Jobs, Subprime Provide Glimmer of Hope

The Institute of Supply Management (ISM) released the non-manufacturing survey on Monday, and it was a surprisingly strong 52. The ISM surveys, manufacturing and non-manufacturing, show contraction of that economic sector if the number is under 50 and expansion if above 50. Monday's non-manufacturing number was a good bit better than expectations. Couple this number with the better-than-expected jobs report last week, and you get a picture of an economy that is struggling, but not in recession.

On the job front, it's important to remember there are two numbers. One is the "big company" job report from the Bureau of Labor Statistics that gets all the press. The other is the "small company" report called the household survey. It's the latter that is used to compute the unemployment rate.

Ed Hyman of ISI, the best economist in the business in my opinion, says that for 35 years, he has favored the household employment report as capturing the best picture of the employment landscape. This report has averaged 97,000 new jobs per month for the last year.

The numbers are admittedly lumpy, but the average is a good way to look at it. This is why, despite the headlines foretelling doom, the unemployment rate went down last month. I do not mean to say we don't have major issues (collapsing home prices, rising gas prices and an over-indebted consumer), but it appears to me that we have a significant slowdown, not a recession, at least not yet. The American economy is amazingly resilient.

Another glimmer of hope comes from the metrics that measure mortgage delinquencies. In the past, the rate of delinquencies tended to slow when the subprime mortgages were three years old, peak in the fourth year, then decline after that.

Underwriting standards went out the window as greed took over, and subprime mortgages issued between the second half of 2005 and the first half of 2007, when standards were the most lax, showed an astonishing rate of delinquencies. Nearly 15% of subprime mortgages taken out in 2006 were 60 days late within the first year. It took twice as long for that many subprime loans to go bad for the "class" of 2000 and 2001.

---

Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.