Albert Edwards (And Goldman Sachs) On "The Biggest Scandal Of The Last Decade": Plunging Labor Force Participation
Seven months ago, when the horrendous August 6 NFP print set the stage for Jan Hatzius to lower his outlook for the economy (and all the other sellside lemmings to follow suit), resulting in the announcement of QE2 three weeks later at Jackson Hole by our dangerous monetary Dr. Moreau (not our definition: Sean Corrigan's - more on that later), we dubbed an article titled "Real U-3 Unemployment Rate When Adjusted For Labor Force Participation: Around 14%" in which we warned that the unemployment rate presented for public consumption is really one big lie. Fast forward to today, when we now read that the topic of labor force participation, and specifically the massive plunge therein, is now seen by one of the brightest strategist minds, that of SocGen's Albert Edwards, as "one of the scandals of the last decade." We thoroughly agree. In fact, we are certain that the labor force participation rate is the greatest scam the government is attempting to pull in order to create the impression that QE is working. The threat of this issue being comprehended by the broader population is finally so big that it necessitated Goldman Sachs' Sven Jari Stehn to come out with yet another extremely humiliating apologist piece of drivel, explaining how the labor force participation rate is really not at all concerning and that one should welcome the fact that less people are in the "labor pool", as a percentage of the total population, than at any time in the last 26 years. Nothing could be further from the truth, and in fact it underscores Bernanke's latest Catch 22 - the "lower" the unemployment (U3) rate is, the worse the economy is, as more and more workers get terminally disenchanted with their labor prospects, thereby validating just how ugly the truth behind the scenes truly is.
Here is what Zero Hedge said on August 6, 2010:
Running these numbers through the actual unemplyment calculation, reveals the following: while assuming a declining LFP rate we obviously get the 9.5% unemployment rate, assuming a peak 67.1% LFP results in a 13.0% unemployment rate. And if the labor force participation rate were to grow according to trendline, the jobless rate in the US today would have been reported at 14.7%, just about where the U-6 was reported, but based on an entirely different methodology.
We even charted this for those whose strong suit is visual learning:
Keep in mind, that as the participation rate plunged since August, this chart looks far uglier now, and the real unemployment rate assuming trendline growth of the population and the labor force participation, is easily north of 15%.
We are delighted to discover that once again we were more than half a year ahead of the curve in spotting this latest attempt at gross manipulation of popular sentiment vis-a-vis some imaginary improvement in the unemployment rate.
So now that the stage has been set in this latest fight of discovering the truth between the forces of pragmatic skepticism and vile central planning propaganda, here is how Albert Edwards sees this topic.
One of the scandals of the last decade is the decline in US labour force participation. Yet despite this “reserve army of the unemployed” holding down wage and price inflation, there is likely to be a cyclical upward shock on core CPI. Given the market’s current worries about the inflationary impact of QE, prepare for a major market over-reaction.
It wouldn't be an Edwards piece without the recount of some self-deprecating anecdote. Well, age is as good as any:
At a macro client lunch recently, it was fear of sharply rising inflation and bond yields that topped investor concerns for de-railing the equity bull market. The discussion of inflation was very interesting but I felt very, very old when one of our guests related that his parents remembered 15% inflation! Hang on, I can remember 15% inflation. In fact, I can remember 25% inflation! Am I really now that old? My mind was transported back a decade when I was in a pub with a work colleague chatting to the barmaid who was a student at the local university. I already felt old when I discovered she had never heard of The Beatles, but on the way out of the pub she told my colleague that "your dad's a real rocker?!" That week I shaved off my moustache to shave 10 years off my appearance. What to do now? Well at almost 50 and newly-wed, I am more than content to become a historic relic and talk about my personal experience of double-digit inflation.
At about the same time I was being mistaken for my colleague's father, US labour force participation was peaking at 67% of the working age population (see chart below). Then, it had been rising continuously since the early 1960s, but the savage decline seen since is symptomatic of the post bubble, Ice Age adjustment and has profound implications.
Next, we take some pride in seeing that Edwards recreates the chart we put out over 7 months ago:
The decline in the proportion of the working age population in the workforce has contributed greatly to the impression that unemployment has fallen. Had the participation rate remained at the 2000 peak of 67%, the official unemployment rate would now be 13% (see chart below). That means the level of unemployment would be some 6.7 million higher than the 13.8 million currently officially registered. The Bernanke Bust has unraveled decades of social progress. (Note that January's 500k decline in workforce participation fully accounted for the decline in unemployment from 9.4% to 9% that month. This lumpy decline was due to a benchmark revision as laid out in Table C of the payroll report - link, but that does not in any way negate the shocking downtrend in the participation rate over the last decade or the fact that if participation had not declined sharply, unemployment would be 13%.
Another way of looking at this is to note how the rise in the labour force has levelled off over
the last few years, despite the working age population trending higher (see chart below).
And for the latest Catch 22 the Chairsatan finds himself in: should we really have an economic improvement, absent massive BLS data manipulation, the labor pool will surge by far more than actual jobs created, pushing the U-3 far higher, thereby extinguishing any simplistic explanations that the unemployment rate is declining due to economic improvement. In fact, the only reason the unemployment rate is so low is that the economy is so bad we have a near record number of people discouraged from actually looking for jobs!
No wonder Ben Bernake is reported on Bloomberg as telling the House Budget committee yesterday that unemployment would remain elevated "for some time" despite the biggest two month fall in the unemployment rate since 1958 - link. For if there is a "true" cyclical recovery, there are an awful lot of discouraged workers who might emerge from the woodwork to keep the rate of unemployment very high and wage inflation at its current low rate.
At this point Edwards shifts his focus to inflation and the impact rising CPI, primarily due to the "rent" component which is 30% of overall CPI, and a reflux of Chinese inflation sent back to the US, will have on rates and equities.
Our own US economists have just done an excellent review of the imminent end of disinflationary trends. They note, in particular, that the rent element of the CPI (both actual and imputed), after slumping into outright deflation, has begun to rise once again (see left-hand chart below). As well as being a weight of 30% of the overall CPI, 'rent' comprises a hefty 40% of core CPI (ex food and energy). Our US economists believe the current cyclical uplift that rising rent inflation should be having on core inflation is temporarily being offset by erratic downward moves in goods inflation that will be reversed shortly - link. A series of 0.3% rises in core CPI inflation will seriously threaten the long-term downtrend in 10y bond yields (see right-hand chart below). Any decisive break above 4% is likely to trigger a melt-up in yields which will in retrospect prove to have been a total over-reaction to what are normal cyclical trends. Therein lies the near-term risk, but also the medium-term opportunity.
Lastly, those searching for inflation in all the wrong places, will have to search no more: the reason - a 4 month lag between Chinese CPI and US imports of Chinese goods, not to mention that said goods are about to surge in price.
Our US economists believe that an additional factor which will drive core CPI up is that higher Chinese inflation is about to ripple onto US shores. Higher Chinese CPI inflation is set to feed through into higher Chinese import price inflation as wages move upwards in China - our economists note a four-month lag (see left-hand chart below). US goods inflation could be set to rise sharply in reaction to higher Chinese inflation (see right-hand chart below). So, despite Ben Bernanke's firm denials that QE is not responsible for higher global food prices and hence higher Chinese inflation, to the extent that he is totally wrong (surely not!), the Fed's QE policies are likely to have a ruinous effect on both bond and equity prices in the near term.
But going back to the labor force participation. As noted above, there is logical, sensible analysis. And then there is anger-inducing spin and propaganda. As usual we have to go no further, than Goldman Sachs' latest worthless apologist analysis on why all of the above is irrelevant, and why it could actually away in a way that doesn't challenge the propaganda machine's dominant theme of economic improvement.
We draw two broader conclusions from our analysis. First, we find little support for the view that the labor market is even weaker than indicated by the 9% unemployment rate. Since participation has evolved roughly as one should have expected given the underlying demographic trends and the state of labor demand, we believe instead that the unemployment rate provides a reasonable read of the state of the labor market.
Second, given our forecast for participation and the Census Bureau’s population projections, we can calculate how much payroll growth will be required to reach our forecast that the unemployment rate will fall to 8% by late 2012. The answer is that we need gains in nonfarm payrolls that average around 200,000 per month over the next two years—broadly in line with our current forecast.
Those who wish to read this excremental gibberish in its entirey can do so here. All we can say is that there was a time when Goldman economists actually wrote sensible, insightful work. Now, it is as if Goebbels corpse has been exhumated and is running the GS economic department. We hope the millions in taxpayer-funded bonuses allow the Hatzius et al team to sleep well at night. And yes, the people will not forget those who actively lied to them during the greatest economic depression, when "the recovery" is discovered to have been the biggest lie in the history of the US.
Bottom line - look for a continued plunge in the labor force participation rate as this is the only way that the Department of Truth can persist with its massive lie that the unemployment situation is improving, when in reality U3 is north of 14%, a number that when finally confirmed, would see the president and the Hewlett Packard guy impeached for economic treason.