Okun's Brokun... Or Why Someone Is Lying
For those who wish to get straight to the punchline, and why we ask if someone is openly lying, here it is:
For those who want some background color, read on.
A year and a half ago, we asked a simple question: "Is Okun's Law The Latest Casualty Of Central Planning." For those unfamiliar, and to paraphrase what we said in February 2012, "Okun's rule-of-thumb relates the long-term empirical finding that a country's unemployment rate is closely related to a country's output (or GDP). To be a little more explicit, it is the change in unemployment that is more notable in its relationship to the potential GDP (the output gap). Okun's original work noted that a 3% increase in output corresponds to a 1% decline in unemployment rates (and/or rise in labor force participation, rise in hours worked, and rise in labor productivity)."
Several months later, none other than Jon Hilsenrath, who back then wasn't quite as busy with paraphrasing every word uttered by various FOMC central planners for the benefit of Getco's vacuum tubes, explaining to the market why it is so wrong and the Fed never intended for the epic bear flattener to take place in the process crucifying all bond managers (see today's Bill Gross letter), and why things are really much better in the Princetonian ivory tower than in reality, followed up on our observations with his own question: "How can an economy that is growing so slowly produce such big declines in unemployment?"
Something about the U.S. economy isn't adding up. At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. Many other measures of the job market are improving. Companies have expanded payrolls by more than 200,000 a month for the past three months, according to Labor Department data. And the number of people filing claims for government unemployment benefits has fallen. Yet the economy is barely growing. Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate."
How ironic then that one year later, $700 billion more in debt monetized by the Fed, the stock market just shy of all time highs, the US economy grew by essentially the same annualized amount and at the lowest year over year growth rate since 2010, even though the unemployment rate, supposedly, keeps dropping.
Of course, back then inquiring about the validity of Okun's Law was all the rage (if only for a few weeks) as there was some hope it may normalize. It didn't, and after the spring of 2012, the topic wasn't breached by anyone again for fears of the embarrassment Bernanke could suffer if someone asked him what is going on with Okun's law at one of the quarterly media press conferences.
At least, it wasn't until now, when we were happy to see at least one other commentator raise some red flags surrounding the ongoing collapse in all traditional economic relationships.
In "When Numbers Don't Add Up", Bloomberg's Caroline Baum catches up with Zero Hedge circa February 2012, and observes that:
Just because economics relies on numbers doesn't make it a mathematical science. For example, gross domestic income -- the costs incurred and income earned in the production of the nation's output -- should equal gross domestic product. It doesn't. Ever. The Bureau of Economic Analysis adds up the two columns, draws a line and reconciles them with the notation, "statistical discrepancy."
Sometimes there are anomalies within GDP. BEA's third guess at first-quarter GDP was a lot weaker than growth implied by labor inputs (employment and hours worked). Real GDP growth was revised from 2.4 percent to 1.8 percent -- one-fourth of last quarter's output gone in a flash! The major source of the adjustment was to real consumer spending on services, which was slashed to 1.7 percent from 3.1 percent, based on new data from the Census Bureau's Quarterly Services Survey. The QSS, which gathers revenue from the sales of a wide range of services, is a relatively new addition to the BEA's statistical library.
She then references two economists who are desperate to explain what is going on without admitting what we said nearly two years ago: that central-planning has broken the economy in virtually every possible way.
Joe Carson, head of global economic research at AllianceBernstein LP, was quick to point out (to BEA, too) the inconsistency between reported GDP and output implied by an alternative method of calculation: using the sum of aggregate hours worked (the number of employees times the number of hours) and productivity.
"Hours worked in the private service sector is growing faster than output, which would imply a decline in productivity," Carson said. "If that were true, firms would be shedding workers rather than hiring."
Neil Dutta, Head of Economics at Renaissance Macro Research, had trouble with the math as well. Private hours worked for the overall economy rose 3.6 percent and productivity increased 0.5 percent in the first quarter, implying a 4.1 percent increase in GDP.
Could the Labor Department have overestimated employment and hours? "It's hard to see why," given solid growth in individual withholding and corporate taxes reported by the Treasury, he says. Tax data tend to be reliable because people don't withhold taxes, and corporations don't pay taxes on income they didn't earn. (Sometimes they don't pay it on earned income either.)
That leaves productivity growth, which is a derived number: output divided by hours worked. Mathematically, it has to be revised down with GDP. "Whether that's an accurate reflection, given strong tax receipts and hours, is the question," Carson says.
In other words, something is way off: either the unemployment data is very much wrong and the real unemployment rate is far higher especially when normalized for the collapsing labor participation rate and the surge in part-time and temp workers, or the GDP calculation is incorrect and the economy is growing at a 4%+ rate. (It isn't). The scarier implication is that in addition to all other seasonally adjusted economic data points which have become painfully unreliable, daily Treasury tax receipts must also now be added to the docket of meaningless and corrupt data points. The question of just how the Treasury could explain a massive (and deficit boosting) cash discrepancy could only be answered if somehow the Fed is found to be parking cash directly into the Treasury's secret basement.
But that would be very illegal...
Obviously, the US economy is not growing at a 4% pace, although following next month's wholesale revision of the GDP calculation which will include the benefit of intangibles, we wouldn't be surprised if the BEA and BLS push the country's entire economic reporting apparatus fully and entirely into wonderland, and absolutely every economic number is no longer accurate, relevant or unmanipulated.
In the meantime, and while we still have at least one apples to apples economic data set, here is the record spread between the annual growth rate in GDP and the annual drop in unemployment.
The chart needs no explanation.
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