Is Okun's Law The Latest Casualty Of Central Planning...And BLS Seasonal Adjustments

Tyler Durden's picture


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) - perfectly sensible and comprehensible. In fact 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). His 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) but as Goldman Sachs notes this week, Okun's Law has broken. As they point out, even though US real GDP growth has averaged a meager 2.5% pace since the end of the recession, the unemployment rate has fallen almost two percentage points from its peak.

There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth).

It seems to us that none of these are good for growth as the reality of a higher unemployment rate (BLS adjustments aside) is negative, lower potential for growth impacts earnings expectations (as we are already seeing in company and analyst outlooks which has perplexed those market watchers pinning their hopes on the jobless rate), and the balance sheet recessionary impacts of the 'employed' minimizing debt rather than maximizing potential gain is a further drag. Either way, as Goldman notes the potential growth rate going forward (2012 and 2013) is likely to remain quite weak, in the neighborhood of 2% in line with the CBO's dismal views and this could be further exacerbated by the drop in labor force participation we have noted vociferously.

Source: Goldman Sachs

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Mon, 02/13/2012 - 11:54 | 2153593 RockyRacoon
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Jeebus.  They got a stock-picking dog on CNBC.   I'm gonna shoot myself in the front yard for all to see.

They should name the dog ALGO instead of whatever goofy name he has.

Mon, 02/13/2012 - 11:54 | 2153607 Dr. Engali
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Cramer is on?

Mon, 02/13/2012 - 12:01 | 2153639 JPM Hater001
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Does anyone else think the stock market looks drunk?

Ok, it's me.

Mon, 02/13/2012 - 12:19 | 2153736 scatterbrains
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I would agree, just looking at the usual indicators of covert printing (IBM XOM GLD) to name a few... seem to be rolling over maybe ?


Mon, 02/13/2012 - 14:30 | 2154375 _ConanTheLibert...
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Rolling over into a hangover or coma.

Mon, 02/13/2012 - 12:34 | 2153813 MsCreant
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That would be a low down dirty stock picking dog.

Mon, 02/13/2012 - 11:57 | 2153622 SheepDog-One
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'Stock picking dog'...makes as much sense as anything else these days!

Mon, 02/13/2012 - 12:05 | 2153649 Alcoholic Nativ...
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I wouldn't be surprised if they broke out the Ouija boards and started calling on the powers of the animal spirits. 


Mon, 02/13/2012 - 12:15 | 2153708 MsCreant
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If you are in the stock market, you too are a stock picking dog. 

Mon, 02/13/2012 - 12:03 | 2153643 Alex Kintner
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Stock pickin', doggie style. How fitting.

Mon, 02/13/2012 - 12:15 | 2153713 MsCreant
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Assume the position!!

Mon, 02/13/2012 - 12:50 | 2153892 falak pema
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shoot on sight?

Mon, 02/13/2012 - 11:52 | 2153594 battle axe
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"Unemployment rate is hopelessly miscalculated", BINGO!!!

Mon, 02/13/2012 - 11:56 | 2153614 Cognitive Dissonance
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As a good friend likes to say, the unemployment rate is hopelessly miscalculated "on accident". :>)

Mon, 02/13/2012 - 11:59 | 2153626 francis_sawyer
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Ball don't lie... (only BLS does)...

Mon, 02/13/2012 - 12:09 | 2153667 kridkrid
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It's a pity that the origin of "lies, damn lies and statistics" is unknown, but it has always been the case.  I can no longer hear a statistic of any sort without immediately considering the possible agenda behind the number... even with the most mundane topic.  

Mon, 02/13/2012 - 12:17 | 2153721 MsCreant
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100% of statistics are made up.

Mon, 02/13/2012 - 12:25 | 2153762 kridkrid
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One of my favorite lines... but you got to go with a random, more official sounding number.  I like throwing in "studies show" as a prelude to the BS.  Recent studies show that 72.7% or nearly 3 out of every 4 statistics quoted are made up on the spot.  It's fun to do at a dinner party... quickly exposes who is actually listening to what you are saying.... most people aren't, so I just keep on trucking.  I amuse only myself... which is really my only goal.

Mon, 02/13/2012 - 12:43 | 2153856 Cognitive Dissonance
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"I amuse only myself... which is really my only goal."

God bless single minded goal seeking. However....mother was never amused when she caught me amusing myself. But that's another story for a rainy day. :>)

Mon, 02/13/2012 - 14:00 | 2154156 carbonmutant
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"I do not feel obliged to believe that the same God who has endowed us with senses and [sic] the equipment has intended us to forgo their use" -Galileo Galilei

Mon, 02/13/2012 - 12:00 | 2153628 midtowng
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I vote for "all of the above"

Mon, 02/13/2012 - 12:53 | 2153900 LongSoupLine
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There are three implications, in our view...


I'll take "C"...all the above.

Mon, 02/13/2012 - 14:35 | 2154395 _ConanTheLibert...
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Unemployed dropping out of the workforce and high prices explains a lot.

Mon, 02/13/2012 - 14:35 | 2154405 aerojet
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Occam's razor.  They are cooking the numbers.

Mon, 02/13/2012 - 11:52 | 2153598 JailBank
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Sounds bullish. Full speed ahead S&P 500!

Mon, 02/13/2012 - 11:57 | 2153601 CrashisOptimistic
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The most powerfully devastating effect of the disconnect in unemployment calculation derived from the labor participation rate focuses on the fiscal budget projections. With a 2% LPR drop now apparently in effect, all models of GDP based tax revenue estimates are blown apart.

With LPR 2% lower, tax revenue will be much lower than expected for a given GDP. Toss in the lower paying job nature of what job creation there is and the models are further blown apart. The deficit and debt is therefore woefully underestimated in the years to come.

This is what Bernanke sees and why he was so negative on the unemployment report. Regardless of our attitude towards his judgement here on ZH, he is a smart cookie.

Mon, 02/13/2012 - 12:07 | 2153657 GeezerGeek
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I read that the estimated budget deficit for this year will be around $1.3 trillion. If Obama had simply sent out a gift card for $5,000 to every adult rather than directing the money at normal government waste then he would have had approximately the same deficit while increasing the GDP immensely. After all, we're told that consumer spending is responsible for some 70% of GDP, and normal government waste no longer seems effective for generating GDP growth. If the gift cards were made to expire around Sept. 30 then he could easily win reelection without having to depend upon contributions from his normal sources, the guys who normally get the first shot at government largesse.

I feel like I've entered the twilight zone: it almost sounds reasonable to me.

Mon, 02/13/2012 - 13:25 | 2154019 GernB
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The way I heard it unemployment is stimulative. So if we can just get 100% of people on unemployment and boost it to 999 weeks GDP will go through the roof!

Mon, 02/13/2012 - 13:45 | 2154095 narnia
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There's no doubt $5k in the hands of people to engage in voluntary transactions would be better than the central wankers spending that $5k building a bomb, a prison or some other government delivery of unnecessary scope.  That doesn't mean that's the best answer, though.  

GDP doesn't measure wealth or quality of life.  Employment is a worthless statistic too if people are engaged in a trade that's counter-productive or irrelevant to market based voluntary transactions.

When the cost of everything you need and most of the stuff you want falls in price so dramatically that you can work 3 days a week for 20 years to save enough honest money to retire, you'll know we have a great economy.  When 50% of the population works for the TSA, you'll know the opposite is true.

Mon, 02/13/2012 - 14:40 | 2154428 aerojet
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Agreed.  Plus, a big giveaway like that might stoke actual price inflation, and the Fed is trying to keep a lid on that as much as possible (and slowly failing at it).  If all that hot money ever does flow into the real economy, we're looking at $10/gal gas and "Game over, man!  Game over!" 

It's all an accounting game still right now.  Well, not in Athens.  The real austerity hasn't even hit and people are rioting.  The future looks like of ugly to me.  Think Japan--high suicide rate, no real prosperity.  Probably a lot more crime and violence than in Japan, though. 

Mon, 02/13/2012 - 14:43 | 2154444 Bwahaha WAGFDSMB
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If 9 women could make a baby in one month.

Mon, 02/13/2012 - 12:22 | 2153748 djudy003
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I agree that Bernanke is a smart cookie, but you also have to factor in the fact that he spent a huge amount of time studying the great depression. I can only imagine the question that anyone who is studying a crisis would be thinking about. "How can I prevent this? or how can I make it less painful next time." I think that has been evident through his pursuit of unorthodox methods to deal with the issue at hand. This presents a huge risk which is that we have the fate of the entire country/world at the hands of a man who thinks he can save the world. Just like everything in life, higher risk more reward. Meaning if he succeeds he would have saved us 10 or so year of pain and 5 years or so of a massive global war that we can no longer afford. I think it is important for everyone including the young generation to understand how much of their future lies in the judgement of this man. I hold my fingers crossed, but there has to be a sanity check at one point in time by someone. I am in no position to evaluate whether he is right or wrong but I hope he knows what he is doing. And god knows, I would want the government to put more security around this man than Barack Obama because if any international terrorist (if they exist) hope to screw things up he would be the man to target.

Mon, 02/13/2012 - 12:57 | 2153914 Ahwooga
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"Just like everything in life, higher risk more reward. Meaning if he succeeds..."

And what about moral hazard?

Mon, 02/13/2012 - 14:06 | 2154252 djudy003
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I agree with you. Moral hazard is the issue here, that is why I questioned who would stand to make sure that he does not take too much risk. Because he may continue to follow his dream of saving the world from another great depression, that he might lose track of what kind of risks he is taking. Effectively, it seems like the entire global economy is Bernanke's research lab and there are no supervisors. At what point do the risks of his policies out weight the draw backs of another great depression. Situations in which he will not be the bearer of the ultimate costs.

Mon, 02/13/2012 - 14:42 | 2154438 aerojet
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He may be holding it off only at the cost of making the eventual blow up far worse.  The breaking point will come, regardless of Fed policy.

Mon, 02/13/2012 - 15:35 | 2154681 donsluck
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In this sad case, the man IS the problem. If someone were to target him, it would force interest rates up, which would help to re-capitalize our economy. However, one man coming or going is never the answer. The system cannot be changed any more than you could get a brain transplant. One must play the cards one has been dealt.

Mon, 02/13/2012 - 12:29 | 2153793 DeadFred
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Not to worry, those effects won't really start to show until after the election. Party on.

Mon, 02/13/2012 - 11:56 | 2153608 Cheesy Bastard
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unemployment rate is hopelessly (miscalculated) manipulated

Mon, 02/13/2012 - 12:09 | 2153670 JPM Hater001
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Well, that much is obvious. The bigger question is what do you do when the lagging indicator stops following the leading indicator.

One of two theory below is true.

One of the two numbers is more right.

One of them has been right longer.

Mon, 02/13/2012 - 12:18 | 2153733 Cheesy Bastard
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The bigger question is what do you do when the lagging indicator stops following the leading indicator.

Buy more silver, gold and bullets.

Mon, 02/13/2012 - 11:55 | 2153610 alexwest
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sorry to upset my NOT SO SMART FRIENDS in GS but
using uneployment rate is kind of stupid..

TRY TO USE LABOR PARTICIPATION RATE... it will align perfectly..


Mon, 02/13/2012 - 11:56 | 2153613 SheepDog-One
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WTF! We arent arent at DOW 13,000 YET? WTF is taking these assclowns so long COME ON we want all-time record highs here, bitchez!

Mon, 02/13/2012 - 12:01 | 2153636 Dr. Engali
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Patience sheep dog. They can'tmake it too obvious. They must make it seem like a real market. Don't worry we will be at 14,500 by election day and Apple will be pushing $1000.

Mon, 02/13/2012 - 12:04 | 2153648 SheepDog-One
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Why NOT make it too obvious? Really, who would do anything? Why not just open the markets up +5% daily? No ones objected to ANYTHING so far, much less actually do anything at all about why not just make the DOW 25,000 by July?

Mon, 02/13/2012 - 12:07 | 2153655 alexwest
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where to sign in for, bro ?


Mon, 02/13/2012 - 11:56 | 2153616 Dr. Engali
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There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth)

 4) All of the above.





Mon, 02/13/2012 - 12:01 | 2153640 SheepDog-One
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Yea right, like GOLDMAN SACHS is 'confused' by whats going on? Oh poor innocent little us...Mission Control for Operation 'Implode USA' ... 'GEE we just dont understand these numbers we're highly confused here'...gimma a break, Squid.

Mon, 02/13/2012 - 11:58 | 2153624 kaiserhoff
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Dudes, look at all those broken windows in Greece...., BULLISH, or something to do with bull...

Mon, 02/13/2012 - 12:03 | 2153644 battle axe
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Buy Greek window makers. Huge upside....

Mon, 02/13/2012 - 12:08 | 2153661 Cheesy Bastard
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Definitely.  I heard somewhere that Greeks like to take it in the glass.

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