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.

Stocks Experience Irrational Exuberance on Employment Report

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.


U.S. stocks rallied strongly on Friday because of the February employment report. In what could only be described as the latest episode of the emperor has no clothes or more appropriately the emperor's people have no jobs, the Dow Jones was up 122 points (1.2%), the S&P 500 up 16 points (1.4%), the Nasdaq up 34 points (1.5%) and the small-cap Russell 2000 up 14 points (2.1%). Oil rallied close to 2% and gold was flat on the day. Bonds sold off. One major media outlet after another trumpeted the reported loss of 36,000 jobs as good news in their Friday and weekend coverage, as did the politicos in Washington. Wall Street was jubilant.

The media clearly wants to tell the story of a recovering economy and will be doing so even if there isn't any evidence to back that viewpoint up. The story of course is coming directly from the U.S. government during a congressional election year. The government writes detailed press releases for each economic report and in those it presents the rosiest scenario possible. It is not going to go out of its way to point out any bad news, but spins the story to make our political leaders look good. Analyzing the numerous detailed and at times poorly laid out charts in the economic reports is a time consuming and difficult process, but is the only way to find out what is really going on.  For those who are interested, the next time there is a major economic news release, look at the time stamp (the moment of publication) on the articles from the major news services. I have seen time stamps of 8:30AM for a news release that took place at 8:30AM. This is merely a reprint of the government's best of all possible worlds press release. This is the only news that most media outlets report.

Looking at the details and footnotes of February's employment report painted an ugly picture of the U.S. job situation. In addition to the 1.2 million census workers that seem to have been placed in the Business and Professional Services category over the last several months, instead of the Government category where they belong, the seasonal adjustments were substantial and made the headline numbers much better than the real numbers. The actual unemployment rate (known as U-3 in the report) was 10.4%, but this became the reported 9.7% through the magic of adjustment. The unemployment rate that takes into account forced part timers and some discouraged workers (known as U-6 in the report) was actually 17.9%, but this became a still whopping 16.8% for seasonal reasons. Does this sound like good news?

For those who want to see the numbers themselves, Table A-15 (yes, there are a lot of tables) of the February Non-Farm Payrolls report can be found at: http://www.bls.gov/news.release/empsit.t15.htm.

The snowstorms in the East during February were specifically used to imply that the employment numbers were actually much better than they appeared. The BLS in its press release said it couldn't calculate their impact (as if it has never snowed in the United States previously). The spin coming from Wall Street was that there must have been huge job losses, which could have taken place in construction, and this meant the 36,000 job loss number would have been a gain otherwise. This is completely implausible. It could only have happened if there were a lot of workers that were going to be working during that time (there weren't, construction employment has fallen severely over the last two years) and couldn't because of the weather and that the numbers didn't already account for this problem through seasonal adjustments (they did). Furthermore, snow removal is frequently done by temporarily employed workers and this would have added substantially to the employment numbers, not subtracted from them. Moreover, it is unlikely anyone fell off the employment rolls as far as the government was concerned because of the snowstorms. Any regular worker who got paid for at least one-hour during the two-week survey period was considered to be employed.

Job losses in the U.S. have been a regular occurrence for the last couple of years. The only exception recently was in November 2009, when the numbers became positive because of after the fact adjustments. While job losses are bad, small job gains are also bad. The U.S. needs to create up to 200,000 additional jobs each year to employ people entering the labor force. Things will really have turned around when that happen and the jobs are from private industry and not the government. Wall Street's reaction to the February employment report indicates more than snow was being shoveled recently.

Disclosure: None

NEXT: Watch What China Does and Not What It Says

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.