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RAY STONE, PARTNER, STONE & MCCARTHY RESEARCH ASSOCIATES, TALKS ABOUT THE ECONOMY AT BLOOMBERG SURVEILLANCE
JUNE 9, 2011
SPEAKERS: KEN PREWITT, BLOOMBERG SURVEILLANCE HOST
RAY STONE, PARTNER, STONE & MCCARTHY RESEARCH ASSOCIATES
8:37
KEN PREWITT, BLOOMBERG SURVEILLANCE HOST: Our guest is Ray Stone, Stone & McCarthy Research.
We'll go over the jobless claims numbers in a minute. But, Ray, we had some Forex analysts in Europe telling us earlier this morning on Bloomberg The First Word to watch for that term "strong vigilance" from Mr. Trichet. It means the ECB is going to raise interest rates in July.
RAY STONE, PARTNER, STONE & MCCARTHY RESEARCH ASSOCIATES: Well, I wouldn't doubt it. I do think that central banks around the world are now more concerned about inflation than they had been previously, for good reason. And I think even in the United States, Ben Bernanke and others have told us that it appears to be transitory. It does appear as if core inflation has an upward creep to it.
PREWITT: We do have gasoline going down - down around $3.73 now according to the nationwide average, according to AAA.
STONE: Well, that is very good news and it is going to be good news for headline inflation. But it will probably not be much of a factor for core inflation.
PREWITT: Yes. And we had another report this morning that because corn prices are up, pork prices are down. In other words, people in the hog business are liquidating their herds, which mean pork is cheaper now, but it is only going to be more expensive later, right?
STONE: That is exactly right. The benefit of higher corn prices now mean you slaughter your pigs a little bit earlier than otherwise, pushing prices down. But then you have less inventory later on, which will put upward pressure on prices later.
PREWITT: So when Bernanke says that it is temporary, is he right about that?
STONE: Well, I think he correct as it relates to headline inflation. We've seen bubbles in gasoline prices and food prices and these factors have taken the headline CPI up a whole lot.
But the rise in the core CPI tends to be more driven by services than goods, and within that services group is rents and owner equivalent rent, which is effectively the cost of living in your own home. And these things are creeping up gradually, and there are indications from everything I read, including on Bloomberg News, that rents in many of the urban areas are increasing.
PREWITT: Because people have figured out that - or at least in their minds, it is better to rent than to own.
STONE: Well, that may be the dynamic that is driving that, that they look out the window and they see home prices falling, so they would rather rent than buy.
PREWITT: Well, you know, say you buy a house and the worst thing happens, it goes down 20 percent. You've lost 20 percent of your equity, but you've still got 80 percent of your equity left. And if you rent you will never have any.
STONE: Well, that's true, but the arithmetic of that, if you pay $100,000 for the house and you paid cash, you lost $20,000. If you paid $80,000 in cash - excuse me, if you borrowed $80,000 and paid $20,000 in cash, you lost all of your equity. So in a way renting is a way of shorting housing in effect and that may be the motivation and that may be one of the reasons why rents are rising.
But more generally, it could be simply that the economy is improving, while the recent unemployment rate has picked up. In general, the direction has been down and rents tend to over time behave similarly to the unemployment rate.
PREWITT: Jobless claims 427,000 last week. That was a thousand more than the previous week, which was revised upward to 426,000. What is that telling us about the labor market?
STONE: Well, it was number that was pretty well anticipated. I think expectations were around 420,000. So there is not that much of a surprise.
But stepping back and looking at these data more generally, claims are higher now than they were earlier in the year. They are running in the average - well, the four week average is 426,000.
So we can attribute some of this to supply chain disruptions, tornadoes, flooding, and all those sort of things. But the take away if you step back is the labor force - labor market is doing less well now than it did a few months ago. And the May employment numbers were consistent with that notion.
PREWITT: Okay, so the jobless rate 9.1 percent. Where is that number on election day next year?
STONE: Oh, gosh. Well, I'm hoping it is going to be 7.5 percent or something of that nature. And I do think the direction will generally be down.
I am disappointed with the recent rises, particularly the May increase because it was driven not by people reentering the labor force without jobs, but it was driven largely by people who were already unemployed, not finding jobs. So the pool of unemployed has increased.
PREWITT: We're having a lot of people though who just sort of segway from unemployment right into retirement, right?
STONE: Well, that would be a nature thing. One of the interesting things in status that the BLS always puts together called gross flows, is that the dropping out of the labor force interestingly has been largely by people who were employed in one month, and not in the labor force the next, as opposed to being unemployed and dropping out.
So it may be people who are taking buy outs and things of this nature, or people who are simply retiring, or people who are dying while they are still working as workers are working later in life now than they used to be. But the interesting thing is it is not simply because of an increase in discouraged workers.
PREWITT: Oh, it's not?
STONE: It's more than that. It is more related to people leaving the labor force who already have jobs in hand. So they are going from being employed to not in the labor force, which is something that most commentators haven't really picked up on.
PREWITT: Why has everybody missed that?
STONE: Well, these are - the BLS actually publishes data called gross flows, and these data are not part of the employment situation report. They are experimental in nature.
But it tells us what people did the month before. So were they employed last - in April and unemployed in May? Were they unemployed in both months? Did they go drop out? Were they unemployed in April and dropped out of the labor force in May? Were they employed in April and not in the labor force in May? And these data give us a very - a much rich understanding of the household survey and the unemployment rate.
PREWITT: Sure.
STONE: And they are just not well publicized and they are experimental in nature. So you have to forgive them a little bit, but I think they provide us with a rich understanding of what is going on.
PREWITT: Ray Stone, Stone & McCarthy Research. Again, that jobless figure came out at 427,000 initial claims last week, up a thousand from the upwardly revised figure of the previous week.
8:44
***END OF TRANSCRIPT***
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