The Jobs Report: Solid Growth, But Does Little to Solve Our Economic Malaise

Today the Bureau of Labor Statistics issued the March jobs report.  It shows continued solid growth:  An increase of 215,000 new jobs.  The unemployment rate stayed at 5.0% as more people worked and more people reentered the labor force.  The labor force participation rate is now at 63%.  

The graph shows the percent of the adult population with jobs according to the household survey.  It shows the economic malaise the country has suffered these last seven years. Robert Bartlett tittled his history of the Reagan period The Seven Fat Years.  These have been the seven lean years.

The employment ratio plunged during the recession and continued to fall after its official end (June, 2009.) Jobs data, revised after the NBER called the trough, show that jobs continued to fall into the first few months of 2010.  Jobs growth failed to keep pace with population growth on into 2011.  We really did not see job growth fast enough to outpace population until 2013.

Wichita's Chief Industry

On a less cheerful note, aircraft employment fell by 900.

Wichita Was Lucky to Lose the Tanker Contract

There is little stomach in the West to defend democracy around the world and, as night follows day, those aging republics which constitute the West show little appetite for spending on the weapons of war.

Defense spending is falling throughout the developed world. Prudent firms and metropolitan areas desiring growth will invest in more pacific lines of businesst. There was great outrage in Wichita when Boeing shifted the dwindling jobs for the Tanker contract to Seattle and other cities to satisfy its unions.  Yet when commercial aircraft is waxing and military aerospace is waning, shifting from jobs dependent on defense spending to civilian activity is a sound investment in the future.

Reports from the world of commerce confirm this.  Peggy Hollinger, Industry Editor for the Financial Times, wrote on September 16, 2014 that Airbus will streamline defense and space division by selling or otherwise divesting itself of units.

Doug Cameron and Robert Wall predict in the Wall Street Journal that Boeing may no longer be in the fighter business as orders for F/A-18 run out.  Management shifts toward bombers, drones and trainers. Boeing's revenues from the military side fell from almost 60%  to under 40% over nine years.

As Russia becomes more adventurous and China more assertive, America has grown weary of being the arsenal of democracy.  The capitalists have taken note.

Is Koch overpaying for Molex?

Yesterday's (9/9) Wall Street Journal proclaimed that Koch Industries (a "conglomerate known for unglamorous industries") is buying Molex.  Koch, privately held, is one of Wichita's largest employers and one of the two largest privately held U.S. companies.  Cargill is the other.

The current Merger and Acquisition market is pricey, if not frothy.  According to the Journal, Koch is paying 38.50 a share or $7.2 billion.  Given the scanty numbers in the article, that seems rich: about twice sales, thirty times earnings, and 1.78 times enterprise value.

Nevertheless, Koch only buys companies when it thinks its Market Based Management philosophy can produce positive results.  It has found that it has a core competence in managing process business.  Still this is an industry with powerful customers including Apple (14% of Molex's revenues) and the automotive industry.  They do not roll over for suppliers.

James Haggerty and Bob Tita report in the Wall Street Journal, "Molex, based in Lisle, Ill., makes products including connectors, sockets, antennas and switches used in cars, computers, cellphones and factory equipment, among other things."

MOLEX is traded on the NASDAQ. You can find their SEC filings online.

Why Wichita and Kansas Are Places to Move Your Business to or Start Your Business.

John Stears writes in the Wichita Business Journal that "Wichita businessman Wink Hartman hopes [he can[ elicit warm and fuzzy feelings about living in Wichita and Kansas — and catch the eye of job creators."  He has produced a pair of ads highlighting the type of people who make up our local economy and its culture of growth.  Spending his own money for production and airing the ads,  Stearns characterizes Hartman's campaign as "one man’s economic-development cause."




Meanwhile the American Legislative Council has boosted Kansas' economic outlook based on improved policies.  Kansas jumped 15 rankings in the ALRC's ratings of the fifty states' prospects: "Rich States, Poor States."

A Dismal Employment Report, But Hope for Wichita

Unemployment Rate Up, Job Growth Nil

The Bureau of Labor Statistics issued its monthly labor report this morning.  The unemployment rate was 9.18%.  It is up for three straight months now.  The establishment survey showed only 18,000 new jobs, a number so small, it is noise.  No sensible statistician would reject the hypothesis that June's job growth was zero. May's strong job growth was even revised downward. 

The Long Slow Slide

Reviewing the data for the last year is even more depressing.  Although the establishment survey shows a growth of over a million jobs since June, 2010, the household survey shows only about a quarter million more working now than then.  That is a big discrepancy and bodes ill for the next big establishment data revision.  More depressing still is the trend in the ratios of jobs to the population.  This statistic is immune from oddities in Washington's population estimates.  The proportion of the population working appeared to have bottomed out in January, 2010 at 58.23, but now hit a new low in June, 2011 at 58.18%.  

The unemployment rate peaked at 10.15% in October 2009.  The bulk of the improvement since then came from a fall in the number looking for work (i.e., a fall in the labor participation rate.)  The economic distortions caused by the credit boom of the middle of the last decade continue to drag on growth.   Housing starts have averaged a little over a half million for more than two and a half years.  Unemployment in construction is at 15.6% despite a slowly shrinking labor force.  Conventional economic stimulus is poorly equipped to cure such distortions.

But Is Aerospace Up!

Amid all this gloom, there is good news for Wichita.  Manufacturing employment is up nationally.  Moreover manufacturing jobs are up about a percent and a half over a year ago.  

Digging under the published numbers in the BLS report, it appears aerospace employment is up by a thousand jobs in June.  This comes after a great Paris air show for commercial aviation.  Over $90 billion in orders were placed for new planes.  This is good news for Spirit.  Even general aviation is showing glimmers of life.

Employment Was Up in March

The Bureau of Labor Statistics (BLS) reported jobs on U.S. payrolls were up 214,000 in March and the unemployment rate fell to 8.8 percent. Particularly encouraging was a 17,000 increase in manufacturing jobs.

And What About the Aircraft Industry?

The BLS did not publish data for the aerospace industry, but it did report that jobs in transportation equipment were up 6,100. If we exclude motor vehicles and part, the rest of the sector (mostly aerospace) was up 2,900 jobs. That is good news for Wichita.

Wichita's Unemployment Rate Falls Compared to Last Year

The Kansas Department of Labor gave us new evidence that Wichita is continuing on its slow road to economic recovery.  Dan Voohris reported in the Eagle, "The unemployment rate in the Wichita area fell in February to 8.4 percent from 8.7 percent in January, according to the Kansas Department of Labor.
It was also below the rate of 8.9 percent in February 2010."   It is prudent to compare the new data for February with February a year ago since the data have a strong seasonal swing.

Voohris quoted Friends University finance professor and Mammon Among Friends blogger, Malcolm Harris, as saying, "'We're seeing a trend, and that trend is in the right direction'...But, he cautioned, 'we've got a long way to go.'"

This theme was taken up by the Associated Press.  Referring to Wichita, the wire service reported: "The falling unemployment rate in Wichita shows an improving jobs trend in this aviation manufacturing hub that was hard hit by the economic downturn."

Dan Voorhis found evidence that the demand for temporary workers has been strenghthening which is often a harbinger of increased demand for permanent workers.  From the Arnold Group's Phillip Hayes, Voohris learned that in February hours worked by temporary workers were up 85 compared with a year ago. "Demand started to increase in April and continues to do so." He learned from Hayes that "The conversion of those temporary workers to full time, though, is just beginning."  Naturally enough, "Employers are reluctant to convert temps to regular employees in case demand drops."  

Particularly encouraging is that Hayes "is seeing the strongest demand for manufacturing workers."  Is that a further sign that the aircraft industry is reviving or might this be a sign that other sectors are taking the lead?  The data are not telling. Boeing and Airbus have both increased their production rates for their single aisle mainstays.  Nationally aerospace employment has gone up more often then not these last eight months. While that may be a straw in the wind and the wind seems to be blowing in the right direction, but it is a pretty wimpy breeze by Kansas standards.

Economic Update: Wichita and the World

1) The world economy is eighteen months into an economic recovery. The U.S. economy lagged six months behind. Employment lagged another six months behind that and Wichita lagged yet further behind.  The most recent news is mixed.  the Commerce Department reported Housing starts were up.  Alan Rappeport writes in the Financial Times that "That was stronger than economists expected and marked the third month running that starts increased."  The Fed reported that September industrial production was down.  Rapeport tells us that "US industrial production fell for the first time in more than a year last month."

2) The U.S. unemployment rate is still at 9.5% reflecting the enormous dislocations caused during the bubble years of 2004-7. The administration's two top economists Larry Summers have retreated to academia.  CNN interviewed Peter Diamond the new Nobel Laureate who seems to see it differently.  He told CNN’s Fareed Zakaria GPS: "The central focus of the problems in the economy right now is not that the labor market is working badly but the demand for labor is way down. ... I view the US economy as extraordinarily adaptive . . . I expect the economy to adapt this time as well."

3) Wichita and Kansas are seeing signs of recovery. Wichita's August unemployment rate at 8.2% is down a percentage point from a year ago. (August is the worst month each year.) For four straight months we have seen an improvement over the year before. A new state study shows job openings up and up relative to the number out of work. The Kansas Department of Labor reported, "There are more job vacancies in Kansas this year than last year, according to the 2010 Job Vacancy Survey. The survey, completed by employers during the second quarter of 2010, found there were an estimated 32,091 job vacancies statewide. This represents a 24.5 percent increase in vacancies from 2009." World trade is vital for Kansas and the world economy is pulling up the Kansas economy.

4) As for the aviation industry, it is a three legged stool: commercial, military, and general aviation. Commercial aviation is reviving. The lessors are back. The other two legs are weak.  Most countries are cutting military spending around the world. General aviation (business jets and private planes) is still in a big slump.

5) The business aviation industry has its big show in Atlanta while we speak. In connection with that, Honeywell's new forecast shows a 10% increase over the next decade, but tough slogging over the next two years. For 2010, Honeywell Aerospace estimates deliveries of 675-700 new business jets, down 16-17 percent from 849 in 2009 mainly due to continued global economic weakness as well as overarching concerns about government debt, austerity programs, export growth, financing costs, and general availability. Rob Wilson, President, Business and General Aviation, Honeywell Aerospace said "The industry should begin another period of expansion by 2012"  Molly Mullins reports on Hawker's new business jet, the 200 and on Cessna's new version of the Citation, the Citation X.

6) Hawker-Beechcraft's two lines of business are military and business jets: not a pretty picture. Kansas has put together a package to keep it from moving to Louisiana, but the union has now rejected the firm's proposed labor contract. This cloud remains over our economic horizon.

Wichita's Unemployment Rate Rises Seasonally to 8.4 Percent; GDP Grows at 2.4 Percent; and Europe's Mercedes Reves Up

The Stock Market Falls Again

Here it is Friday afternoon and the U.S. Stock Market is down some more after a 144 point plunge yesterday. The Fed of Philadelphia's activity index took a dive and new claims for unemployment jumped over a half million. That latter is one statistic economists do not want to see rise and it is one of the Conference-Board's leading indicators. Yesterday's plunge turned a nicely developing  global rally into a global route.

Markets have been particularly spooked since the Commerce Department issued its GDP report a week a go.  The economy grew at a 2.4 percent rate in the second quarter.  This was seen as lack luster growth.  However the deceleration was not due to a lack of demand but to an over appetite for imports.  Real, domestic final demand grew at a 4 percent annual rate.  More economic stimulus would further aggravate our current account balance.

Its Bureau of Economic Analysis revised the last two and a half years of national income accounts estimates showing, as I expected, that the recession was deeper and the recovery stronger than previously reported.

Good News From Germany

The global rally had been fueled by news that the Bundesbank had increased its forcast of German economic growth. Germany is the Eurozone's engine. Moreover the strength in the world economy is reflected in the new resource M&A boom according to Javier Blas and William MacNamara in the Financial Times. They report, "The rise of China and India has sparked a renewed surge in aggressive dealmaking in the resources sector, with more than $50bn in proposed take­overs this week alone wagering on continued strong commodities demand."

The American stock market is focused on the possibillity of a "double-dip recession."  As I said yesterday, "I don't see a double-dip recession, either here or nationally...It's too late for one to start. They need to happen within 12 months."  We had a  double dip recession in 1973-75.  The economy fell in response to the oil shock of the arab oil embargo.  The economy recovered in the first half of 1974, but as inflation artificially inflated manufacturing order books, firms soon found their perceived demand to be ephemeral.  Industrial activity plunged after June in the "second dip."  The recession of 1982 followed closely (fourteen months) on the heels of the 1980 reession leading some economists to argue it was really one double dip recession not two separate recessions.

There real recession threat for the U.S. is more medium term.  When tax hikes and the supply side effects of the new health care legislation hit in 2011 and 2012, we could see something like the "Roosevelt Recession" of 1937-38.

Wichita's Good Bad News.

Dan Voorhis of the Wichita Eagle reported, "The July unemployment rate in the Wichita area hit 8.4 percent — worse than June, but much better than the 10.3 percent in July 2009."   That compares with 8 percent in June.

The rise is seasonal.  As Voorhis points out, "The unemployment rate typically rises in July as thousands of students and school staff enter the work force looking for jobs."   Chris Moon in the Wichita Business Journal notes that "metro [Wichita] had 26,669 people who were out of work, up from 25,184 a month ago."

To look past the seasonal effects, compare July's unemployment rate to the same month in 2009 (10.3%.)  That is a big drop.   This is the third straight month that the unemployment rate improved compared to a year ago and that provides grounds for optimism.   The Eagle quotes this Friends University professor as seeing "encouraging economic trends that will soon translate into better employment.  'I can see the unemployment rate in the fall closer to 7 percent than where it is now.'
[and the] strength in commercial aircraft construction and a general demand for Wichita-made products in other parts of the globe.."

Kansas

Seasonal factors drove the state unemployment rate up for July to 6.9 percent.   Kansas Department of Labor economist Tyler Tenbrink said "Kansas continued to see steady but slow job growth in July. An increase in goods producing jobs, like construction, are very important. We are still seeing a decline in some service providing jobs, like information services and financial activities. A bright spot this month within those declining industries was administrative and support services, which includes job placement services for temporary workers. We are particularly interested in job gains in this area because employers tend to use these services before hiring permanent workers. This industry saw its first over-the-year job gain since June 2008, a positive indicator that we may continue to see growth in other industries in the coming months."

Farnborough, Jobs, and Wichita

Wichita's unemployment rate is 8.0 percent.

The national recovery is starting to come to us. Wichita's unemployment rate was 8.0 percent June, down from 9.0 percent in June, 2009. Dan Voorhis reported in this morning's Eagle.   "'Given that it's for June, that's a positive sign for Wichita,'" quoting Mammon Among Friends' own Malcolm Harris, Professor of Finance at Friends University.

Note the data is not seasonally adjusted. The national unemployment rate, which is, fell to 9.5 percent (from 9.7 percent.) The national rate fell as fewer folks were in the June labor force. That was in part because of the seasonal adjustment and in part because those census workers who took the work for a few extra dollars but were not looking for permanent work left the labor force. He also quoted "Jeremy Hill, director of the center for Economic Development and Business Research at Wichita State University, [who] said the bulk of the new jobs has come in the medical sector and professional and business services."

As I told Dan Voorhis, "We're 12 months into a national recovery and some of that is spilling into the local economy." One big area of improvement is the aircraft industry.  New aircraft orders are up for the five months through May according to Commerce Department data.   Although well below the boom years of 2007 and 2008, there is a distinct recovery showing up.  Both Boeing and Airbus have been conservative in their production planning.  Boeing is now slowly stepping up its 737 production, a sign it is growing confident.  Increased production also protects Boeing from potential cannibalization of the 737 market by its and Airbus's new planes.   Spirit Aerospace largely avoided layoffs by using a shortened workweek during the worst of it.  By thus spreading the work around, it conserved its younger workers who are the manufacturer's future.

Which brings us to Farnborough:

The Farnborough International Airshow is this week: 19-25 July 2010. The biennial show was last held at the peak of the boom in aircraft orders.  The 2008 show (pictured on the right) set a record of US$88.7 billion worth of orders announced during the show.  Note planes are priced in dollars not Euros.

Boeing's Dreamliner made a splash. The 787 flew into Farnborough Monday and returned home yesterday.  Gulliver, the Economist's Business Travel commentator blogged, "The Dreamliner is much more than just another incremental upgrade to Boeing’s fleet: its revolutionary lightweight carbon-composite wings and fuselage mean much-improved fuel efficiency (20% better than comparable planes made from aluminium, according to Boeing). This could well persuade airlines to open some direct routes around the globe that they previously deemed uneconomic."

Today's Eagle carries an AP report by Jane Wardell and Emma VanDore that orders have totaled $25 billion.

There is life among the aircraft lessors. Halleluja!

I knew the aircraft industry was in trouble when I learned AIG was Boeing's and Airbus's biggest customer.   AIG required a federal bailout, CIT entered bankruptcy and GE Financial was in trouble (the piggy bank that Jack Walsh built was broken.)  Lessors' share of aircraft orders dropped from 40 percent to 2 percent.

The Financial Times' Pilita Clark reported that "Steven Udvar-Hazy made a notable re-entry into the field.  He is one of the biggest names in aircraft financing who founded and ran ILFC, AIG’s aircraft leasing arm, until his departure earlier this year. He announced a $4bn order for 51 Airbus A320 family aircraft for his new leasing company, Air Lease Corporation."

"That news was swiftly followed by Boeing’s announcement that GE Capital Aviation Services, the aircraft leasing arm of General Electric, was ordering 40 of its best-selling 737 jets valued at around $3bn, according to the manufacturer’s published prices."

The A320s and the 737s are the workhorses of much of commercial aviation and seem to be commodity most easily leased.  Udvar-Hazy largely created the air leasing business with International Lease Finance Corporation (ILFC), now owned by AIG.  When AIG lost its AAA bond rating, ILFC got shut out of the commercial paper market and was hard pressed to buy new planes.  Udvar-Hazy's solution?  He left ILFC and started a new company and now he has ordered 40 Boeing 737-800s.  That should be good news for Spirit Aerospace here in Wichita which makes fuselages for 737s.

Is the market developing according to Boeing's view of the world or Airbus's?

The first step to understanding an industry and a company's business model is asking who the customers are. On the commercial side, Airbus and Boeing (and Bombardier and Embraer) sell to commercial airlines and air freight companies. The customers' business models will drive the demand for their planes. As the busiest airports get more and more congested, the airlines will either have to fly bigger planes with more seats into those hubs or fly longer point-to-point routes to relieve pressure on the hubs. Airbus in the A380 bet on the former, while Boeing in the 787 bet on the latter.

Pilita Clark reported from Farnborough Monday that "Emirates, the Dubai-based airline, on Monday announced a $9bn order for 30 Boeing 777 passenger jets, making it the biggest deal so far at the show."

This follows the the Berlin airshow where she reported on June 8th that "the Dubai-based airline, placed one of the largest civil aircraft orders in history on Tuesday when it said it would buy 32 A380 superjumbo passenger jets from Airbus in a deal worth $11.5bn."  That Airbus claimed was the biggest commercial aircraft order by dollar value ever.

At the time the FT's Clark further reported, "Emirates already had 58 A380s on order, with Tuesday’s announcement taking that number to 90, firmly cementing its position as the largest operator of the superjumbo.


"The deal is a big boost for Airbus, which now has 234 orders from 17 buyers. The programme is far from making a profit, however, after it was affected by numerous delays and cost overruns.
In addition to its A380 orders, Emirates has 70 Airbus 350s, 18 Boeing 777-300s and seven Boeing air freighters on order, totalling 143 wide-body aircraft worth more than $48bn.

"The world’s largest passenger jet, which typically has 525 seats, costs $346.5m at list prices, although large customers receive sizeable discounts."

While the luxury airlines can offer has been much commented on in the press, Airbus is stressing that the A380 is a money maker for airlines:  "The big news for operators is that the A380 is earning hard dollars at the same time. Introducing this next-generation jetliner is saving customers millions in operating costs annually while creating thousands of extra seats on long-haul routes. With the lowest cost per seat and the lowest emissions per passenger of any large aircraft, the A380 provides a competitive edge."


Molly McMillan reports in Air Capitol Insider, Hawker Beechcraft has found some business and Bombardier brags "it has captured 50 percent of net orders in the 100- to 149-seat marekt segment over the past two years. The program is on schedule for entry into service in 2013."

In a video report, Richard Milne reports from the Farnborough Airshow on the rise of emerging market manufacturers and the challenge posed to Airbus and Boeing from the Bombardier C-Series.  (3m 5sec) 

Separately,Molly McMillan reported in the Eagle, that "Hawker Beechcraft is looking at states that might be suitable for developing facilities to build parts for the company and has narrowed the field to two — Mississippi and Louisiana" according to its CEO, Bill Boistur. Molly McMillin reports that he said, "'The market for our products has decreased dramatically over the last 18 months...Our view is that this is not a momentary decrease, and we believe strongly it's necessary to adjust the cost structure of the company to be able to be profitable in a small market.'"

Payrolls Are Up, Employment is Up, and the Labor Force Surges Causing a 9.9% Unemployment Rate

BLS released its April jobs report. Unemployment hit 9.9% because the labor force jumped by 805,000 including almost 200,000 re-entrants. Payroll jobs were up 260,000. Private jobs up 231,000 including 44,000 manufacturing jobs.

Although the unemployment rate rose, the household survey showed employment growing faster than population for the fourth straight month.

As for Wichita's unemployment situation, aviation is the core of its economic base. There was no evidence of a rise in aviation jobs in the report motor vehicle manufacturing jobs rose by 4,100 jobs while other transportation equipment employment fell by 4,000.

Correction:  The last sentence should read: "There was no evidence of a rise in aviation jobs in the report: motor vehicle manufacturing jobs rose by 4,100 jobs while other transportation equipment employment fell by 400."

You Doubted that We Are in a Recovery? Jobs Up by 162,000 Confirming the Household Uptrend

Confirmation for the Recovery

Mammon Among Friends has been dating the cyclical trough at June, 20010. Skeptics can now finally find confirmation that there is indeed a recovery in the jobs data announced this morning.

The Bureau of Labor Statistics announced, "Nonfarm payroll employment increased by 162,000 in March, and the unemployment rate held at 9.7 percent. Temporary help services and health care continued to add jobs over the month. Employment in federal government also rose, reflecting the hiring of temporary workers for Census 2010. Employment continued to decline in financial activities and in information."

The Household Survey of Employment

I have been following the household data very closely.  While noisy and trend distorted by the Census Bureau's insensitivity to the need for useful time series, the household data do not suffer from the cyclical biases of the payrolls data.

The unemployment rate remained at 9.7 percent in March, below its cyclical high of 10.1 percent in October.  For three months, households have reported large increases in employment after a huge drop in December (During Christmas, retailers did not hire as many workers as the seasonal adjustment process projected.)  Labor force growth has been strong.

Employment increased faster than population again in March.  Common sense dictates that the employment ratio, which hit bottom in December,  should be a long lagging indicator.  Bottoming out six months after the cyclical peak would be consistent with that characterization.

The unemployment rate is now five months past its cyclical high and the employment ratio is three months past its cyclical low.  This reflects the global recovery.

The Economic Recovery

We are emerging from a financial and economic crisis of historic dimensions.  Unemployment reached levels not seen since 1982.  America suffered the largest falls in industrial output and housing starts since the “Roosevelt Recession” of 1937-8.  

However deep the recession, the recovery is well underway.  A long list of indicators hit bottom last year and are rising: auto sales (February), durable goods orders (March), real retail sales (April), housing starts (April), and industrial production (June.)  The fall in global industrial production ended in March as did world trade’s in May.

Wichita

Aircraft orders were up sharply in February according the the Census Bureau for the second straight month.  The BLS payroll data indicated aerospace employment was level for March (it does not break out the detail in its monthly reports.)

The Good the Bad and the Ugly: The Weak Dollar, CIT's Bankrupcy, Aircraft Leasing

1) The economic recovery: Real GDP grew at a 3.5 percent seasonally adjusted annual rate in the third quarter after falling five of the previous six quarters. Jeff Bator in the Wall Street Journal writes, "[A]fter a bullish report on manufacturing suggested the smokestack sector is in a hiring mood., ...U.S. factory goods orders rose in September...0.9%, the Commerce Department said Tuesday, the fifth increase in six months. Orders fell an unrevised 0.8% in August."
.
World trade bottomed out in April and our national economy's recovery started in June according to my best estimate.

2) The main opportunities and threats to recovery here in Wichita: the weak dollar is helping make American aircraft more competitive vis-à-vis Airbus and Embraer.  In the Wall Street Journal, Mike Spector Vanessa O'Connell and Kate Haywood reported that CIT filed for bankruptcy "in New York, listing assets about $71 billion and nearly $65 billion in liabilities." CIT's bankruptcy shows the fragile financial shape of the aircraft leasing business.  CIT Aerospace is a major aircraft lessor with aircraft worth something in the vicinity of $10 billion.

Seven aircraft leasing companies (GE Capital Aviation Services, AIG's International Lease Finance Corporation, CIT Aerospace, Royal Bank of Scotland Group PLC's RBS Aviation Capital, Bank of China's BOC Aviation, Pacific LifeCorp Inc.'s Aviation Capital Group, and Pembroke Group, a unit of Britain's Standard Chartered PLC) are big customers of the aircraft manufacturers.   Last fall, we were shocked to discover that AIG was Boeing's and Airbus' biggest customer. Daniel Michaels at the Wall Street Journal estimates that approximately 35% of the world's jetliners are owned by these lessors.  Thus these lessors' own $147 billion of the world's $417 billion worth of jets. The larger lessors are all in shaky financial shape.  This means the biggest set of customers for Airbus and Boeing (Spirit's customers) face severe financial constraints to their buying planes.

Earlier we wrote, " AIG has been trying to sell ILFC for a year. Steven F. Udvar-Hazy, chairman and chief executive of International Lease Finance Corp., is trying to work a deal whereby he and investors carve out a part of ILFC and go it alone.  The investors are supposed to be mostly from the Middle East and China." The commercial side of the aircraft industry has held steady so far.  With Wichita's unemployment rate at 8.6 percent, let us pray this is not the other shoe ready to drop.

The State of General Aviation and the Consequences for Wichita

The National Business Aviation Association conference is opening in Orlando, Florida next week.  It and surrounding events will provide focus the business world's attention on general aviation and the economic hammering it has taken.  The Wichita Eagle's Molly Mullins in a big Business Section feature surveys the damage, "The state of Kansas' business aviation industry."


She writes:


"Nobody saw this coming.


"Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program.


"The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall.


"A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow."

Back in March, 2008, I argued that the national economy had been in a recession for six months or more ("What is Good for Wichita Is Hemlock for Wall Street.") The National Bureau of Economic Research eventually dated the recession to have started in December, 2007.  Few fully appreciated the extent of the general aviation bubble ("2007 Increasingly Looks like It was a Bubble Year for the Aircraft Industry.")  The bursting, when it came in the fourth quarter of 2008 was dramatic. 


Peter Sanders at the Wall Street Journal reports on the effect of the aviation downturn on Wichita's economy noting that "more than a quarter of the area's aviation work force has been let go, not including thousands more layoffs among parts suppliers and support businesses."

Cessna's New Orders "Nosedived" In the Fourth Quarter of 2008

To amplify Sanders' report, Cessna's new orders, net of cancellations, averaged about $2.4 billion a quarter in the first three quarters of 2008.  They fell over 80 percent to $400 million in the last quarter.  (These are my estimates based on Textron financial reports.)

Outsourcing

Sanders also reports on a "recent push to manufacture offshore that many Wichita aerospace companies have embarked on. Some companies have opened operations in Mexico. During the boom times in late 2007, Cessna announced it would build a new, small propeller plane in China. That plane would be shipped to Wichita for reassembly and delivery to U.S. customers.


"While the companies are guarded about their plans in light of the downturn, officials concede that it is unlikely that they would expand their Wichita operations beyond today's level. Any future growth would probably happen abroad."

Commentary

A few points:

1) 2007 was a bubble year for general aviation.  Look at the new orders data. 

2) The bubble was fueled by the same over expansion of credit that fueled the housing bubble. 

3) The negative short term interest rates of 2002-2004 enabled (should I say caused?) the credit over expansion.

4) The general aviation industry over expanded in 2008. 

Fun Question: Would Cessna have expanded production as much in 2008 had it been independent rather than owned by Textron?


5) On the commercial front, Boeing expanded much more cautiously.  Compare Boeing's production in the run-up to this recession with its production in the run-up to the 2001 recession.   This has allowed Spirit to hang tight and manage for the longer run.

Fun Question: Do you attribute that to good management, conservatism, or technical delays?

6) Hypocrisy in Washington about corporate jets is business as usual.  Congress votes to appropriate for themselves a more elaborate fleet of planes than the Air Force requested.  Simultaneously, it pillories corporate executives.  (For the Journal, Brody Mullins and August Cole reported in August, "the House more than doubled the [Air Force's] request to $550 million for a total of eight new passenger planes for use by government VIPs.")

7) Outsourcing has its drawbacks as the yo yo economy of 2008 demonstrates.  

8) Outsourcing means having less control.  Boeing has had to buy back three of its suppliers to get the Dreamliner back on path.


9) The administration's fiscal policy and the Fed's monetary policy represent more than the benign neglect of the 1980s.  This may be Washington's real industrial policy.  Let the dollar get so worthless that manufacturing will find it cheaper to come home.  We can debate whether that is a plan.

In the long view of things, Wichita's current 8.9% unemployment rate (10% in July) is collateral damage from Alan Greenspan's and Ben Bernanke's misjudgment that preventing bubbles was not their job.  As in the refrain from the old Pete Seeger song goes, "When will they ever learn?"

The Unemployment Rate Goes to 9.7% and Payrolls Drop "Only" 216,000

The Bureau of Labor Statistics reported on the August employment situation this morning.

The Nation

The national unemployment rate rose to 9.7 percent in August from 9.4 percent in July and 9.5 percent in June.  The size of the labor force still reflects the upsurge we saw at the beginning of the summer.  The month to month variation in th employment rate mostly reflects the sampling variation in the proportion of respondents who say they have jobs.

Non-farm payrolls fell by 216,000 in August.

April Is the Cruelest Month

The Bureau of Labor Statistics survey of households shows a drop of 1,351,000 employed since April, while the payroll survey shows a fall of 1,258,000 jobs.  The good news is that new unemployment claims peaked in April.  Historically this has been a reliable indicator of a recession's end.

Wichita

Although BLS did not report job losses for the aerospace industry, transportation equipment other than autos and auto parts fell by another twelve hundred for a total loss of 17,100 since April.

AIG's Financial Crisis and Boeing's Biggest Customer

Boeing and Airbus's biggest commercial customer is not an airline but the fallen insurance giant, AIG (see my earlier  posting "Who's Boeing's and Airbus's Biggest Customer? Would You Believe AIG?") AIG's financial Götterdämmerung forced International Lease Finance Corporation (ILFC),which it owns, onto the Fed's life support system last October.  When AIG lost its investment grade rating, ILFC could no longer access the commercial paper market to roll over its short term debt.

AIG has been intent on paying off the $80 billion federal debt that keeps it in bondage to Washington.  The strategy has been to sell off assets.  The flaw in this strategy has been that you get Filene's Basement prices not Neiman Marcus prices when you dump assets at market bottoms when buyers know you have to sell and the few who have the cash bargain hard.  In the Wall Street Journal, Matthew Karnitschnig and Liam Pleven tell us AIG's new CEO, Robert Benmosche, is reconsidering its asset sales strategy. 

AIG has been trying to sell ILFC for a year.  Now Peter Sanders and Daniel Michaels also at the Wall Street Journal write that Steven F. Udvar-Hazy, chairman and chief executive of International Lease Finance Corp., is trying to work a deal whereby he and investors carve out a part of ILFC and go it alone.  The investors are supposed to be mostly from the Middle East and China.

The Hungarian born "Mr. Hazy is a co-founder of ILFC, which now owns about 1,000 aircraft, most of which are leased to commercial airlines world-wide. ILFC is the largest customer of Boeing Co.'s upcoming 787 Dreamliner, with 74 planes on order."

It is important to Spirit that a major support for the demand for commercial aircraft have the financing to buy planes and maintain its existing portfolio.  Boeing was more conservative expanding production in 2008 than its general aviation brethren seeking not to repeat the mistakes of the late 1990s.   So far Spirit has done a laudable job maintaining its workforce for the future.  We in Wichita where the unemployment rate is now 9.9 percent hope that continues. 

Steven F. Udvar-Hazy and General John R. "Jack" Dailey at the overlook of the new Center.
Photo by Carolyn Russo, National Air and Space Museum

Wichita's Unemployment Rate Jumps from 8.5% to 9.9%

The Kansas Department of Labor reported today that Wichita's economy lost 4,671 jobs in July and the unemployment rate hit 9.9 percent.

Seasonality plays a big part of it. In the Eagle, Dan Voorhis rightly points out that "The Wichita unemployment rate typically peaks in the summer months because some workers are laid off temporarily and claim unemployment. That may be exaggerated this year by employee furloughs." The summer labor force also reflects school leavers and youngsters looking for summer work. Some of this month's high unemployment rate reflects this.

Wichita's labor force participation rates have run about seven tenths of a percent higher than average in July, although the seasonal increase is greater when employment is scarcer. Comparing July this year with July two years ago, the labor force has grown about 21,300. A little over a third of that is population growth and a bit less than half is the increase in the labor force participation rate. So more people are looking for work either to supplement the lost income of families hit by the recession or to take advantage of the increases in the minimum wage. The federal minimum wage rose in the second of three steps in July. A seasonal reduction in the work force in August may keep us below 10%, but it is a touch and go proposition at this point.

The Kansas unemployment rate rose from 7% to 7.7 percent while Kansas payrolls shed 48,500 jobs. Labor Economist Tyler Tenbrink comments, "The amount of over-the-year job losses dropped from 54,800 jobs in June to 48,500 jobs in July. Although this is still a significant loss, it indicates that the rate of job loss did slow from last month. It remains to be seen if July will begin a new trend of slowing job loss or if we will return to the more rapid pace of job loss we were experiencing in the months prior to July."

If You Think Wichita's Unemployment Is Bad, Look At Detroit's!

The Bureau of Labor Statistics summarized the employment situation for the country's states and metropolitan areas. As announced earlier by the Kansas Department of Labor, Wichita's unemployment rate is 8.5 percent. That is up from 8.3 percent in May and is a lot worse than a year ago when 4.2 percent of Wichita's workforce was out of work.

While the number of unemployed has more than doubled in a year, the actual number of people saying they have jobs is down less than a half percent. Some of this discrepancy may reflect the inevitable variation arising from any statistical sampling of households. It could also mean more people are looking or saying they are looking for work as secondary wage earners seek to help out when the primary bread winner is laid off. The increased labor force participation may also come from an increase in the federal minimum wage. Firms may also be reacting to the new minimum wage by hiring more experienced, more productive, higher paid workers to replace less experienced workers.

Wichita looks good in comparison to the rest of America. Fifteen states have double digit unemployment rates. The Detroit-Livonia MSA has the dubious distinction of "achieving" more than double our our unemployment rate at 17.1 percent.

Making Sense out of the Economic News: Not As Bad As The Dow Took It.

We have just had a great deal of economic news come out.

The Employment Report: The unemployment rate is up slightly to 9.5 percent (compared to 9.4 percent in May.) This was as expected. The payroll survey showed a bigger than expect drop: 467,000 jobs in June. The latter became the headline news. Wall Street opened a hundred and fifty points lower and continued to fall. London and European stock markets accelerated their early morning declines in response to the news. A closer look at the data shows a curious divergence in the trends measured by the household and establishment surveys. Over the last three months, the establishment survey shows employment falling by an average of 436 thousand jobs a month, while the household survey shows a monthly fall in employment almost half that (230 thousand.) This is significant because in the last recession household employment growth turned positive well over a year before payroll jobs turned up. Corrected for base biases, it may be a better cyclical indicator.

Aerospace appears to have lost another five thousand jobs in June for a two month total of 12-13,000. BLS does not break these data out, so I have to estimate them from the published data.

Consumer confidence was down. German and Australian retail sales were up and beat expectations. U.S. durable goods orders were up in May.

Non defense aircraft and parts orders were up as well. Although orders were half May, 2008, they reached the highest level since October. Order backlogs for the industry fell from 39.2 months to 33.4 months.

Car sales are up and appear to have bottomed out in February. They are way from May, 2008.

Turn in Thursday for News

Thursday will bring two big releases of national economic data with significant implications for the Wichita economy.

9:00 A.M. Central Daylight Savings Time: The Bureau of Economic Analysis (of the Commerce Department) will issue data for May manufacturing orders, shipments, backlogs, etc. While total new orders are an important cyclical indicator, we in Wichita will be particularly interested in the new and unfilled orders for the aerospace industry. This will not include the impact of Quantas' recent cancellation of orders for 15 Dreamliners.

7:30 A.M. Central Daylight Savings Time: The June employment report. Normally this would be issued Friday, but the Bureau of Labor Statistics is moving it up a day for the Independence Day holiday. The consensus of forecasts is that it will show a loss of 350,000 jobs on nonfarm payrolls and the unemployment rate up to 9.6 percent.

What to look for: A better showing on job losses would support our thesis that the economy has bottomed out. Even without a significant surprise from the payroll data, the report may better expectations on the unemployment rate which is based on the notoriously noisy household survey. The household survey also gives an alternative measure of employment. Analysts tend to ignore this measure for techical reasons, however I have found a careful analysis of these data gives better signals at turning points. By this metric the decline in employment has moderated even more than manefested on the establishment survey. Look for further confirmation of bottoming out. The non aerospace component of Wichita's economy needs to see a pickup in activity in the national economy.