaghetti Western of Employment - 2

 

The Spaghetti Western of Employment - 3

 

The Spaghetti Western of Employment - 4

 


XLE: Bigger Than Brent

The chart essentially speaks for itself: Earlier this year, when Brent Crude oil was busy ripping to the upside, it had the edge over the broader Energy Select Sector SPDR ETF (XLE). As the dollar got crushed by Bernanke heading into the late summer and fall, diversifcation became essential; the XLE performed better and as we've seen this week, oil continues to get crushed. 

 

XLE: Bigger Than Brent - image001


BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS

Takeaway: Knapp Track Casual Dining sales track BLS employment growth data for the full-service industry. We are bearish on $DRI, $BLMN, $TXRH & $BWLD

Employment data released this morning by the Bureau of Labor Statistics suggest near-term strength for Quick Service and Fast Casual trends.  The outlook for Casual Dining seems less positive.  Employment trends within the industry suggest a possible sequential deceleration in same-restaurant casual dining sales. Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - knapp vs leisure   hospitality1

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - knapp vs full service emp growth1

 

 

Employment by Age

 

Employment growth among the 20-24 YOA cohort, which has been highlighted by many QSR and fast casual management teams as an important source of demand, accelerated to 3% year-over-year in September from 1.3% in August.  Employment growth among 55-64 year olds decelerated, sequentially, in September to 3.6% from 4.4% in August.  If this deceleration were to continue, it would be a negative signal for casual dining sales.

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - Employment by Age

 

 

Industry Hiring

 

The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggests that employment growth in the food service industry may have tracked sideways-to-down in September.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 11k (second chart below).   As the first chart of this post illustrates, the trend of employment growth within the Leisure & Hospitality seems to be stabilizing at roughly 2%. 

 

Sequential Moves

  • Leisure & Hospitality: Employment growth at +2.3% in September, down 7 bps versus August
  • Limited Service: Employment growth at 3.9% in August, down 15 bps versus July
  • Full Service: Employment growth at 2.5% in August, up 13 bps versus July

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - employment growth

 

BLS DATA IMPLYING SLUGGISH CASUAL DINING COMPS - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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Jobs Report: Fuzzy Math?

Takeaway: Unemployment is likely in the 10.8-11.1% range, not 7.8%. The government needs to go back and check the math it's using.

Today’s jobs numbers don’t add up when we take a closer look at what’s been going on during the last four years under the Obama administration. The headline today was that unemployment rate was 7.8%, a suspiciously low number that any American would second guess. Stripping away the government’s window dressing, we believe that the number is somewhere in the range of 10.8-11.1% depending on the methodology used.

 

 

Jobs Report: Fuzzy Math?  - unemployment1

 

 

We continue to think the headline US unemployment rate is being artificially deflated through generationally-low labor force participation rates. Hedgeye Senior Analyst Darius Dale explains why the numbers that came out today don’t display the true state of America’s jobs and employment landscape:

 

If you adjust the headline figure for a 10yr average LFPR, the US unemployment rate for September would have been 10.8% in September; a decent improvement over the 11.3% rate in August, but still elevated nonetheless – particularly relative to the elevated 8.9% adjusted rate Obama inherited from President Bush. 

 

Interestingly, if you adjust the headline figure for the LFPR on Obama’s first day in office, the September unemployment rate would have been 11.1% – substantially elevated from the comparable 7.8% figure he inherited from Bush. What this suggests is that, over the last four years, President Obama has seen the US unemployment rate tick up 3.3% when accounting for all the disgruntled civilians who’ve completely given up looking for work since the president took over the leadership reigns of the US economy.”

 

Take a look at the two charts below for a visualization of the range in which we believe the unemployment rate truly lies.

 

Jobs Report: Fuzzy Math?  - unemploymentA

 

Jobs Report: Fuzzy Math?  - unemploymentB

 

While this is not the appropriate setting to debate whether or not this material erosion in the US labor market is A) a function of President Obama’s failed economic policies or B) a function of the failed Policies To Inflate out of Washington D.C. in general, we can be sure the dismal state of the US labor market should continue to give Mitt Romney the upper hand in any economic exchange. The next two presidential debates are October 16 and October 22; the former will be Romney’s best chance to capitalize on his momentum from Wednesday night’s big win, as it focuses on both domestic and foreign policy, rather than just the latter as the October 22 debate does.

 


COH: Anatomy Of A Short

Hedgeye Retail Sector Head Brian McGough has delivered a 9-point breakdown of fundamentals and durations of Coach (COH). We think Coach as a brand is just fine, but we are keen to short the stock in the immediate-term TRADE and intermediate-term TREND durations. With 8 out of 9 negatives, this image speaks for itself.

 

COH: Anatomy Of A Short  - coachCHART


THE HIDDEN TAXES OF SOVEREIGN DEBT

Takeaway: Every dollar of sovereign debt is a dollar of [future] tax. Who's going to foot the bill?

SUMMARY BULLETS

 

  • In the note below, we review a recent analysis put forth by the bi-partisan American Enterprise Institute titled: “A Simple Measure of the Distributional Burden of Debt Accumulation” which was co-authored by Aspen Gorry of UC Santa Cruz and Matthew Jensen of AEI.
  • One of their primary conclusions was that sovereign debt expansion implies incremental taxes and, like tax policy, these costs of servicing incremental federal debt is incredibly progressive.
  • A key takeaway we had was that, because of this highly progressive nature of debt service, the rich will bear the lion’s share of the burden in a revenue boosting scenario and the poor (i.e. households who receive a disproportionate amount of gov’t benefits) will bear the lion’s share of the burden in an expenditure reduction scenario. Moreover, if the GOP has its way, the poor will pick up the tab via regressive spending cuts; if the Democrats have their way, the rich will pay via progressive tax hikes.
  • Lastly, to the extent this continues to edge higher, the marginal propensity for politicians to pursue tax hikes (via voter preference) should also increase.

 

Those who’ve grown familiar with our team’s work over the last few years know that we aren’t afraid to evolve, often borrowing new ideas from risk managers, authors and academics alike. Moreover, we like to use those ideas to help develop the structural views and biases we manage immediate-to-intermediate-term risk within.

 

In this vein, one of the more prominent conclusions we’ve weaved into our own research process is the idea that there is a critical threshold (~90% of GDP) where the stock of sovereign debt in an economy structurally impairs economic growth. This thesis was originally demonstrated through the empirical analysis of Carmen Reinhart and Kenneth Rogoff as has since been expanded upon and cited by other scholars in the field. Their work is one of the primary reasons we continue to hold the view that economic growth is likely to remain structurally depressed across a number of developed economies for the foreseeable future.

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 9

 

Why sovereign debt slows economic growth at that critical threshold is still up for debate. From our vantage point, sovereign debt loads that great imply to a certain extent that the government is crowding out private investment, on the margin, due to its deficit financing needs. Another hypothesis we’ve posited is that the threat of future tax hikes and spending cuts loom large in the psyches of consumers and businesses alike, causing them to slow their rate of consumption and investment growth – two occurrences that perpetuate incremental sovereign budget deficits! A third, more simple hypothesis is that it likely takes economies some time to grow the stock of sovereign debt to 90%-plus of GDP and that is may just well be that an older, less productive society is left behind to foot the bill.

 

There’s likely a handful of other explanations to the aforementioned question; in the prose below, however, we focus specifically on the second hypothesis from above – particularly with regards to the costs of servicing sovereign debt imposed upon US consumers.

 

A few days back, the bi-partisan American Enterprise Institute published a paper titled: “A Simple Measure of the Distributional Burden of Debt Accumulation” which was co-authored by Aspen Gorry of UC Santa Cruz and Matthew Jensen of AEI. From a critique standpoint, we like that there are no major assumptions in their analysis and that it is overwhelmingly fact-based, sourcing the [presumed] bi-partisan CBO and Tax Policy Center for the bulk of their forward-looking data (though we are all aware of the fact that the CBO’s forecasts of “long run” real interest rates and GDP growth tend to be a bit aggressive). The article mostly walks through their methodologies – which we find generally sound – allowing the reader to focus extensively on the detailed tables of data analysis presented throughout the paper. They even do a good job of remaining bi-partisan, as advertised. All told, the paper is definitely a good read and the analysis is quite thought-provoking; we send our thanks to the client who initially passed it along.

 

The primary conclusions from the article is that incremental sovereign debt implies incremental taxes and, like tax policy, these costs of servicing incremental federal debt is incredibly progressive. Moreover, when operating under the key assumption that the revenue source for all federal expenditures (including sovereign debt service) is the government’s power to “tax” the public via outright tax hikes or lower future expenditures relative to previously-established policy, we should arrive at the conclusion that any budget outlook with persistent deficits implies equally persistent tax hikes.

 

One key takeaway that we had is that, because of this highly progressive nature of debt service, the rich will bear the lion’s share of the burden in a revenue boosting scenario and the poor (i.e. households who receive a disproportionate amount of gov’t benefits) will bear the lion’s share of the burden in an expenditure reduction scenario. Now we know why President Obama was so keen to focus on Governor Romney’s alleged “$5 trillion tax cut” during Wednesday night’s debate.

 

Lastly, the paper sheds light on exactly why both the existing stock of debt and the rate of future debt accumulation are so critical when discussing changes to fiscal policy: it’s not just about having an ideological debate about spending, taxes and the size of the government, but rather about the most important discussion of them all – who’s footing the bill? If the GOP has its way, the poor will pick up the tab via regressive spending cuts (assuming they are in conjunction with tax cuts); if the Democrats have their way, the rich will eventually pay via progressive tax hikes (though lower-income earners could still wind up “paying” via incrementally faster inflation and incrementally slower economic/employment growth).

 

Given that there’s 15.3x the number of US households at or below the median income than those making $200k-plus (91 million vs. 5.9 million), it’s not difficult to anticipate a future where tax hikes are increasingly favored over spending cuts – especially considering that politicians in a democratic government are generally incentivized to pursue populist means. It’s worth noting that the US’s Gini Index (a standard measure of income inequality) rose for the first time since 1993 last year (at .477 currently). To the extent this continues to edge higher, the marginal propensity for politicians to pursue tax hikes (via voter preference) should also increase.

 

A collection of the key tables is below; we encourage you to check out the appendix of the paper as well  - some great data. We especially enjoyed the tables highlighting the annual projected debt service costs levered upon US households as a result of the Bush and Obama presidencies.

 

Darius Dale

Senior Analyst

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 1

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 2

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 3

 

THE HIDDEN TAXES OF SOVEREIGN DEBT - 4


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