Posted: 05 Sep 2013 06:34 PM PDT

The payroll report tomorrow is going to be interesting. The discrepancy between what Gallup reports and the BLS reports is widening.

Last month, the BLS reported the seasonally-adjusted unemployment rate at 7.4%.

Today Gallup reported Unadjusted unemployment climbs to 8.7% (The seasonally adjusted rate is 8.6%).

Even if there is a huge jump of half a percentage point in unemployment, there will still be a major difference of opinion as to what the rate is.

Here are some charts and discussion from the Gallup report.

The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, dropped to 43.7% in August, from 44.6% in July, and is down from 45.3% in August 2012.

Gallup's P2P metric estimates the percentage of the U.S. adult population aged 18 and older who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted.

August marks the seventh month this year that the P2P rate failed to improve over the same month in 2012. In fact, so far this year, P2P has declined an average of 0.3 percentage points in terms of monthly year-over-year changes. That is a reversal from last year, when 11 out of 12 months showed year-over-year increases in P2P and there was an average 0.8-point increase for the year.

Unemployment Rises to 8.7% in August

Gallup's unadjusted unemployment rate for the U.S. workforce was 8.7% in August, up from 7.8% in July and from 8.1% in August 2012. Similar to P2P, unemployment fluctuates seasonally, and the year-over-year change is the most informative comparison. The uptick in unemployment this August compared with August of last year is the first year-over-year increase since Gallup was able to begin tracking yearly changes in 2011.

The increase is partly due to the decline in the size of the workforce. Because the unemployment rate is based on the size of the workforce, if people drop out of the workforce but the number of unemployed remains relatively flat, the unemployment rate will actually increase, even though the same number of people are unemployed.

Gallup's seasonally adjusted U.S. unemployment rate for August was 8.6%, up from 7.4% in July. Gallup calculates this rate by applying the adjustment factor the government used for the same month in the previous year. Last year, the government adjusted August's rate down by 0.1 points, but adjusted July's down by 0.4 points, which partly accounts for the increase in seasonally adjusted unemployment.

Underemployment 17.4%

Underemployment, as measured without seasonal adjustment, was 17.4% in August, essentially unchanged from July (17.3%), but up slightly over August 2012 (17.1%).

Gallup's U.S. underemployment rate combines the percentage of adults in the workforce who are unemployed with the percentage of those who are working part time but looking for full-time work.

Bottom Line

Gallup's seasonally adjusted U.S. unemployment rate -- the closest comparison it has to the official numbers released by the BLS -- increased in August. The BLS is not likely to report a decrease in unemployment when the numbers are released on Friday, and may even report a slight increase.

However, it is important to note that Gallup's adjusted number is based on past seasonal adjustments made by the BLS, and that this year's BLS adjustments may not be the same when the government releases its number. Additionally, while both Gallup and BLS numbers are based on robust surveys, there are important methodological differences between the two. Thus, although Gallup's employment numbers are highly correlated with BLS rates, Gallup's numbers tend to have more month-to-month variability, and the unemployment rate as reported by the BLS each month does not always track precisely with the Gallup estimate.

The decline in the workforce, combined with the drop in P2P and increase in unemployment, indicates that little job growth occurred last month over August 2012. Unemployment rates, which are based on the workforce, can actually decline if unemployed people become frustrated with the job search and drop out of the workforce. This decline in unemployment masks a lack of job growth, and makes the employment situation appear to be improving when in fact little has changed. Many economists have attributed recent improvements in unemployment partly to a shrinking workforce rather than true job growth.

BLS vs. Gallup

Gallup has the seasonally-adjusted unemployment rate at 8.6%
The BLS has the seasonally-adjusted unemployment rate at 7.4%
Gallup has the unadjusted underemployment rate at 17.4%
The BLS has the unadjusted underemployment rate at 14.3%.

Who To Believe?

Gallup notes seven consecutive months of declining full-time employment. Because of Obamacare effects , the Gallup P2P statistic is entirely believable. The rising trend in unemployment is also believable.

Unless the BLS heavily modifies its August seasonal adjustment factors, I expect the BLS reported unemployment to spike higher over the next two months and for full-time jobs to disappoint as well.

Tomorrow we see, but I am inclined to believe Gallup has this correct regardless of what the BLS reports.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Is the Selloff in Treasuries Overdone?

Posted: 05 Sep 2013 11:36 AM PDT

Curve Watcher's Anonymous notes that yields on US treasuries are the highest since mid-2011.

click on chart for sharper image

$TYX: 30-Year Long Bond
$TNX: 10-Year Note
$FVX: 05-Year Note
$IRX: 03-Month Discount Rate

$TNX Daily Chart

Since May, the yield on 10-Year treasuries is up 137 basis points (1.37 percentage points) to 2.98%.

Mortgage rates are up similarly.

Here is set of charts from Bankrate.

30-Year Mortgage Rate on June 11

15-Year Mortgage Rate on June 11

30-Year Mortgage Rate September 5

15-Year Mortgage Rate September 5

Since the beginning of May 30-year fixed rates have gone up from 3.36% to over 4.5%.
Since the beginning of May 15-year fixed rates have gone up from 2.6% to over 3.5%.

Given mortgage rates generally follow the 10-year treasury, it is likely that current mortgage rates are about 10 basis points higher than shown in the September 5 charts above.

Bill Gross's View

Bloomberg discussed Bill Gross's view in a report Treasury Yields Reach Highest Since 2011 on Bets Fed to Taper QE

Gross's View

Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed's intent to keep benchmark lending rates at almost zero.

"The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks," Gross said in his monthly investment outlook on Newport Beach, California-based Pimco's website today. "Central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns."

Gross's Pimco Total Return Fund (PTTRX) has dropped more than $41 billion, or 14 percent of its assets, in the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, Chicago-based researcher Morningstar Inc. (MORN) said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year.

Not That Simple

If things were that simple, the 10-year yield would not be at 3% right now, and Gross would not have suffered a drop of $41 billion in assets.

Yet, I sympathize with the viewpoint.

Is the Fed going to raise rates? Nope. There is a zero percent chance of that.

Should Fed tapering purchases from $85 billion to $75 billion or $65 billion have that much effect?

All things being equal, the answer is no. But all things are seldom equal. Rates should not have gotten as low as they did for as long as they did.

Historical Perspective

On a historical perspective, rates have never been where they have been for the past few years. On that basis alone, there is plenty of reason for yields to rise further.

One statement in the article is rather curious. Did you catch it?

Here it is: "Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed's intent to keep benchmark lending rates at almost zero."

Did Gross Really Say That?

The short-term treasury rate is a mere 0.15%. There are no capital gains to be had by interest rates falling. And short-term rates are not rising either (a point on which I agree with Gross).

So there is nothing about short-term bonds that will be bolstered except perhaps in relative terms (meaning everything else - stocks and bonds - lose money).

This is precisely what Gross said, straight from Seventh Inning Stretch

...the safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks. Instead of QE, central bankers are shifting to "forward guidance" which, if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns. If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark, Pete Rose notwithstanding. While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency. With Big Investor unsure or perhaps unable to catch stock, long bond or currency fly balls in today's afternoon sun, it's perhaps best to field boring slow-rolling grounders based on policy rate stability for "an extended period of time." Recall as well that the result of Minsky's "Big Government" and "Big Bank" policies has always been accelerating inflation at some future time. We recommend longer-dated TIPS as insurance against just such an outcome.

Gross never used the word "bolstered".

He did say "front-end yields become the most reliable bet in the ballpark".

Gross also stated "the result of Minsky's Big Government and Big Bank policies has always been accelerating inflation at some future time. We recommend longer-dated TIPS as insurance against just such an outcome. "

There is a difference between "reliable" and "bolstered". And as protection against inflation, Gross also recommended longer dated TIPS.

If the selloff on the long end is over, or nearly over (I don't know, nor does anyone else) then it is long-term treasuries that will be bolstered.

Should rates rise much further, and housing take a huge hit as a result, a genuine buying opportunity in long-term treasuries may present itself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Separating Politics and War From Oil and the Economy

Posted: 05 Sep 2013 09:43 AM PDT

Following two consecutive posts on Syria, one reader asked "Can we get back to economics Mish?"

That's an interesting question given that my discussion never left economics!

How can one talk about Europe without discussing the politics of the euro?
How can one discuss economics without discussing the politics of war and its effect on oil prices?
Is not Obamacare and its repercussions a discussion about politics?
Did not a regime change in China affect its growth rate (as I said in advance it would)?
Is Abenomics in Japan not a fair game for discussion?
Is not the Fed playing politics of the worst kind?
What about beggar-thy-neighbor and war-mongering politics in Congress and by the Obama administration? Do those not play a role in the economy?

Unfortunately, it is increasingly difficult to discuss the economy without diving into the political landscape that shapes it.

In Warmongers Unite (As They Always Do); Boehner Caves In, Backs War; McCain Caught Playing iPhone Poker During Syria Hearing, I made the claim ...

The Difference Is Oil

The US is in Syria for two reasons.

Oil

Warmongers promote war on the flimsiest of excuses every chance they get

Were it not for oil, the warmongers probably would not have succeeded in this case. Oil is the only real difference between this case and numerous slaughters in Africa in which the US stood by and did nothing.

Syria Has No Oil

One reader responded "Oil?!! Seriously? Syria has no oil."

Indeed, Syria has no oil. Yet, I responded ...

We would not be in the region at all were it not for oil. Whether Syria has oil or not (it doesn't) is irrelevant. It's neighbors do. The US is aligned with Saudi Arabia and against Iran. So... Think!

Syria Connection

Does someone want to to revive the Trans-Arabian Pipeline (Tapline) that runs through Syria?

Who knows? I sure don't.

US Would Counter Syria Oil Spike With Reserves

I note with amusement that Analysts Say US Would Counter Syria Oil Spike With Reserves

A US strike against the regime of Bashar al-Assad is not expected to have any direct effect on oil supplies, but a release from oil reserves would be used to counter any disruption that hits oil-producing countries or trade routes.

The International Energy Agency, the rich countries' watchdog, which would co-ordinate any joint international release of reserves, said last week: "While the IEA, as always, stands ready to respond in the event of a major supply disruption, the current situation does not call for an IEA response."

But analysts say a US release, possibly co-ordinated with other countries, could curb any increase in prices.

Really?

What if Iran gets involved? What if Israel attacks Iran as a result of US meddling? What if tensions hit Saudi Arabia? What if a crisis lasts 8 months? What if all of the above happen?

Will releasing oil reserves solve the problem? The idea is ridiculous.

Is Obama doing the right thing? Is McCain proposing the right thing?

The right thing for who?

You? Me? The nation? How about the warmongers and the oil interests?

If you really think all this concern over Syria is truly about chemicals and humanitarian concerns you really are not thinking clearly.

I cannot separate politics from the war and the economy. Nor can anyone else (but at least I discuss the issues, no matter how intertwined they are, or who I offend in the process).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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5.9.13

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