Phone and Email Interview with PCI Chief Economist Ed Leamer

Last night I had the pleasure of speaking with Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast about the Ceridian shipping index and what trends in fuel usage suggest about holiday sales. We also discussed the likelihood of a double-dip recession. First let's take a look at the report.

Recovery Time-Out

It's a "Recovery Time-Out" says the Ceridian-UCLA Pulse of Commerce Index™ for October 2010.

Holiday Season Begins on a Down Note

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) by the UCLA Anderson School of Management, adjusted for season and for monthly workdays, fell 0.6% in October following a decline of 0.5% in September and a decline of 1.0% in August, which was the first three consecutive months of decline since January 2009, when we were still deep in recession.

We have had a recovery time-out since May of this year. From peak in January 2008 to trough in June of 2009, the PCI fell 15%. A strong recovery from June 2009 until May 2010 gave us back almost 2/3rds of the losses, leaving us 6.1% below the January 2008 peak. But since May, trucking has been slowly receding, and we are now 8.3% below the peak, and much farther below normal trend.

October is especially important because it is the peak month for holiday shipping, with a seasonal factor of 1.029 compared with 0.978 in November and 0.941 for December. The October decline in the PCI can be summarized in a single word: worry. Worry about the strength of sales in the holiday period has apparently caused a slowdown in trucking in October which might be only a postponement to November if consumers show a little more exuberance.

Year-over-year growth in the PCI has continued to fall since May's exceptional number of 9.0%: 8.6% in June, 8.0% in July, 6.0% in August 5.8% in September and now 4.1% in October. With the three-to-one relationship between the PCI and GDP growth in recessions and recoveries, that 4% figure translates into 1.3% GDP growth, far below what is needed for a healthy job market.

Those are 2 of 10 charts and tables in the report. Inquiring minds will want to give the report a closer look.

The Ceridian-UCLA Home Page contains additional commentary plus an interactive graph as well as an animated video.

Over the Road Trucked Shipping Decline Signals Weaker Holiday Season

"The October PCI sounds an alarm about growth in the fourth quarter, and our latest PCI data indicates retailer wariness about future sales prospects," said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast.

"While it's discouraging to see the PCI decline for the third consecutive month, October represents the eleventh straight month of year over year growth in the index. This means that the holiday sales season will likely be better than last year, but potentially disappointing versus current expectations in the marketplace," said Craig Manson, senior vice president and index expert for Ceridian. "Should consumers show early exuberance, October's decline may only spell postponement to November. However, the PCI's performance indicates that retailers lack confidence in the coming sales season."

Interview With Ed Leamer

Yesterday I was asked by Cerdian if I would like to speak with Ed Leamer about their shipping index. Here are a few questions I submitted accompanied by responses from Leamer.

Mish: Does the drop-off in shipping signal anything definite about real demand or is it merely a sign that inventory replenishment is over? Isn't that the crux of the problem in interpreting your data?

Leamer: As we discussed on the phone, the continued increase in shipping after the inventory replenishment at the beginning of this year depended on increases in sales (with a constant inventory/sales ratio), and the drop-off in shipping suggests that there hasn't been much to replace what was sure to be a temporary driver - inventories.

Mish: How do you reconcile recent hiring, and more specifically holiday season hiring plans by retail stores in light of a shipping slowdown? Are stores making a mistake by increasing hiring?

Leamer: Be aware that on a year over year basis October shipping is up 4.1% which suggests a need for more seasonal hiring than last year on the order of 1%. The weakness is in the second half of that October-October year. (the critical half for thinking about the future)

Mish: Do you have an actual forecast for holiday sales in percentage terms, if so what? (e.g. -1% to +1% or whatever)

Leamer: Our formal forecast model doesn't have retail sales as one of the variables, but our forecast for GDP growth in the fourth quarter is 2.1%, quarter over quarter, annualized. Tepid growth.

Mish: What is the likelihood consumer attitudes change for the better or worse in December, regardless of what Gallup and other surveys suggest right now, and regardless of what Ceridian suggests?

Leamer: It doesn't matter what they say to Gallup, what matters is what they do, which is subject to some serious uncertainty but there doesn't seem to be anything on the horizon, like a big surge in jobs, that is going to improve the mood. Fortunately, fear of another Great Depression is dissipating.

Mish: Given that much of the rise in shipping, hiring, ISM etc, has been inventory replenishment, and given pending cutbacks in municipal and state budgets, why should anyone want to rule out a double-dip?

Leamer: Dips come from collective postponement of the postponeable purchases: homes, cars and equipment. But all three of these are at record lows relative to GDP after all the postponement that has already occurred. (After having falling to the floor, the economy has to at least get back to its knees before it can fall again.)

Phone Notes

Here are a few additional notes I made from our phone conversation.

• To get a recession, volatile parts of the economy have to shrink. The volatile components are housing, consumer durables, and business capital spending. The first two are extremely weak and unlikely to shrink much further.
• 0% to 2% growth is not out of the question. The critical thing to watch is labor. So far there has been no sustainable positive feedback from any efforts to stimulate hiring.
• Data suggests the inventory replenishment cycle is over for now.
• Consumers have to start saving.
• The seasonal adjustment "one size fits all" methodology of the BLS in regards to the Household and Establishment Surveys is suspect.
• Housing is the business cycle and that cycle is anemic.

Structurally High Unemployment Here to Stay

I believe we are going to have structurally high unemployment for a decade. The San Francisco Fed ruled it out. You can see my rationale in Common Sense vs. Academic Formulas; Fed Concludes Structurally High Unemployment is a Myth

To those arguments I would like to add the fact that boomers are ill-prepared for retirement. They need to work longer than they expected. Their homes are not the retirement plans they once thought.

Equity extraction for consumption is over. In many cases there is no equity to begin with. The only reason the unemployment rate is not above 10% now, is the participation rate (labor force), has been falling like a rock.

Duration of Unemployment

BLS Table A-12 tells a sad story. Over 6.2 million unemployed have been out of work for 27 weeks or more. That is 41.8% of the total. Once you lose your job, it is likely to be gone for a while.

Unless Congress extends unemployment benefits in the November lame-duck session, an estimated 2+ million would-be workers, will lose their benefits.

Stop and think as to what that might mean for spending, bankruptcies, foreclosures, etc.

No doubt that is weighing on consumer psychology, and it will continue to weigh on consumer psychology until there is a meaningful uptick in jobs.

Final Thoughts

Here is a point I made over two years ago that has now come to fruition: "Boomers will be competing against their kids and grandkids for jobs at Walmart and McDonalds."

Look at the average age of greeters at Walmart and the ages of some employees at fast-food restaurants. Think those people are working because they want to work or because they need to work?

Now look at things from the perspective of management. Would you rather hire someone over 62 who collects Medicare or someone 25 starting a family in need of family medical insurance?

What about kids are graduating from college with no prospects of a job and moving back home with mom and dad? What does that do to family formation and the need for goods and services?

Avoiding the Double-Dip?

Bernanke is certainly doing everything he can to avoid a double-dip, but it is highly unlikely QEII will do any good. I made the case in Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again.

Please give that a read if you have not yet done so.

If Congress raises taxes and does not extend unemployment benefits I think a double-dip recession is a given.

Regardless, if "housing is the business cycle" then things prospects for jobs do not look good, whether there is a double-dip or not.

In conclusion, we are likely in for a period of low-growth or no-growth accompanied by painfully high unemployment for quite some time. Is that what the stock market has priced in?