Non-farm payrolls fell -20,000 in January according to the latest establishment survey from the BLS. November was revised from +4,000 to +64,000 whilst December was revised from -85,000 to -150,000. The 3 month moving average of changes in non-farm payrolls is now at -35,000. Details of job gains and losses are shown below:

Also of interest in this report was the annual benchmark revision to non-farm payrolls for the period April 2008 to March 2009. We got wind that this would be an ugly number when the BLS released an estimate a few months ago and it certainly didn’t disappoint. The BLS now estimates that non-farm payrolls were actually 930,000 worse than originally estimated.

Since employment peaked in December 2007, the US economy has shed a massive 8.4 million jobs. As shown below, the US economy has now shed all jobs created since the trough in employment in the last cycle and is now even lower than that previous trough hit in August 2003. Whilst the US population has grown by 30 million in the last decade employment has effectively gone nowhere.

The graph below shows how truly awful the plunge in employment has been in this cycle, easily the worst in the post WWII period. In total the US economy has now shed 6.1% of it’s workforce since the peak just over 2 years ago. The mild recession earlier in the decade took 4 years for employment levels to get back to their previous peak, this time will no doubt take a lot longer.

As usual the talking heads on bubble vision were confused how non-farm payrolls could be down whilst the unemployment rate fell to 9.7%. For some reason they need to be reminded that the unemployment rate is derived from the household survey whilst changes in payrolls come from the establishment survey.

In contrast to the establishment survey the household survey showed an increase in employment of +541,000 almost completely reversing the decline of -589,000 from the previous month and thus the reason for the fall in the unemployment rate. Such volatile numbers make is difficult to put much credence in one month’s numbers so as usual we won’t get too excited until we get some confirmation. However, there were other signs of life in employment numbers.

The labor force participation rate showed a slight uptick in January after falling for 6 straight months. A rising participation rate would suggest some previously discouraged workers may be feeling a little more confident about reentering the workforce. Perversely a rising participation rate has the effect of keeping the unemployment rate elevated, the opposite of what we have been seeing over the past 6 months.

Those working part-time for economic reasons has also made a u-turn and has now been heading down since October last year.

Another positive sign is the uptick in average weekly hours worked, now at 33.3 hours, off the bottom of 33.0 seen in October.

Whilst those unemployed for 15 weeks or more appears to have peaked, the news for long term unemployed continues to worsen with those unemployed for more than 6 months hitting a new record.

There are definitely some positive signs appearing in the US labor market, and we will almost surely see positive job growth before the end of the 1Q10, however that pace of job growth is unlikely to make a significant dent in the unemployment rate in 2010. Do not be surprised to see the unemployment rate tick back up again during the course of the year.

A hat-tip to Deano for directing me to the following story about growing mortgage stress amongst first home buyers in Australia. Unlike the rest of the world Australia did not undergo a sizeable correction in home prices as a result of the misguided policies of the government to lure first time home buyers with cash giveaways that only had the effect of driving up prices.

Now an increasing number of heavily indebted Australian households are finding it tougher to make the mortgage payments. It didn’t take a genius to see this would end in tears. Australian home prices need a healthy correction so this is not all bad news. However, the problem is that the government is so heavily wedded to the narrative that their own clever economic policies helped Australia avoid a recession, that they will probably throw more taxpayer money at the problem to prop up the bubble and keep the fiction alive. From news.com.au

Aussie’s struggle to foot mortgage bill

• 45% of first home owners in mortgage stress
• Homebuyers using credit cards for repayments
• Numbers to worsen as rates continue to rise

ALMOST half the first-home buyers lured into the market by the Rudd government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young homebuyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments, the Sunday Telegraph reports.

Just weeks after the grant was officially withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting revealed that 45 per cent of first-home owners who entered the market during the past 18 months are now experiencing “mortgage stress” or “severe mortgage stress”.

Those numbers are likely to worsen in the next 12 months as interest rates rise by an expected one per cent. On Tuesday, the Reserve Bank is almost certain to raise the cash rate by 0.25 per cent to four per cent, taking the typical standard variable mortgage rate to around 6.90.

If lenders pass on the hike in full it will add $47 a month to the typical $300,000 mortgage.

“The dream of home ownership has turned sour for many thousands of first-home buyers now that the reality of rising interest rates is kicking in” said Martin North, managing director of Fujitsu Consulting.

“Rising utility costs and school fees are also cited as reasons for hardship, and many first-home owners are living without proper furniture or carpets as they divert all their cash to their monthly repayments.”

During the past 18 months, more than 135,000 first-home buyers have entered the market, encouraged by grants of up to $24,000 in NSW, plus as much as $18,000 in stamp-duty relief. More than 50 per cent of first-home owners are forecast to fall into the mortgage stress category by the end of 2010.

The crisis will be seen as vindication for critics of the stimulus program, who argued that the Government was enticing buyers who were not financially ready for home ownership.

Steve Keen, professor of economics at the University of NSW said last year that the homeowner grants were a “disaster waiting to happen”.

“The grant panicked first-home buyers to rush into the market, which pushed prices up by far more than the grant itself,” he said yesterday.

AMP Capital chief economist Shane Oliver said: “This is a scary survey. It provides a clear warning to the RBA not to push rates up too far or too fast.”

January came in with whimper with all major indices falling across the board. The DJI did the best falling -3.5% whilst the Shanghai Composite fell -8.8%. If you want to take the glass is half full view, 2010 was the best January for the S&P500 in the last 3 years. January 2008 saw a -6.1% slide in the S&P500 whilst in 2009 the S&P500 fell -8.6% as shown below.

Of course this time of year brings out the old adage, as goes January so goes the year, meaning that if the stock market is down in January it will be down for the year and vice versa. But just how accurate is the so-called January effect? After all, January 2008 was down and so was the year, however if you invested on that basis in 2009 you would have missed a year of stellar returns in the stock market.

Taking a look at the S&P500 over the last 60 years, the January effect seems to have some predictive value although that comes with some caveats. As shown in the table below, over the last 60 years the S&P500 has finished higher in January 37 times and subsequently the S&P500 finished the year higher 34 times. Or said another way 92% of the time January has finished higher the year has also finished higher. However when the S&P500 has finished down in January the year has only finished down 57% of the time or 13 times out of 23 in the last 60 years.

The results are not unexpected since as we know over the last 60 years, the S&P500 has risen on an annual basis 73% of the time or 44 times out of 60. So of course the January effect has better predictive ability when the S&P500 finishes higher. However since January 2010 was a down year you might as well flip a coin as rely on the January effect for guidance on how the year will end.

Always worth a listen is James Chanos of Kynikos Associates. Jim talks thoughtfully on the growing bubble in China.

Australian Employment increased 35,200 in December. Full-time employment increased by 7,300 whilst part-time employment increased 27,900.

Unemployment decreased 10,600 whilst the unemployment rate decreased to 5.5%. It is looking more likely that the unemployment rate has peaked in this cycle, quite a Houdini effort giving the state of the global economy just a year ago.

Aggregate monthly hours worked decreased 1.0 million hours (-0.1%) to 1,535.6 million hours whilst the average work week fell slightly from 32.62 hours to 32.49 hours per week.

Employment gains are still largely of the part-time variety with full-time employment still 140k below the peak in July 2008. However December is the fourth straight month of increases in full-time employment, something not seen since the first quarter of 2007.

the number of loans for owner occupied housing fell a seasonally adjusted -5.6% in November on the heels of the halving of the first home buyers boost was halved from $7,000 to $3,500 at the end of October. No doubt more falls are in the pipeline as the remaining $3,500 was removed in December.

Not surprisingly with the Home buyers boost drying up, first home buyers as a percentage of total dwellings fell to 22.1%, the lowest level since October 2008. That percentage is also tipped to drop further in the coming months. It will be interesting to watch how the housing market fares in the face of rising interest rates , the absence of government handouts and a household sector up to their eyeballs in debt.

Great Discussion by Steve Keen

US non-farm payrolls fell a seasonally adjusted -85,000 in December whilst prior months revisions cancelled each other out. October was revised from -111k to -127k whilst November was revised from -11k to +4k. November would represent the first month in 22 that non-farm payrolls rose, although given the standard error on that estimate a positive 4k doesn’t mean much. Details of the establishment survey were as follows:

Construction -53,000
Manufacturing -27,000
Service providing -4,000
Retail trade -10,000
Professional and business services +50,000
Education and health services +35,000
Leisure and hospitality -25,000
Government +21,000

The 3 month moving average of monthly job losses continue to fall now at -69k.

The unemployment rate was unchanged at a seasonally adjusted 10.0%. However that number is being masked by the drop in the labor force. The Household survey reported a loss of -589k jobs however the labor force also shrank by -661k. The drop in the labor force has the effect of exerting downward pressure on the unemployment rate. When we start to see consistent net job additions, those so-called discouraged workers will come back into the workforce thus keeping the unemployment rate elevated even though jobs are being added.

The bottom line is that it is unlikely that the unemployment rate will move much lower than it’s current level in 2010 and there is a high possibility that it could go higher in the short to medium term. The broader measure of unemployment, U-6 ticked up slightly to 17.3%.

Since employment peaked in December 2007, 7.24 million US jobs have been lost amounting to 5.2% of the workforce and given the preliminary estimate of a further -824k for the annual revision to be announced in February, that number will be closer to 8 million. The chart above shows that the plunge in jobs is unprecedented in the post WWII experience and is on track to be the worst in terms duration before returning to the prior peak in employment.

Average Weekly Hours Worked remained unchanged at 33.2 still slightly above the all time of 33.0 in October. An upturn in average weekly hours is a harbinger of an improving labor market, so we need to see this improve further before getting too excited about labor market conditions.

The number of persons working part time for economic reasons or in other words, people who were working part time because their hours had been cut back or because they were unable to find a full-time job, continued to tick down slightly in December.

Those out of work for more than 15 weeks fell marginally to 58.3% from 58.8% in the previous month. However for those long term unemployed the news continues to worsen with a record 39.8% now put of work for 6 months or more.

The optimism for the November employment report did not spill over into December and is a timely reminder that trends don’t move in a perfectly straight line. Despite a recovery of sorts underway in the broader economy, the job market is in for a long hard slog in 2010 with little to no improvement in the unemployment rate likely.

As the chart above clearly illustrates, 2009 was a much better year for global equity markets than 2008. That’s not to say that all went swimmingly as the S&P500 hit new lows in March, the US economy continued to contract for the first 6 months, more jobs were lost than in any other year on record, home prices continued to fall, foreclosures hit new records and 140 FDIC banks failed.

How much of all this did I see coming? Let’s take a look at 2009’s predictions and see how they panned out and then take a look at some predictions for 2010.

Deflation to persist – despite all the chatter about looming inflation because of the Fed’s money printing activities it seems it is a lot is harder to generate than many had thought, just ask the Japanese. Grade B

China will NOT save us – the only reason I don’t give myself an F is that China’s numbers are more than a bit dubious. I didn’t think the Chinese economy could continue to grow at 8% but they ramped up the stimulus and kept the economy moving, maybe it will end in a bubble but I got it wrong in 2009. D

US 2nd Half Recovery that will not be – clearly a recovery of sorts has gotten underway although it would seem to be almost entirely induced by fiscal and monetary stimulus and thus the only reason I don’t get an F. D

US Earnings weaker than most expect – the consensus at the beginning of 2009 were estimating S&P500 Operating Earnings of $82. I thought they’d be closer to $50, as of a couple of weeks ago 2009 S&P500 Operating Earnings are expected to be approximately $56 for 2009. B

Bankruptcies to Ratchet up – wasn’t too hard to predict, 140 FDIC insured banks went belly up in 2009 compared to 25 in 2008. A

Home Prices Continue to Fall in 2009 – that they did falling another -7.5% through April according to the Case-Shiller indices but have since recovered. However with the winter seasonals now kicking in, home prices will finish 2009 lower than they finished 2008. B

Changing Social mood – whether it was teens turning their back on social media networks such as Facebook or the number of apocalyptic themed movie releases, 2009 saw a darker mood take hold and with the exception of Goldman Sachs, a return to a more frugal lifestyle. B

Heightened Geopolitical Risk – while there weren’t any major incidents of note, risks are definitely building in the Middle East. C

Market Predictions – I successfully predicted a lower low in 2009 but thought we would get more than one rally as one or more failed and I thought we would end the year only 10% higher at best. The S&P500 closed 2009 23.5% higher than the close of 2008. C

For the record, I don’t put much stock in predictions, including my own. No matter who makes them it’s wise to take any predictions about the future with a large grain of salt. Anywho, just for kicks let’s have a stab at 2010.

Economy Let me preface my comments on the US economy by saying that the single biggest disappointment of the great recession has been that next to nothing has been done to address the causes of the crisis and hold those responsible accountable. The use of public funds to backstop private losses is reprehensible and antithetical to free market principles.

In my humble opinion the US government, beholden to the interests of the financial industry has only succeeded in kicking the can down the road and sowed the seeds of a bigger crisis in the future. However, that doesn’t mean the US economy can’t have a reasonable year in 2010.

The US economy looks to be on the road to recovery, whether that is entirely due to stimulus or not GDP is growing. I expect net job additions to materialize in the first quarter but the unemployment rate to stay elevated (above 9%) throughout 2010. Whilst GDP is growing, given the depth of the recession, the recovery is lackluster to say the least in comparison to other deep recessions.

Still, the US economy appears to have enough momentum through inventory restocking and stimulus measures to expand through the first half of 2010 at a reasonable pace. However, with a rise in tax rates looming in 2011, mid term elections on the horizon and over a trillion dollars of debt to be issued by the US government, the second half of 2010 and into 2011 looks more than a little worrisome.

Despite recent home price rises a massive amount of unsold inventory remains and foreclosure mitigation measures are doing little more than keep people in houses that they ultimately can’t afford. Rather than let the market clear at it’s natural level, government policy is aimed at extend and pretend measures that will only draw out the conclusion of the housing bust. House prices may be at or close to a bottom but those expecting a sharp rebound in 2010 will be disappointed.

Stock market
The stock market rally from the March lows has been stunning and caught many including myself, off guard. However, neither the length of the rally nor the percentage gain is without precedent. The chart below shows 6 rallies off significant bear market lows prior to a 10% or more correction. As the chart shows, the 1980’s rally coming out of a severe recession lasted 14 months before a correction of greater than 10% whilst the rally from the Great Depression bottom rose a remarkable 94% in just 2 months before a 10%+ correction.

The current rally is 9.5 months old and has taken the S&P500 up 67% from the low in March. Based on previous rallies from bear market lows, all we can really say is that it the market can continue to go higher and the rally can go on longer, although in terms of both length and magnitude the rally is closer to the end than the beginning. I suspect we’ll see a correction of 10% or more sometime in the 1Q10 and if not then definitely by the end of 2Q10. However, I should note that basing predictions on 5 observations over the course of 80 odd years is not particularly rigorous.

On the valuation side the market is not cheap, even with S&P500 operating earnings forecast to hit $75 in 2010 the market does not look cheap on a historical basis and expected returns from these type of valuation levels over the coming decade would be considered subpar. That doesn’t mean I couldn’t envision an S&P500 of 1300 sometime in 2010, given the gyrations of the last two years I wouldn’t be surprised by any outcome but I find it hard to see how the S&P500 could finish higher than 1250 in 2010.

Of course, I reserve the right to change my mind as the facts change, no point in being wedded to an idea once it proves to be false. As for other predictions, I think Bernanke’s record proves that he will be late in raising rates and unless the unemployment rate plummets below 8% in 2010 I doubt rates will be raised until 2011. Although long term the $US dollar looks fated to continue to slide I wouldn’t be surprised to see a $US rally commensurate with a pullback in stock and commodity markets.

Inflationists will again be disappointed as the excess liquidity does not result in sharply higher inflation in 2010 and whilst goldbugs may be right about the meltdown of fiat currencies over the long term, I think gold will have a much more muted year in 2010.

There are many other variables that go into the mix that I will only briefly mention to try and keep the length of this post short. China, can the Chinese government maintain the balancing act of keeping growth humming along whilst preventing speculative bubbles forming? Is Dubai’s default a sign of a bigger nastier default looming in Europe? Are the mounting tensions between Iran and Israel likely to spark a major geopolitical incident? Or could it be Pakistan, Afghanistan or Iraq blowing up again? All worth pondering and no doubt interesting to watch in 2010.

US home prices were flat in October according to the latest report from S&P/Case-Shiller. The 10 city index rose a measly 0.01% whilst the broader 20 city index fell a marginal -0.05%. Remember these are not seasonally adjusted numbers.

Year over year comparisons continue to improve with the 10 city index down -6.4% from a year earlier whilst the 20 city index is down -7.3%. We can probably expect year over year numbers to turn positive in February or March next year although we’ll have to wait until April or May to get the data.

As alluded to last month and as shown in the chart above, the seasonal nature of home prices has begun to reassert itself again. Clear price declines will likely start again next month however we won’t see the 2 – 3% month on month declines witnessed at the same time last year.

The trend in the chart above chart above also indicates weakness ahead with only 7 out of 20 metro areas showing price rises in the latest month as opposed to 17 just 2 months ago. However, that is better than October last year when exactly zero metro areas showed price increases.

US house price are no longer in free-fall mode but further price declines are on the cards through winter, even with more extend and pretend policies such as the extension of the home buyers tax credits and more foreclosure mitigation efforts. Also, we shouldn’t overlook the last minute, almost clandestine undertaking by the US Treasury to increase Fannie and Freddie limits in an attempt to limit mortgage rates rising too much as Fed purchases of Agency securities run off in the new year.