Is October's Unemployment Rate Really 12.7%?

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The BLS released its non-farm payroll figures for October today and they stated that 80,000 jobs were created and that the U.S. unemployment rate was 9.0%. There are reasons to believe that this number is actually as high as 12.7%.

Except for February and March of this year, the unemployment rate (the U-3 number) has been 9.0% or higher since May 2009. It hasn't risen well into the double digits because large numbers of workers have supposedly left the labor force and these people are not counted as unemployed. If we go back four years to just before the Great Recession began, we find that in October 2007 there were 145,937,000 employed Americans over 16 and 79,506,000 were not in the labor force. Now in October 2011, there are 140,302,000 employed people and 86,071,000 not in the labor force. You can see the figures here: http://www.bls.gov/webapps/legacy/cpsatab1.htm.

So in the last four years the American economy has had a net loss of 5,635,000 jobs. This huge loss hasn't shown up in an escalating unemployment rate because at the same time a net 6,565,000 people have supposedly left the labor force. The BLS conveniently does not count them as unemployed even though they do not have jobs. If we included them in the unemployment calculations, the unemployment rate for October would be 12.7%. This should not be confused with the underemployment rate (known as U-6) which includes people working part-time, but who want full-time jobs. This number was 16.2% last month.

A case could be made that the U.S. labor force should be shrinking because more people are retiring than there are graduating students. There are approximately 3.5 million people reaching age 65 (not all of whom retire and many of whom didn't work) and only about 3.2 million students graduating high school currently (eventually most of them enter the labor force). While retirees have the advantage, there are also approximately a net 1.3 million immigrants coming into the U.S. every year and a disproportionate number of them are younger adults of employment age. The labor force should at least be steady, if not growing slowly. Instead, BLS figures indicate a rapid shrinkage is taking place.

It would be highly unusual for the labor force to decline at all during a recovery. When the economy is strong, people on the margins go out looking for jobs. For the labor force to drop by millions indicates an extremely weak economy.  So, if the U.S. labor force has six and a half million fewer workers than it did four years ago, no significant recovery has taken place. If the labor force hasn't dropped by as much as the BLS claims, then the unemployment rate is in the double digits and this also indicates no significant recovery has taken place. While it seems more likely than the true unemployment rate is closer to 13% than 9%, either figure indicates that the U.S. economy is still recessionary.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

EU Deal With Greece Falling Apart

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The market lost its rose colored glasses today with Greece announcing a political referendum early in 2012 on the recent EU bailout deal. This could lead to the deal falling apart sooner rather than later.  Stocks sold off on the news in Europe and the U.S. while interest rates rose in Greece and other troubled EU countries.

The deal that the EU put together last week to handle its debt ridden members and to help prop up its banks was essentially smoke and mirrors surrounding a house of cards. It had no chance to work in the long run and the best it could accomplish was to buy more time before the inevitable day of reckoning. The 50% haircut on Greek debt, plus $130 billion euros did provide Greece with enough funds to keep going. It did not stabilize the situation enough however to ensure another debt crisis didn't occur within the next few years. Nor was there any reason to believe that Italy, Spain, Portugal and Ireland wouldn't need a similar bailout in the future. The plans for recapitalizing EU banks were likely to create a credit crunch and send the EU into a deep recession before further steps were taken. The centerpiece of all the bailout operations — the EFSF (European Financial Stability Facility) — was based on essentially printed money that was going to be leveraged. This was how the problem of too much debt was going to be solved.

While stock markets worldwide had huge rallies based on the "good" news that came out of the EU last week (traders like hearing about governments printing more money), they were giving back those gains on Tuesday. Both the German DAX and French CAC-40 were down over 4% in late day trading. The euro, which has held up remarkably well during the entire crisis was down over 1%. Big EU banks were getting slammed hard. France's Société Générale (FR:GLE) was down  almost 17%, Credit Agricole (FR:ACA) fell almost 13% and BNP Paribas (FR:BNP) dropped almost 12% .  Deutsche Bank (DB) was down over 6% and Commerzbank (DE:CBK) down over 10%. The U.S. S&P 500 was lower by a comparatively mild 2% in early going.

Bonds reacted more strongly. The yield on the safe haven 10-year U.S. treasury fell over 6% and the yield was barely above 2% in the morning in New York. Yields on trouble country debt in the EU were moving in the opposite direction. Italian 10-year governments traded over 6.25% (above 6% is considered a critical point of potential breakdown). Only buying from the ECB, which also included Spanish government debt, kept yields from soaring much higher. Yields in Greece were even more telling of the market's true opinion of the EU debt deal and its aftermath. Before the deal, yields on one-year Greek governments reached 193%. They had only fallen to 154% (no solvent country pays anywhere close to this amount) before the announcement of the Greek referendum. This yield peaked at 200% today (November 1st).

Panic was caused by the proposed referendum in Greece because polls show that the terms reached with the EU and IMF are highly unpopular with the Greek people. Even though they have gotten an incredibly good deal, the average Greek is focused on the additionaly years of austerity that would be required on Greece's part.  Apparently, neither the Greeks, nor the markets like hearing that there is no free lunch.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.