Posted by Michael A. Kamperman on August 7, 2009
Was I surprised the reported unemployment rate fell from 9.5% to 9.4%? Yes I was. I expected the unemployment rate to rise. Especially since the Labor Department reported the U.S. lost another 247,000 jobs in the month of July. But I was also surprised last month that the unemployment rate rose by only .1% from 9.4% in May to 9.5% in June. In June, the Labor Department reduced the number of people wanting jobs from 155,081,000 to 154,926,000. Based on estimates for population growth we need to add about 125,000 jobs every month for the job market to absorb new entrants seeking work. By decreasing the active participation in the labor force by 280,000 in June, the reported rate of unemployment rose to only 9.5% instead of 9.7%. For the month of July, the Labor Department once again reduced the number of people wanting a job in America. This time the number dropped from 154,926,000 to 154,504,000. If the Labor Department kept the numbers of those seeking work in May constant with July and added the normal 250,000 new entrants into the ranks of those seeking employment, then the unemployment rate reported this morning would have been 10% and not 9.4%. In the last two months the Labor Department has added almost 1 million people to the ranks of those not in the Labor Force. This is the reason the official unemployment rate is the same in July as it was in May and not 10%. Just as with the GDP report, signs of economic weakness are being reported as signs of economic strength. In the U.S. 577,000 fewer people are earning a paycheck than were just two months ago, and we had more young people enter the workforce than older people retire, and yet our official unemployment rate is unchanged and the pundits declare the economic recovery is on.
Intuitively and intellectually it doesn’t make much economic sense that more people are leaving the workforce than entering it. If you are a stay at home parent and your spouse loses their job, then that means in many cases two people are looking for employment in your home rather than one. If you are a stay at home spouse and your working spouse lost a good paying job and has had to accept a job at much lower wages, then that means in many cases two people are looking for employment from your home rather than one. If you are a young adult going to school and Mom and Dad have to pull your financial support, then that means in many cases you are looking for work. It only makes sense that we have more people seeking employment when many households have declining, rather than rising, incomes.
While we may be entering a sustained period of economic growth, the data and the reaction by the White House and the Media means the economy will have to recover on its own without any further near term significant assistance from Washington. This is not a comfort to me when the “improvement” comes from a combination of claiming a 20% decline in exports over the last three quarters actually added to economic growth, and the way we are improving our unemployment rate is by no longer counting fellow citizens desperate for work. Perhaps the strategy of talking ourselves into recovery will work. However, woe is us if the recovery spin is wrong and we wasted an opportunity to head economic calamity off at the pass at Thermopylae.
Posted by Michael A. Kamperman on August 5, 2009
We are not in an economic recovery, not by a long shot. If estimates are correct the unemployment numbers for July will show somewhere between 300,000 to 450,000 job losses. That would not be a sign of slack hiring but of continued firings. Hiring is a lagging indicator once a recovery takes hold. Continued firing is a clear sign there is no recovery. Confusion about the concept of “net exports” in the GDP data is leading many to misinterpret the state of the economy as being more positive than it really is. U.S. imports and exports peaked in the third quarter of 2008, with exports reaching $1.913 trillion. In the fourth quarter of 2008 total dollar exports fell to $1.706 trillion, followed by a drop to $1.509 trillion in the first quarter of 2009 and a drop to $1.483 trillion in the second quarter of 2009. Yes, the rate of decline is slowing. But the GDP data claims “net exports” added .45% to GDP in the fourth quarter of 2008, added 2.64% positive growth in the first quarter of 2009, and finally added 1.38% to positive GDP growth in the second quarter of 2009. Our actual exports have fallen by over 20% in the last three quarters and yet our GDP calculation claims “net exports” have added 4.5% to our economic growth. The firing data offers a clearer picture of the true state of the economy. Firing is not a lagging or leading indicator, it is a current indicator. If the July unemployment report estimates are accurate, then the economy was still falling and not in a state of recovery in the month of July. Yet July is part of the third quarter when the average forecast of economists is calling for positive GDP growth.
Many look to China as a source of economic strength and positioned to lead a global economic recovery. The latest data out of South Korea says otherwise. According to Bloomberg news, “exports to China, South Korea’s biggest overseas market, fell 15.7 percent from a year earlier in the first 20 days of July. Exports to the U.S. slid 26.5 percent in the period while shipments to Japan fell 32.6 percent, today’s report showed.” China claims a 7.9% second quarter growth rate and yet, just like the U.S. and Japan whose economies are in an acknowledged deep slump, China is importing much less than it did last year.
The economic strategy being employed by the White House is being driven more by the political advisers than the economic advisers. Today the President and his Administration began making a concerted effort to convince Americans the economy is doing better than expected, and the stimulus plan is working as intended. Considering the stimulus plan was supposed to keep unemployment around 8% in 2009 and it will soon reach 10%, just what is the objective of this plan of denial and obfuscation? The objective is to paint the picture the President has a solid plan for the economy. No, he doesn’t. What the President needs to do is say the economy is in much worse shape than expected and that is unacceptable. He should say the stimulus plan, while helpful, is proving to be not nearly effective enough in stopping the economy from declining. He should say he is willing to stake his Presidency on restoring jobs in America and will do whatever it takes to make that happen. President Obama, I will tell you what your political advisers should have already told you, your Presidency is already staked to the unemployment rate.
Posted by Michael A. Kamperman on August 1, 2009
The happy talk President and media have declared that the second quarter GDP report contained “good news” and the contraction in the economy was less than expected. They are both signaling an expectation that slow growth will soon resume in the second half of the year. But are they reading the right tea leaves? Yes, the preliminary GDP report showed the overall economy contracted at minus 1%, which was a much better performance that the previous couple of quarters. However, they ignored the fact that there were downward revisions going back to the fourth quarter of 2007 that added an additional decline of 2% to GDP. Hence, the 1% decline was off of a smaller than expected base. But that is all looking back in time. What is the second quarter GDP report telling us about where we are now and where we are going? The real picture not in the headlines is not pretty.
For starters, the headline number is based on a statistical quirk in the way GDP is calculated that needs to be revised. According to the second quarter GDP report, “net exports” rose and added a positive contribution to overall GDP of 1.38%. In reality actual exports fell 7% and actual imports fell by a larger 15%. Now who really believes an economy that exported less in the second quarter achieved significant export driven growth? Economists should revise the GDP net export calculation and base it on whether or not combined imports and exports were growing or shrinking. Based on a combined calculation imports and exports would have subtracted 1.5% from growth and not added to it. This would have made the reported GDP figure minus 4% rather than minus 1%. Next, federal government spending rose 11% overall. But this figure was juiced by a 13% increase in defense spending as President Obama expands the war in Afghanistan. Fighting in Afghanistan is not going to revive the domestic economy now or in the future.
The real problem in the GDP report is consumer spending, which accounts for 70% of GDP, shrank at a rate of 1.2%. Even in the 6.4% revised first quarter downturn consumer spending was positive. The consumer has finally thrown in the towel and is hunkering down. If this behavior continues we will only see further economic erosion and not positive growth. What economists are missing in their models is that credit is so tight to qualify for a mortgage or an auto-loan that consumers are being forced to forego spending. With a rising unemployment rate it is hard to see where the predictions of renewed consumer spending vigor are coming from. The other thing most economists are missing, because of a false faith in their econometric models that are based on a post World War II inflationary cyclical economy, is that inventory reductions are due to semi-permanent decreased demand. These economists expect a re-stocking of inventories to drive positive GDP growth going forward. But, if the consumer spends even less in the third quarter than in the second quarter, then why would companies add to their inventories? What we need President Obama is an economic prescription that does not include the currently preferred method of watchful waiting to get us out of the depression.
