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Magic Numbers

April 4th, 2011 Posted in Uncategorized
Apr, 04 2011
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As soon as I got a look at the March Nonfarm Payrolls Report from the Bureau of Labor Statistics on April 1, I knew that the cheerleaders from the “rose-colored glasses” crowd would be trumpeting the onset of some sort of new era, or “golden age”.  I wasn’t too far off.  My own reaction to the BLS report was similar to that expressed by Bill McBride of Calculated Risk:

The March employment report was another small step in the right direction, but the overall employment situation remains grim:  There are 7.25 million fewer payroll jobs now than before the recession started in 2007 with 13.5 million Americans currently unemployed.  Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force.  Of those unemployed, 6.1 million have been unemployed for six months or more.

Nevertheless, the opening words of the BLS report, asserting that nonfarm payroll employment increased by 216,000 in March, were all that the cheerleaders wanted to hear.  My cynicism about the unjustified enthusiasm was shared by economist Dean Baker:

Okay, this celebration around the jobs report is really getting out of hand.  Both the Post and Times had front page pieces touting the good news.  The Post gets the award for being the more breathless of the two   .   .   .

Brad DeLong had some fun letting the air out of the party balloons floating around in a brief piece by Gregory Ip of The Economist.  Mr. Ip began with this happy thought:

TURN off the alarms.  After several weeks when the data pointed to a recovery still struggling to achieve escape velocity, the March employment report provided reassuring evidence that, at a minimum, it is still gaining altitude.

After completely deconstructing Mr. Ip’s essay by emphasizing the painfully not-so-happy undercurrents lurking within the piece (apparently included out of concern that the Federal Reserve might take away the Quantitative Easing crack pipe) Professor DeLong re-visited Ip’s initial statement in the sobering light of day:

There is “recovery” in a sense that the output gap and the employment gap are no longer shrinking — and so that real GDP is growing at the rate of growth of potential output.  But this is not reason to “turn off the alarms.”  This is not reason to talk about “pieces [of recovery] … falling into place.”  And I am not sure I would describe this as “gaining altitude” with respect to the state of the business cycle.

The exploitation of the March Nonfarm Payrolls Report for bolstering claims that economic conditions are better than they really are is just the latest example of how the beauty of a given statistic can exist in the eye of the beholder – depending on the context in which that statistic is presented.   Economist David J. Merkel recently wrote an interesting essay, which concluded with this important admonition:

Be wary.  Look at a broader range of statistics, and take apart the existing statistics.  Don’t just take the pronouncements of our government at face value.  They are experts in saying what is technically true, while implying what is false.  Be wary.

David Merkel’s posting focused on the positive spin provided by a representative of Morgan Stanley concerning 4th Quarter 2010 Gross Domestic Product.  Merkel’s analysis of this statistic included some good advice:

In 4Q 2010 real GDP rose 3.1%, while real Gross Domestic Purchases fell 0.2%.  Why?  Energy and other import costs rose which depressed the price indexes for GDP versus Gross Domestic Purchases.

Over the long haul, the two series are close to equal, but when they diverge, they tell a story.  The current story is that average consumers in the US are doing badly, while those benefiting from high corporate profits, and increasing exports are doing well.

In general, I am not impressed with statistics collected by our government, or how they use them.  But it’s useful to understand what they mean — to understand the limitations of the statistics, so that when naive/conniving politicians use them wrongly, one can see through the error.

David Merkel’s point about “understanding the limitations of the statistics” is something that a good commentator should “fess up to” when discussing particular stats.  Michael Shedlock’s analysis of the March Nonfarm Payrolls Report provides a refreshing example of that type of candor:

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 8.8%.  However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is.  That number is in the last row labeled U-6.

While the “official” unemployment rate is an unacceptable 8.8%, U-6 is much higher at 15.7%.

Things are much worse than the reported numbers would have you believe.

That said, this was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years.

On the negative side, wages are not keeping up with the CPI, wage growth is skewed to the top end, and full time jobs are hard to come by.

At the current pace, the unemployment number would ordinarily drop, but not fast.  However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there.  Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace.  It is very questionable if this pace of jobs keeps up.

In other words, if a significant number of those people the BLS has ignored as having “dropped out of the workforce” prove the BLS wrong by actually applying for new job opportunities as they appear, the BLS will have to reconcile their reporting with that “new reality”.  Perhaps many of those “phantom people” were really there all along and the only thing preventing their detection was the absence of job opportunities.  As those “workforce dropouts” return to the BLS radar screen by applying for new job opportunities, the BLS will report it as a “rise” in the unemployment rate.  In reality, that updated statistic will reflect what the unemployment rate had been all along.  An improving job market will just make it easier to face the truth.




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Seeing Reality With Gold Glasses

March 8th, 2010 Posted in Uncategorized
Mar, 08 2010
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March 8, 2010

The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat.  Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.”  Nevertheless, the BLS report disclosed a figure of approximately half that much.  Only 36,000 jobs had been lost and unemployment was holding at 9.7%.   One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:

While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%.  This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy.  It is what America does best, creative destruction with a turbocharger.  There is a third influence here, which could be huge.  The BLS only contacts existing businesses for its survey.

*   *   *

The bottom line is that payroll figures are much better than they appear at first glance.

Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators.  I discussed that subject on March 1.  On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board — a drop to 46 in February from January’s 56.5.  Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:

Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.

*   *   *

The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009.  (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)

Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26.  One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments.  Luskin spelled it out this way:

Consider stocks priced not in money, but in gold.  In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold.  After all, you don’t want to make money for its own sake — you want the money for what you can buy with it.  Gold is a symbol for all the things you might want to buy.

*   *   *

It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another.  As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.

How about a year ago, on the day of the bottom for stocks on March 9?  That day the S&P 500 closed at 676.53.  Gold closed at 920.85.  That means that one “unit” of the S&P could have bought 73% of an ounce of gold.

Today, with stocks and gold each having risen over the last year — but with stocks rising more — one “unit” of the S&P can buy 99% of an ounce of gold.  All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.

A 34.9% gain for stocks priced in gold is pretty good for a year’s work.  But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars.  Do you see what has happened here?  Stocks have made you lots of dollars.  But the dollar itself has fallen in value compared to the real and eternal value represented by gold.

Here’s the most troubling part.  The entire 34.9% gain made by stocks — priced in gold, that is — was achieved in just the first five weeks of rallying from the March 2009 bottom.  That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there.  All risk, no reward.

*   *   *

So why, then, did stocks — priced in dollars, not gold — continue so much higher?  Simple:  We experienced inflation-induced growth.  Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth — and, eventually, lots of inflation.

Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth.  On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.

Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.

Everyone is hoping to see evidence of economic recovery as soon as possible.  Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.



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Just In Time For Labor Day

September 7th, 2009 Posted in Uncategorized
Sep, 07 2009
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September 7, 2009

Friday’s report from the Bureau of Labor Statistics, concerning non-farm payrolls for the month of August, left many people squirming.  The “green shoots” crowd usually has no trouble cherry-picking through the monthly BLS reports for something they can spin into happy-sounding news, utilizing the “not as bad as expected” approach.  Nevertheless, the August BLS report portrayed unpleasant conditions, not only for the unemployed but for those currently working full-time in the labor force, as well.

The current unemployment level is a living nightmare for the unemployed individuals and their families.  It also brings some degree of discomfort (although less significant) to those people with money to invest, who are waiting for signs of a sustainable economic upturn before heading back out from the sidelines and into the equities markets.  Both groups got an unvarnished look at the latest BLS data from Dave Rosenberg, Chief Economist at Gluskin Sheff in Toronto.  His September 4 economic commentary: Lunch with Dave, gave us a thorough analysis of the BLS report:

While the Obama economics team is pulling rabbits out of the hat to revive autos and housing, there is nothing they can really do about employment; barring legislation that would prevent companies from continuing to adjust their staffing requirements to the new world order of credit contraction. While nonfarm payrolls were basically in line with the consensus, declining 216,000 in August, there were downward revisions of 49,000 and the details were simply awful.  The fact that 65% of companies are still in the process of cutting their staff loads is quite disturbing — even manufacturing employment fell 63,000 in August, to its lowest level since April 1941 (!), despite the inventory replenishment in the automotive sector and all the excitement over the recent 50+ print in the ballyhooed ISM index.  The fact that temp agency employment is still declining, albeit at a slower pace, alongside the flat workweek and jobless claims stuck at 570,000, are all foreshadowing continued weakness in the labour market ahead.  Until we see signs of a sustained turnaround in the jobs market all bets are off over the sustainability of any economic recovery.

Looking at the details of the Household Survey, Rosenberg found “a rather alarming picture” of what is happening in the labor market:

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle).  As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented.  We shall see if the nattering nabobs of positivity discuss that particular statistic in their post-payroll assessments; we are not exactly holding our breath.

Second, the unemployment rate jumped to 9.7% from 9.4% in July, the highest since June 1983 and at the pace it is rising, it will pierce the post-WWII high of 10.8% in time for next year’s midterm election.  And, this has nothing to do with a swelling labour force, which normally accompanies a turnaround in the jobs market — the ranks of the unemployed surged 466,000 last month.

The language of the BLS report itself on this subject demonstrates how the current unemployment crisis is not an “equal opportunity” phenomenon:

Among the major worker groups, the unemployment rates for adult men (10.1 percent), whites (8.9 percent), and Hispanics (13.0 percent) rose in August.  The jobless rates for adult women (7.6 percent), teenagers (25.5 percent), and blacks (15.1 percent) were little changed over the month.  The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)The civilian labor force participation rate remained at 65.5 percent in August.  The employment population ratio, at 59.2 percent, edged down over the month and has declined by 3.5 percentage points since the recession began in December 2007.

Dave Rosenberg added the painful reminder that the unemployment picture always lags behind the end of a recession.  How far behind?  Look at this:

Jobless claims started off August at 554k and closed the month at 570k.  So it seems as though we enter September with the prospect of yet another month of declining payrolls because claims have to break decisively below 500k before jobs stop vanishing and below 400k before the unemployment rate stops rising.  Remember, in the early 1990s credit crunch the recession ended in March 1991 and yet the unemployment rate did not peak until June 1992; and in the last cycle, which was an asset deflation phase, the recession ended in November 2001 and yet the jobless rate did not peak until June 2003. So in the last two cycles, it took 15-20 months for the unemployment rate to peak even after the economic downturn officially ended.

At least Mr. Rosenberg had some constructive criticism for the current administration’s efforts at job creation.  It’s one thing to just yell:  “FAIL” and yet, quite another to put some thought into what needs to be done:

Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts.  The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.

As for those who are still in the labor force, the situation is also deteriorating, rather than improving.  A report by Carlos Torres for Bloomberg News noted that the “real number” for unemployment is 16.8 percent.  Beyond that, the work week for factory employees is currently 39.8 hours.  It will have to reach 41 hours before we even get a chance to see some changes:

The index of total hours worked, which takes into account changes in payrolls and the workweek, fell 0.3 percent last month to the lowest level since 2003.

“It tells us payrolls aren’t turning positive any time soon,” Joseph LaVorgna, chief  U.S.  economist at Deutsche Bank Securities Inc. in New York, said on a conference call yesterday, referring to the workweek figures. “This wasn’t a friendly report.”

A measure of unemployment, which includes the part-time workers who would prefer a full-time position and people who want work but have given up looking, reached 16.8 percent last month, the highest level in data going back to 1994.

The workweek for factory employees, which held at 39.8 hours last month, leads total payrolls by about three months, LaVorgna said.  Once it reaches at least 41 hours and once payrolls for temporary workers stabilize, then an increase in total employment can be expected months later, he said.

Payrolls for temporary workers started turning down in January 2007, 11 months before the recession began.  They dropped by another 6,500 workers in August, the government’s report showed yesterday.

In other words, the decline in temporary worker payrolls preceded the recession by 11 months!  Worse yet, the payrolls for temporary workers must stabilize before an increase in total employment comes along “months later”.

Meanwhile, at the Financial Times, Sarah O’Connor reports that many people who have jobs must still rely on food stamps to survive:

The number of working Americans turning to free government food stamps has surged as their hours and wages erode, in a stark sign that the recession is inflicting pain on the employed as well as the newly jobless.

*   *   *

The food stamp data suggest that “the labour market problems are more significant than you would expect, given just the unemployment rate”, said John Silvia, chief economist at Wells Fargo.  “For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.”

Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP.  Economists fear that people may be unwilling to resume that role.

That conclusion is exactly what the “green shoots” enthusiasts don’t seem to understand.  Those who are well-off enough to pay for their groceries with real money will be focused on paying down their credit cards and saving money before they go out to buy another television or jet ski.  If these people have little or no “discretionary income”, then the High Frequency Trading computers on Wall Street can talk to each other all they want — but the stock values will not go up.

Happy Labor Day!



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