The Liscio Line — Fear Factor by Danielle DiMartino Booth, The Liscio Report On The Economy Blog
I sure hoped that instruction manual was in the same Spanish I was trying to perfect. My life had already flashed before my eyes as the propeller plane was violently tossed to and fro in the furious thunderstorm on that thankfully fate-less flight to Isla Margarita from Caracas. It was 1995 and I was taking a weekend away from my summer internship with some Caraquenos, as I learned to call them. The teeny south Caribbean island, 25 miles from the Venezuelan mainland, was supposed to be a quick hop across the sky. Instead, the storm was so intense, it had knocked the pilot senseless. Back before cockpits were sealed tight, one could simply peer down the aisle straight into the cockpit. Doing just that for some reassurance, I was instead horrified to see our obviously less-than-capable captain reach under his seat for what appeared to be an instruction manual. Let’s just say there was no comfort knowing I was in the hands of someone who just happened to be reaching for Flying for Dummies. The moment rendered new meaning to the term, Fear Factor, or Factor Miedo for those of you Spanish speaking readers.
According to the jubilant stock market, the September jobs report packed just enough fear factor of its own to paralyze the Fed into further inaction. As Morgan Stanley’s Ted Wieseman sagely wrote, “The market more decisively priced out a December rate hike and started to ponder if asking when the Fed is going to raise rates is even the right question anymore.” I couldn’t have said it any better if I had tried. And that’s the problem.
My Caracan summer internship at Sivensa, a steel conglomerate, and the events unfolding in America’s labor force are actually linked at the hip. Back in 1995, the current commodities supercycle hadn’t even been born, at least according to the history books which peg the advent year at 2001. But Sivensa was already in the global hunt. In 1993, the pre-Chavez-era government privatized SIDOR, the then-state-controlled steel company. Sivensa was all too happy to play a leading role. Into this happy marriage, this summer intern stepped, tasked with comparing Sivensa’s business model, using my accounting skills (which were about to get severely stress tested) to that of a potential benchmarking partner in the U.S. steel industry. In three months.
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It was clear overnight fluency was in the cards following a naïve attempt to get Microsoft Excel, the English version, that is. Instead I was forced to learn that “FILE” is “ARCHIVO” and got to work. The high point of my internship (in a good way, as opposed to that heart-stopping flight) was an excursion to Puerto Ordaz to see how the sausage was made, or in this case, how the hot steel was rolled. Sivensa was kind enough to put me up at the Hotel Intercontinental replete with air conditioning and cable TV. I spent the better part of that summer in a current affairs vacuum looking like I had smallpox as I was no match for the mosquitos that swarmed my Caracas boarding house room. Imagine my dismay at 24-hour OJ trial coverage the minute I found CNN.
Puerto Ordaz, founded in 1952 as an iron ore port and one of Venezuela’s fastest growing cities, is spectacularly situated at the intersection of the Caroni and Orinoco Rivers, the former the color of the darkest of night and the latter a light brown – who knew sediment could be so influential?
Though the hard-hatted plant tours were fascinating – Sivensa was on the cutting edge of producing hot briquetted steel, a premium form of direct reduced iron — the real marvel was the port itself, bustling with Asian tankers. That image, it turns out, is one for the ages. Back then, the developing world didn’t even contribute one-quarter of the world’s economic output; today it accounts for 40 percent of global gross domestic product. Narrow the focus to the now infamous BRICS – Brazil, Russia, India, China and South Africa; these resource-driven five countries at the forefront of the commodity supercycle accounted for 56 percent of developing countries’ GDP in 2014 and 22 percent of global GDP.
The recent reversal of fortunes for the BRICS was the main reason for trepidation on the Fed’s part when it last met. Now they have something much closer to home to ponder. As has been widely broadcast, September’s job creation was punk. But the real news was the downward revisions of the prior two months’ payrolls data. We still have another revision for August, and both revisions for September, so maybe the long-term trend of upward revisions to those two months will save the day.
A deeper delve into the recent trend in revisions proves more worrisome. Though it can’t be proved on a month by month basis, economists tend to associate a trend of upward revisions with an economy that’s gaining steam. As things currently stand on the payroll front, a string of positive revisions at the turn of the year has switched to a string of negatives. My Liscio partner, Philippa Dunne, long an expert in gleaning hidden nuances in labor market data, has never been one to be satisfied with superficial analysis. She notes that the final word on payrolls, the annual benchmark revision, although within the long-term average, took out jobs through March 2015, meaning the BLS’s models were too positive on the contribution of new business formation to the monthly job churn. And since young businesses are the engines of job growth, that’s not a good thing going forward.
To make matters worse are the less-than-lucrative types of jobs being churned out. The Liscio Report’s tallies find that the eat, drink and get sick sectors – health care, bars and restaurants – accounted for 47 percent of private job creation in September, two-and-a-half times their share of private employment. Mining and logging, which captures energy and the recent re-downdraft in oil prices, lost 12,000 positions (to think that last year at this time, the sector had been adding an average of 4,000 a month over the prior 12-month period). Meanwhile, manufacturing’s rolls fell by 9,000, the flipside of factory’s average gain of 9,000 over the last year.
Extrapolate this trend to encompass the rest of the world and you can imagine the bar at the Intercontinental in Puerto Ordaz just ain’t moving and shaking like it used to. For starters, the Chavez government did a number on the Puerto Ordaz private sector when he re-nationalized SIDOR, among others. (Actually, the hotel has been expropriated by the Venezuelan government as well. A recent visitor commented on Trip Advisor that though the food and beverages were reasonably priced, the waiters were much too serious.)
Perhaps the waiters used to be employed in a factory and have taken a seriously painful pay cut. The good but sad fact is they still have a job, albeit one increasingly at risk if jobs that rely on resource industries are being cut at a rate similar to that of the U.S. market At this time last year, jobs that support our own mining industry were seeing gains averaging 2,000 a month over the prior year. Flash forward to today and support positions have been pared by 81,000 in the last 12 months.
The question is, will the contagion spread beyond the network that supports the mining industry? The non-manufacturing ISM report, which captures the economically dominant service sector, reported four sectors had contracted outright in September – mining, arts and entertainment, retail trade and miscellaneous services. Granted, 11 of the 18 sectors surveyed still report expanding new orders, but the pace of gains has slowed to the lowest level of the year. A sister report that captures global services activity also fell to its lowest level of the year.
Corroborating the weakening trend is a fairly new measure of labor market conditions the Fed has devised which captures 19 indicators harvested from hard data on job creation and wages to survey results and job opening postings. Like the nonfarm payroll report, this diffusion index – it denotes expansion when positive and contraction when negative — is also subject to revisions. The latest September read was a goose-egg, as in zero, balancing on a high wire between an expanding and contracting labor market. Incorporating downward revisions to June, July and August, the average for the year is 1.1 compared to an average of 5.4 in 2014, 4.0 in 2013, 3.8 in 2012 and 5.9 in 2011.
Why the death by numbers? I won’t say “hindsight” in my next sentence. During my tenure at the Fed advising Richard Fisher, I argued against launching successive iterations of quantitative easing, what some refer to as money printing (OK, QE1 was DEFCON 1 and I was on board with that). But back in 2011 and 2012, the economy was not perfect, however the need to begin tightening nevertheless outweighed the emerging financial market imbalances. And I battled mightily to taper swiftly and raise rates in 2013 and 2014. It was real time and it was never going to be an easy decision but the time to remove the punch bowl was at hand. Instead, policymakers appear to have waited for so long that it’s too late. Cycle missed.
If nothing else, the mighty dollar has come off its high boil; that will hopefully provide relief to that stoic Venezuelan mesero (Spanish for waiter) given inflation at upwards of 60 percent (some reports say 200 percent) puts the price of an iPhone 6 at $47,700 in local currency terms. A weaker dollar could hold the key to forestalling the global recession many seem convinced is in the cards. A recent International Monetary Fund (IMF) report is making the media rounds with a clear message to the Fed: Stay on hold, or else. The IMF, which convenes in Lima this week for its annual meeting, cites the quadrupling of non-financial emerging market corporate debt in the past decade to $18 trillion as an accident waiting to happen that would be catalyzed by a Fed interest rate hike. Tack on the fickleness of today’s ample bond market liquidity at times of market stress and the formula for igniting systemic risk is squarely in place, the IMF warns.
The Economist’s latest cover, Dominant and Dangerous, referring to the globalized greenback, takes an even deeper (recommended reading) dive into the vulnerabilities the dollar’s expanding empire presents. The bottom line is the entire offshore dollar system is twice its 2007 size; by the 2020s it could rival America’s banking system. During the heat of the financial crisis, the Fed opened the spigot to the tune of $1 trillion in emergency credit facilities to foreign and central banks. The magazine rightly asks if the political wherewithal will still be in place in the event the swollen dollar-denominated global financial system needs rescuing again.
One thing is for certain. With its questionable allies, rampant corruption and most recently, waging of war on its own people, it’s highly unlikely the U.S. will proffer aid in any form to our hobbled western hemisphere neighbor to the south. December 6th’s parliamentary elections appear to be the best hope for the country to begin to heal its economy. In what can only be deemed a small world coincidence, Maria Corina Machado is one of the main voices of the opposition. Her father is the Chairman of the Board at Sivensa and Maria, who is my age, started her own career in the hot and dusty steel mills.
Though I learned many things that summer about commodities and cockpits, the trickiest lessons were on the dance floor. The two-step was as complicated as things got on Saturday nights for this South Texas girl. Salsa, though, is a dance that engages couples on a cerebral level. Let’s just say that missteps were frequent until midsummer when my brain and feet finally connected. The Fed would do well to take some salsa lessons of its own, especially in light of some “truths” it still holds dear.
All dance moves aside, in a Wall Street Journal op-ed by Ben Bernanke shared some memorable nuggets of wisdom about the challenges of executing crisis-era monetary policy. There was this one line, though: “By mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce.” Only history can judge the sanctity at the core of the Fed’s intractable operating assumptions. As is the case with perfecting salsa’s intricacies, dancing against the beat starts at the beginning of the song, not the end.
Contributed by Danielle DiMartino Booth