Employment Picture Continues to Look Grim
The December employment report will be published on January 7. Another large drop in payrolls (-500,000 vs. -533,000 in November) and a sharp increase in the unemployment rate (7.0% vs. 6.7% in November) is widely expected. The Challenger, Gray and Christmas report for December shows announced job cuts of 166,348 vs. 181,671 in November. True, on a month-to-month basis there is a small decline in layoffs but from a year ago layoffs have risen 245% (44,416 jobs cuts announced in December 2007). The financial services (+593% from a year ago) and automobile sectors (+ 5234% in September vs. a year ago) account for a large part of the increase in job cuts.
The ADP employment survey results point to a loss of 693,000 private sector jobs in December after a loss of 476,000 in November. The main message is that employment conditions are grim. From a historical perspective, the median increase in the unemployment rate from a cycle low to a cycle peak is 3.2 percentage points for business cycles in the post-war period (see table 1). The unemployment rate in November was 6.7% and the low for the current business cycle is 4.4%.
Taiwan and the Flat-Panel Drag (Revisited)
On September 25, 2008, Taiwan’s central bank surprised the world by ending its tightening cycle after a shaky outlook on exports and diminishing concerns over inflation. Three months later, and after another surprise rate cut today, it is time to take another look at Taiwan’s export situation.
Below is the chart of a decade of Taiwanese central bank moves plotted against inflation. The bank has cut six times since the latest tightening cycle ended at a peak of 3.625%. Normal moves for the bank are 12.5 bps; however the latest spate of cuts has averaged 35 bps. Today’s move was an emergency 50 bp cut after the release of horrendous export data for December, bringing the overall Rediscount rate to 1.50%. Also note that inflation has subsided as energy import prices have dropped markedly, allowing for additional policy maneuvering. Temporary deflation is even being discussed now by the authorities as import demand crumbles. (Shaded area is recession in Taiwan.)
Again, the Taiwanese export sector is vital to the island’s economy. Exports of goods and services accounted for around three-quarters of GDP in 2008, implying that the economy is heavily-dependent on external demand. Moreover, Taiwan is the producer of 40% of the world’s flat-panel TVs and 80% of the world’s motherboards. Needless to say, demand for high-end consumer electronics in current times is hurting – at best. As a result, merchandise exports for December posted its largest y-o-y drop in the history of the series (31 years). Even China, who was previously responsible for propping up Taiwanese export orders earlier in 2008, is pulling way back on imports. Exports to China (including Hong Kong) fell a record 54% in December.
Industrial production (another measure of manufacturing activity, which accounts for approximately 28% of GDP) fell to a record-low in November on a year-over-year basis. It appears as if real GDP for the next few quarters will be exceptionally weak. Most economists are now predicting that economic activity will contract by 3.0% this year, putting Taiwan on the list of top-ten worst performers for 2009 – unless of course everyone buys a flat-screen TV with their stimulus checks.
