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Unnatural Disasters: Jobs, Wages, And Savings

Econophile's picture




 

This article originally appeared on the Daily Capitalist.

The U.S. recovery appears to be tracking a similar pattern of the past three years, in which the economy gains steam during the winter only to run down in the spring and summer. But the situation this time is puzzling, given that there hasn't been a gas-price spike—prices instead have fallen--or a disaster, such as last year's Japanese earthquake and tsunami.

The above comment is from the Wall Street Journal's story on Friday's poor employment report from the BLS. Piled on top of this was news that manufacturing is softening, wages and hours are declining, and the manufacturing PMIs for the UK, Eurozone, and China are declining. And we were informed yesterday that GDP is sinking. The U.S. markets reacted badly: most were down about 2.5%, with the Russel 2000 d0wn 3.2%.

The given explanations for these events are all wrong and they have been wrong since 2008 as mainstream economists are "surprised" on a regular basis. The news media on Friday offered no valid explanations of current events, and as I listened to the news, commentators were making it up as the went along, trying to make sense of what looks like a worldwide slowdown. Our fellow homo sapiens can't not try to explain events they don't understand.

What is causing the worldwide slowdown are not natural events but rather the result of man made policies from central banks and governments. Yet economists continue to recommend the same policies that caused the economic decline. Will things ever change?

Let's examine the data first.

Employment, the chief motivator of politicians and central bankers, was "surprisingly" (again, that word) weak. Here is a quick summary from Econoday:

New job creation was weak, the unemployment rate increased, hourly earnings were weak, disposable personal income was weak, the work week went down, and the all-important (to the Fed) PCE price index declined (April). This is not what our leaders expected. Here's a picture:

 For those of you looking for the detail on U-6, long-term unemployed, here is the table:

If I were Ben Bernanke or President Obama, I would like to see these data going the other way if I wanted to keep my job.

There is always a lot of controversy about the actual rate of employment as reflected in the number of employed versus the population at large or as compared to the workforce population. The official numbers are as follows: the population to employment ratio is 58.6% and the workforce to population ratio is 63.8%.

My fellow blogger Mish always does an excellent take on the dubious BLS calculations based on the birth-death model of business creation, the real ratio of a growing population to employed, and the dropout rate. I would refer you to his excellent article on these data.

Whatever the real story is, it isn't good.

Part of the data that I believe is most important, other than the headline numbers of growing unemployment, is the PCE price index and the personal savings rate.

As I mentioned above, the PCE price index went down in April (+0.1%) compared to March (+0.2%). To the Fed this smells like (i) recession and (ii) deflation.

The personal savings rate went down as well, to 3.4% in April as compared to 3.5% in March. This tells us that consumers are funding PCE with savings, since disposable personal income is flat (+0.2% in April, same as March).

What the fallout of these data is for planning purposes is:

1. The Administration is seriously concerned since an election is only 5 months away.

2. The Fed is seriously concerned since none of their monetary policies are working as planned. 

3. "Inflation" as the Fed defines it is looking more like the much feared "deflation." The Fed will not let "deflation" happen.

4. The only thing the Fed really knows how to do is print money, and since the inflation hawks on the FOMC have nothing to complain about, it makes another round of quantitative easing likely. And soon.

5. The decline in savings further diminishes the chances of a recovery since what the economy needs is (i) to liquidate the bad investments made during the boom (malinvestment) and (ii) capital from real savings to make it grow again. While one could argue that such "savings" are the product of two prior rounds of QE and not "real savings" as defined by Austrian economic theory, I don't think that is the case. A substantial part of these savings is "real savings" and it is being destroyed.

Mainstream economists treat our current mini-cycles as somewhat natural events, divorced from any action by the Fed and the Administration (see opening quote). One only need to look at Fed policies (QE, ZIRP, and money supply) as we "Austrians" do to get the real answers. 

 

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Mon, 06/04/2012 - 21:03 | 2494268 FrankDrakman
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I wonder if someone could answer a question for me, as I haven't been able to find a definitive explanation elsewhere:

What is the definition of "civilian employment"?

I'm assuming that it doesn't include people in the Army, Navy, etc. on active duty, but what about people who work for DHS? TSA? the FBI? Local law enforcement? What about contractors working for DoD?

If anyone can enlighten me, I'd appreciate it.

Mon, 06/04/2012 - 19:15 | 2493954 Bastiat
Bastiat's picture

The central bankers have been killing this country for years.  An example: back in the late 80s, the Comproller of the Currency changed reserve requirements for banks and turned them into asset lenders rather than cash flow lenders.  This choked off money to all sorts of entrepreneurial business, the engines of growth and creativity. 

Mon, 06/04/2012 - 16:11 | 2493271 roadhazard
roadhazard's picture

And We the People can not even work our way out of the coming tsunami because the American workforce is working shorter hours for less while paying more for everything. Obviously when that happens you have no money to spend and no credit. Big Business is not expanding because of Regulation but because there is no one coming in the door to buy there product.

America can be saved by bringing the jobs home and paying a wage that fits the inflation.

The or A big stumbling block is fuel prices. When there is a whiff of growth the speculators double down which causes the economy to contract. It happens Every Time. Some one should get a clue and put the sqyates on that shit. 

 

Mon, 06/04/2012 - 17:35 | 2493629 Raging Debate
Raging Debate's picture

Really nailed it Roadhazard! I guess several more years before wages rise to fit high costs of living.

Mon, 06/04/2012 - 15:57 | 2493189 daxtonbrown
daxtonbrown's picture

The Fed is always by definition pushing on a string because an element of the sysystem is not smarter than the system. Bernanke would need to be a quantum step smarter than the market to make Fed manipulations worthwhile and that is clearly not the case. Instead, what we are in is a Biflationary Depression. www.futurnamics.com/biflation.php

Mon, 06/04/2012 - 16:28 | 2493365 eclectic syncretist
eclectic syncretist's picture

It bothers me that more people (like the author) don't see that the Fed cannot just create inflation anytime it wants to.  Bernanke was off base on that statement and should be coming to his senses about now.

The Fed can create or remove credit from banks capital accounts any time it wants to, as much as it likes, and that's all.  If the banks choose not to or can not pass that credit on to taxpayers there can only be limited inflation because the credit isn't being utilized in a way that would stimulate the economy.  Thus there is a limit to how much credit based inflation the Fed can create before everyone's tapped out, a wall is hit, and a deflationary turn takes hold.  Look at Japan over the last 20 years trying to stop deflation with credit.  They are worse off than ever before.

Now giving play money directly to the populace without requiring them to pay it back, as GWB did, and the current POTUS wants to do, is inflationary.  To best create inflation you only need give away money, and not credit.

To summarize, the Fed can inflate the credit that certain banks have, and that's all.  There are a number of things that have to happen after that before general price inflation can be stably maintained, and all of that is beyond the Fed's control.

Mon, 06/04/2012 - 15:41 | 2493119 BandGap
BandGap's picture

Behold, the future!

This begins today.

http://www.youtube.com/watch?v=Ld05-5OOLRg&feature=related

 

Mon, 06/04/2012 - 20:23 | 2494156 Things that go bump
Things that go bump's picture

Light rail for a ghost town.  Years ago, when I was in the Philipines, Ferdinand and the lovely Imelda built a state-of-the-art children's heart hospital while they still had wide-spread polio more then 20 years after an effective vaccine had been developed.  I was not consulted about this expenditure.  I would have advised that the money would be better spent vacinating the populace against easily preventable diseases, but that wasn't showy enough for the Marcos.  They wanted bling (and shoes).  The government gave Detroit some money, but I imagine it could only be spent on this particular harebrained scheme. Somebody's brother-in-law will win the bid.  Uninhabited cities comes to mind.  

Mon, 06/04/2012 - 15:18 | 2493013 Snakeeyes
Snakeeyes's picture

I have repeatedly made the point that there is NO jobs recovery, partly because of the emmployment to population ratio graph (your last graph).

But the fact that more people going on disability than are dropping off unemployment rolls is SCARY!

http://confoundedinterest.wordpress.com/2012/06/02/recovery-summer-scorecard-170000-more-on-disability-than-decline-in-unemployment-a-disabled-recovery/

Mon, 06/04/2012 - 20:22 | 2494148 Things that go bump
Things that go bump's picture

* Error

Mon, 06/04/2012 - 15:15 | 2492996 El Yunque
El Yunque's picture

I would like to see FREDs Corporate profit table after taxes superimposed on the Civilian Employment table.

But that would put a torpedo in the side of this horseshit, wouldn't it?

Guns and butter bitchez. Get them while you can.

Mon, 06/04/2012 - 14:55 | 2492936 W10321303
W10321303's picture

When you are part of the Walking DEAD (from the shoulders up) you are surprised by logical outcomes to neo-feudalism in THE EMPIRE.

Mon, 06/04/2012 - 14:50 | 2492919 LetThemEatRand
LetThemEatRand's picture

"The Fed is seriously concerned since none of their monetary policies are working as planned."

Do you really believe that the private banking cartel known as the Fed cares about anything except its members?  The banks and their executives made out like bandits. Mission accomplished. 

Mon, 06/04/2012 - 21:03 | 2494267 optimator
optimator's picture

But they are working and have been since 1914.  The Sheeple are slowly starting to understand it too.  Berank and the crew know exactly what they are doing.  They are near the end of draining the system and getting ready to move on to the next host.  It could be Switzerland, israel or Zimbabwe, but they understand the game is almost up and there won't be too many more large pots for them to take in.  If they overstay their welcome they know exactly what befalls them.

Mon, 06/04/2012 - 15:44 | 2493132 Widowmaker
Widowmaker's picture

First paid from TARP - record bonuses.  The end.

God's faggots exchanging pinstripes for jail stripes - the beginning.

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