Over the past 3 days America has been battered by one after another apologist explaining just how good the employment data is if one strips out all the "bad", and how all the "bad" can and should be stripped out by all patriots, and attributed solely to bad weather. For those who are beyond sick and tired of listening to this tripe, here is David Rosenberg once again telling it how it is. In summary: "The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months. These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support."
JOBS DATA REDUX — ADDING MORE MEAT TO THE BONE
It is laughable that everyone believes the labour market in the U.S.A. is improving. Lost in the debate over the weather impact was the benchmark revision to 2010 — overstated by 215k or 24%. The U.S. economy generated 909k jobs last year, which works out to just under 76k per month. That is insignificant considering that the population grew around 160k per month. The level of U.S. employment today stands at 130.265 million, which is where it was in January 2003.
The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months.
These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support.
Meanwhile, it does look like real weekly earnings contracted in January for the third month in a row — that last occurred from April-June of 2009. Once the payroll tax cut effect fades and material cost pressures come to bear with a lag in margins the retail space will be squeezed hard.
Saving the day now are the payroll tax cuts but this effect wears off in Q2. Congress is about to cut spending and Bernanke doesn’t have a ton of support for QE2 from within the ranks. And the story ahead is one of profit margin squeeze more generally, though the market doesn’t yet see it.
WHAT DID THE U-6 UNEMPLOYMENT RATE DO?
We were asked about this on Friday because it was already known that it went from 16.7% to 16.1% — everyone wants to believe that this is a harbinger of labour market tightening. But it may be time for a reality check. The broad U-6 jobless rate measure was 8.8% when the recession began, was 9.0% when Bear Stearns failed, 10.5% when Fannie and Freddie imploded, 11.9% when AIG was taken over, Lehman failed and Merrill taken over, and 15.6% when the stock market hit its cycle low.
There’s also some seasonal adjustment quirks because of the massive increases in the raw unemployment data in January 2010 and January 2009 and the current seasonal factors are most sensitive to smoothing out what happened in the same month of the past two years. In January 2009, the U6 spiked 1.9% on a nonseasonally adjusted basis and in January 2010 it rose 0.9%. So the seasonal factors now were looking for an increase of 1.4% and instead it comes in at +0.7%, which on a raw basis is pretty normal for January, and it gets translated into a decline to 16.1% from 16.7%. Remember, the raw data showed an increase to 17.3% from 16.6%.
Nobody seemed to know what to do with the job data on Friday due to weather. It’s interesting that the storms seemed to have little effect on the ISMs or chain store sales, but everyone believes that just because a bunch of folks didn’t make it into the office in January the impact is probably hugely exaggerated. We saw an economist quoted on the front page of Investor’s Business Daily stating so arrogantly that he is “comfortable” with the view that the snow subtracted 100k from nonfarm payrolls in January. Even if true that would still be 138k, which is still abnormally weak for this stage of the cycle, not to mention still quite a bit below the post-ADP whispered estimates of +180k.
This U.S. labour market is still one sick puppy. The fact that 2.8 million Americans said they had given up on their job search in January was overshadowed by the debates surrounding the weather impact on the headline. Talk about being small-minded and totally myopic on the small picture. Then again, we have to admit that is what drives speculative rallies — the “noise” in the data. Of all the analysis we saw over the weekend, the only one that made any sense was the editorial by Bob Herbert on page A15 of the weekend NYT:
“The policy makers who rely on the data zealots are just as detached from the real world of real people. They’re always promising in the most earnest tones imaginable to do something about employment, to ease an awful squeeze on the middle class (policy makers never talk about the poor), to reform education, and so on.
They say those things because they have to. But they are far more obsessed with the numbers than they are with the struggles and suffering of the real people. You won’t hear policy makers acknowledging that the unemployment numbers would be much worse if not for the millions of people who have left the work force over the past few years. What happened to those folks? How are they and their families faring.
The policy makers don’t tell us that most of the new jobs being created in such meager numbers are, in fact, poor ones, with lousy pay and few or no benefits. What we hear is what the data zealots pump out week after week, that the market is up, retail sales are strong, Wall Street salaries and bonuses are streaking, as always, to the moon, and that businesses are sitting on mountains of cash. So all must be right with the world.
Jobs? Well, the less said the better
What’s really happening, of course, is the same thing that’s been happening in this country for the longest time — the folks at the top are doing fabulously well and they are not interested in the least in spreading the wealth around.
The people running the country — the ones with the real clout, whether Democrats or Republicans — are all part of this power elite. Ordinary people may be struggling, but both the Obama administration and the Republican Party leadership are down on their knees, slavishly kissing the rings of the financial and corporate kingpins.”
Look, these are just excerpts for your convenience. The whole column just oozes with the truth — the true state of the labour market that is widely dismissed.
As a trusted and loyal reader notified us on Friday after the data were released and the consensus view out of the bond market was how reflationary this labour market report was, the civilian population rose 1.872 million last year. At the same time, the labour force fell 167k. Those not in the labour force soared 2.094 million. Just in January, we saw 319,000 people drop out of the work force. These numbers are incredible. This is a highly dysfunctional labour market. People are falling through the cracks at an alarming rate as they come off their extended jobless benefits — “doubling up” as Bob Hebert put it — and we have traders and economists debating the weather effects of a nonfarm payroll data-point that will most assuredly get revised no fewer than three times in the next couple of years.
It’s incredible how the masses of pundits have responded to the data.
Real labour compensation contracted at a 0.6% annual rate in Q4, and since the recession technically ended, it has shrunk in four of the last six quarters. How is this the hallmark of a well functioning labour market? We can see now how this environment has been wonderful for equities:
- The Chinese government stimulates to the effect of 13% of GDP in late 2008 and this spills over globally.
- The T.A.R.P. money is distributed around the financial and industrial sector in the U.S.A.
- Bank shares are bought by the Treasury; ditto for shares of auto companies.
- Accounting rules are changed so the banks can start showing a profit.
- The Fed radically steepens the yield curve by cutting rates to zero and then promotes financial sector profitability by purchasing mortgages en masse. The mantra is that the Fed and Treasury saved us from a Depression.
- The Fed moves to expand its balance sheet even more in November but unofficially announces the extension in late August.
- The U.S. government embarks on a spending spree in early 2009 and runs up a record debt bill and then extends the stimulus in late 2010.
So the corporate sector has been receiving tremendous support from the government. All the while, the acute anxiety among the working class has allowed companies to continuously cut unit labour costs, which in turn has prompted a V-shaped recovery in profit margins.
Now what about the top-line? We just saw in those Q4 productivity numbers that came out for Q4 that the price deflator for the nonfarm business sector actually fell at a 0.9% annual rate. But, you see, companies don’t have to worry about that — they can afford to keep prices down because not only can they cut labour costs quite easily in this environment, but the federal government is ensuring that people still get paid even if it’s not from their employer. We have a situation now where a record near-20% of total personal income is coming in the form of government assistance, whether that be in Social Security, food stamps, or the unprecedented expansion of jobless benefits.
But to be calling for a labour market recovery when real compensation per hour is declining at a 0.6% annual rate is just slightly a case of looking at the situation through rose-coloured glasses. Just a tad.