MoneyNews
Wednesday, Aug. 3, 2005

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 1. Report: Strong Official Jobs Figures Way Off

A recent report from the Federal Reserve Bank of Boston (FRBB) asserts that the U.S. government's claims of strong employment figures and prosperity in America are simply inaccurate.

According to a new article from Adam Porter of ResourceInvestor.com, a senior analyst at FRBB has "calculated the effects of those who have left the American job market completely. In doing

so the FRBB estimate that 'an 8.7% unemployment rate' could be nearer the truth that current government estimates. Those sit at 5.1%."

If the FRBB's calculations are to be believed, it would mean the United States is almost on a par with Europe in terms of unemployment levels.

The article goes on to say that the FRBB used the most recent figures available and found that "measured relative to the business cycle peak in March 2001, labor force participation rates …have not recovered as much as usual, and the discrepancies are large."

This implies that America's economic recovery has not been as strong as was previously believed.

Katharine Bradbury, FRBB's senior economist and policy adviser, authored the report and she points out that while unemployment figures have fallen, "the percentage amount of the workforce actually in work has remained relatively unchanged," the article states.

Bradbury says an unemployment figure of 6.5% to 8.7% is probably more realistic than the government's 5.1% estimate.

Therefore, she says, "improvements in total employment and the unemployment rate, as delayed and modest as they have been, overstate the strength of the recovery, since the nation's labor force participation rate has not rebounded to date."

And more disturbing: The unemployment rate may have been understated going back as far as 2001.

Other experts agree that the statistics contradict the government's employment numbers, as well as their method of determining them.

A major indicator is the amount of job advertisements in newspapers across the country.

According to the article, one analysis of "help wanted" ads by the St. Louis Federal Reserve determined that "from a starting point of 100 in 1987 the index had fallen in 2001 to 76 -- a fall of 24% in fourteen years. Since 2001, however, this index has fallen to 38. That is a further fall of 50% since 2001. This data also suggests a similar firming up in 2005 to other employment calculations."

Of course there is an enormous amount of information that must be compiled in order to assess employment levels and determine levels of prosperity in America. Since data is gathered in many different ways from so many different sources, there will most assuredly be debate over the topic of employment for a long time to come.

2. Auto Sales Soar on GM Discount Initiative

There's nothing like a good old-fashioned price cut to entice customers into the shop.

And auto industry results for July proved that this approach still works, with Ford and Chrysler announcing a 25%-plus sales boost as a result of the industry-wide employee initiative introduced by GM.

General Motors saw car sales rise 20% and truck sales spike 35% as it announced that employee discount pricing will remain available to customers through September 6. Ford later matched the move.

Sales of cars and light trucks soared to 18.8 million from 17.2 million a year ago.

Both Ford and GM are fighting against continued marketshare declines in the face of import penetration from overseas. Some twenty years ago, GM's North American marketshare was at 43.3%. That now matches what both it and Ford control today.

The longer these discounts remain in place, the more damage Ford and GM will inflict on the Asian competitors. However, does a permanent price reduction make sense when the victory would be merely a battle won in the much larger war against the competition?

Asian branding has become firmly entrenched, built upon reliability combined with value. So it might take more than a summer-long price cut to win this war.

However, there's no doubting the success of the employee-discounting campaigns.

Although dealers complained about running dry of inventory, the end result must have brought smiles back to their faces.

But the real winner will be the economy -- as the incentive will provide a jumpstart to manufacturing.

3. Bonds Point to Sustained Global Growth

Take a quick look at the world's equity markets and you'll see that investors are more optimistic than at any time since 2001 -- when the slump in growth and equities began.

Behind the move is growing confidence in corporate earnings, thanks to strengthening global demand.

The fact that the U.S. consumer has continually picked up the slack plays no small part, but the emergence of Brazil, China and India as viable economic forces is equally important.

Another way of checking the global pulse is through bond prices.

Interest rates or yields on government bonds (debt) are a key way to tell just how much conviction investors have in economic activity.

Bonds are driven by the prospects for inflation, growth and the mood of each central bank, which sets official monetary policy.

Despite relatively robust growth accompanied by a lack of inflationary pressures, bonds have come off the boil in the recent month.

The reason is simple.

Dealers have been wrong in their collective pessimism that global growth is stalling. Add to that the fact that the Federal Reserve continues to talk tough about the need for future rate increases.

Suddenly, the fall in bond prices throughout July makes sense.

In America, the benchmark 10-year yield has risen 43 basis points from 3.92 to 4.35% since late June.

A firm housing market and forward-looking survey evidence that manufacturers are set to ramp up production have caused bond traders to question the current low-yield environment.

In Europe, the central bank has been vindicated in its mantra that there was no need to reduce rock-bottom interest rates. Recent Purchasing Managers data show that the economy was merely in a transition and that growth will resume (as they predicted) in the second half.

Factor in an apparent end to the decline of the euro and the ECB has things under control.

Still, yields on the benchmark 10-year German government bond have surged from 3.09% in July -- when dealers screamed for interest rates to be cut -- to 3.36%.

Even in the UK, where the Bank of England may cut official interest rates as early as this week, 10-year bond yields have risen from 4.12 to 4.40%. And economists have pared back their views on just how weak domestic growth really is.

The international background has improved and demand has returned -- taking most economists by surprise.

The yield funk may continue for some time.

Bond markets have a strange tendency to head for round numbers before taking change to heart. It wouldn't surprise us to see yields head into the 4.50-4.75% window for the U.S. 10-year note.

The recent announcement by the U.S. Treasury Department that it will relaunch the 30-year bond is testimony to the fact that rates should continue to rise. The huge budget deficit needs to be financed, and by locking into low long-dated maturities, the Treasury is ensuring that it keeps taxpayers' costs to a minimum.