EARLY WARNING WIRE 

Friday’s job number was down 663,000 as expected with February unrevised (highly doubtful) and January revised lower by 86,000. The markets are not focused on the past and are looking for a significant rebound in economic activity later this year. The Labor Department’s seasonal adjustment number added 114,000 jobs last month which is even more ridiculous when one considers that this faulty birth/death model added 142M in March 2008, added 128M in March 2007 and 135M in March 2006. When the final revisions are announced in a few months an extra 200M+ jobs will have been lost but until the markets care it doesn’t pay to stand in the way.

There are quite a few important parts of the jobs report that are worth reviewing beginning with the startling fact that a year ago the unemployment rate for women and men was almost identical at 4.5 and 4.6%. Today the gender rates have widened to record levels with women at 7.0% and men at 8.7%. Temporary jobs fell 72,000 in March and followed a 77,000 drop in February. Retail payrolls fell 48,000 as consumers are saving and not spending. Aggregate hours worked fell 1.0% after a 0.6% fall in February and 0.7% in January. Employers are cutting hours as a first move and then laying off after as they try to hold onto long time workers. Europe is suffering from a multitude of situations where workers are kidnapping bosses to protest massive layoffs. The only private sector category showing an increase in jobs (+8,000) is education and health services. The scariest chart of the day shows the number of people working part-time because they can’t find a full time job. If this trend continues (there is no reason to believe it won’t) a 10% U.S. unemployment rate should be seen before the end of this year. The last chart shows the number of people unemployed for a second consecutive month but the Labor Department only has figures that go back 15 years. The key to this chart is the fast rate of ascent and its almost perfect correlation with the unemployment rate.

Those without a job will soon run out of jobless benefits despite Congress extending aid twice last year. Originally a maximum of 26 weeks were allowed but Congress added 20 weeks and then another 13 weeks for people in high unemployment states. At least 46 states are witnessing higher joblessness and I’m sure Congress will hear cries soon to raise the maximum weeks again or why not just make it permanent relief? A few of the newly unemployed are trying anything and everything to find a job including TV ads for possible employers. With the number of unemployed soaring it is no surprise that over 32 million Americans or one in ten are receiving food stamps.

The Fed’s weekly H.8 report was released on Friday and shows why Fed head Bernanke will continue to purchase Treasury and mortgage securities for many months (and years) into the future. I want ALL readers to spend a few minutes reviewing this report to really understand how credit is contracting in the U.S. banking system. On line 21 it shows that banks have accumulated over $200 billion of CASH in the past month that is literally sitting at the Fed earning NO interest because banks are afraid to loan the money to anyone other than the Fed! Line 5 shows the total amount of credit from loans and leases and has fallen over $100 billion in the past 30 days and is lower than it was in September 2008! It is any wonder Gold is down almost $25 today at $873? It’s called DEFLATION!!!!

Consumers and banks are saving and that means less spending and less tax revenue for states. Massachusetts reported on Friday that March tax collections fell $309 million in the last year (16.1%) and were $53 million less than their most recent forecast. It is the negative feedback loop I have been writing about for months. Consumers spend less and states reduce their forecasted revenue and then businesses see declines in sales and lay off workers who spend less and the circle begins again.

The high end retail market is suffering from deflation with Prada, Saks and Christian Dior offering new low end ($700) handbags.

The DEFLATION can NOT end until asset prices end their decline and house prices are the most important asset that must hit bottom before they can show a small advance. Quietly last week Fannie and Freddie lifted their moratorium on foreclosures and that is NOT good for house prices. It is interesting that when they initially ended the foreclosures it received a lot of publicity but now I’m sure they don’t want to wake up Congress.

A few years ago FHA loans were a small part of most lenders originations but 2009 has brought them to the head of the pack but BIG trouble is coming soon and a government bailout may not be far behind. 20.7% of all FHA loans issued in 2008 are at least 60 days late whereas only 14.1% of subprime loans that were issued in 2007 are 60 days late. This should not be surprising to anyone as a 3.5% down payment is lost almost immediately with home prices falling every month. We are not even close to the end of the housing crises but the government is too busy wrestling with Congress over AIG, the banks and more regulations to see what is so clear to anyone outside of Washington.

The Comptroller of the Currency released a report Friday that showed re-default rates for modified mortgages continued to rise at the end of 2008. 41% of modified loans in the first quarter of 2008 were 60 days or more late by the third quarter and 46% for loans modified in the second quarter. If house prices continue to fall (and they will) every modified loan will be delinquent within months because homeowners won’t make payments on a house loan when the amount due is more than the value of the house. Add a rising unemployment rate and it’s a recipe for many more years of the U.S. recession/depression.

Banks will not begin loaning money until asset prices stop declining and borrowers believe that asset prices will rise and that borrowing $$ for purchases will create future profits. BUT banks must have adequate capital underlying their loans and a margin between their cost of funds and the rate they are charging their borrowers. Tonight’s final and most important chart shows the net interest margin at ALL US banks for the past 25 years. Notice how it has shrunk to record levels due to a decrease in short and long term interest rates. If a bank’s margin between cost and return is small banks will continue to invest in Treasury notes and bonds that are seemingly risk free. The Fed is aware how important bank profitability is to any potential recovery and Bernanke has made it clear that the Fed will keep the overnight funds rate near zero for a very, very long time. Until asset prices stabilize banks and borrowers will have no reason to come together and the economy will continue to contract.