"Going Broke Faster" - Economic Numbers Are Less Than Meets The Eye

Authored by James Rickards via The Daily Reckoning,

Investors can be forgiven for thinking they hit the trifecta last Friday.

The U.S. Bureau of Labor Statistics reported that unemployment had dropped to 3.9%, the lowest in almost 20 years.

The Federal Reserve Bank of Atlanta reported that its widely followed GDP forecasting tool was showing projected growth for the second quarter of 2018 at 4%, exactly where Trump boosters like Larry Kudlow said it would be.

Finally, the Dow Jones industrial average rallied 332 points (1.39%), partly in response to the other good news. It was almost enough to make a trader sing, “Happy days are here again.”

Or not.

The fact is that this good news hides more than it reveals. A look behind the numbers discloses a sobering outlook for investors.

Let’s start with the employment report. The U.S. Department of Labor, Bureau of Labor Statistics report dated May 4, 2018, showed the official U.S. unemployment rate for April 2018 at 3.9%, with a separate unemployment rate for adult men of 4.1% and adult women of 3.7%.

The 3.9% unemployment rate is based on a total workforce of 160 million people, of whom 153 million are employed and 6.3 million are unemployed. The 3.9% figure is the lowest unemployment rate since 2001, and before that, the early 1970s.

The average rate of unemployment in the U.S. from 1948 to 2018 is 5.78%. By these superficial measures, unemployment is indeed low and the economy is arguably at full employment.

Still, these statistics don’t tell the whole story.

Of the 153 million with jobs, 5 million are working part time involuntarily; they would prefer full-time jobs but can’t find them or have had their hours cut by current employers. Another 1.4 million workers wanted jobs and had searched for a job in the prior year but are not included in the labor force because they had not searched in the prior four weeks.

If their numbers were counted as unemployed, the unemployment rate would be 5%.

Yet the real unemployment rate is far worse than that. The unemployment rate is calculated using a narrow definition of the workforce. But there are millions of able-bodied men and women between the ages of 25–54 capable of work who are not included in the workforce.

These are not retirees or teenagers but adults in their prime working years. They are, in effect, “missing workers.” The number of these missing workers not included in the official unemployment rolls is measured by the Labor Force Participation Rate, LFPR.

The LFPR measures the total number of workers divided by the total number of potential workers regardless of whether those potential workers are seeking work or not. The LFPR plunged from 67.3% in January 2000 to 62.8% in April 2018, a drop of 4.4 percentage points.

If those potential workers reflected in the difference between the 2018 and 2000 LFPRs were added back to the unemployment calculation, the unemployment rate would be close to 10%.

Of course, there are limits to labor force participation. Some potential workers suffer chronic pain or other disabilities, some are retired, some are students, some are at home raising children. Those are reasons why the LFPR has never been much over 67% since the data have been recorded.

But the drop in LFPR to 62.8% in the ninth year of an economic expansion is stunning. America has a missing workers problem that accounts in large measure for the slow growth, persistent low inflation, stagnant wages, declining velocity of money and social dissatisfaction that have characterized the U.S. economy since the end of the last recession in June 2009.

American labor markets are not tight. America is not even close to full employment. America is in a depression. That’s one reason why wages have been stagnant despite declining unemployment rates.

Another serious problem is illustrated in Chart 1 below. This shows the U.S. budget deficit as a percentage of GDP (the red line measured on the left scale) compared with the official unemployment rate (the green line measured on the right scale).

From the late 1980s through 2009, these two time series exhibited a fairly strong correlation. As unemployment went up, the deficit went up also because of increased costs for food stamps, unemployment benefits, stimulus spending and other so-called “automatic stabilizers” designed to bring the economy out of recession. That makes sense.

But as the chart reveals, the correlation has broken down since 2009 and the two time series are diverging rapidly. Unemployment is going down, but budget deficits are still going up.

That’s unusual because normally when unemployment drops the economy is getting stronger, benefit spending drops and the budget deficit shrinks. In effect, America uses the good times to save for a rainy day (or at least tries not to spend as much as when it’s raining).

This is good evidence that the economy is not nearly as strong as the low unemployment rate indicates. That’s because of the army of 10–15 million “missing workers” described above, many of whom are receiving benefits in the form of disability payments, early Medicare, food stamps or rental assistance. Instead of shrinking rapidly, these payments are stuck at near-recession levels.

It’s also the case that past deficit spending has now caught up with the U.S. The debt-to-GDP ratio is over 105%. Research shows that any debt-to-GDP ratio over 90% results in slower growth instead of faster growth when you pile on more debt. The U.S. is no longer getting any bang for the buck from deficit spending.

We’re just going broke faster.

As for the Atlanta Fed GDP estimate of 4% for second-quarter growth, that’s a statistical quirk based on the methodology used by the Atlanta Fed. It’s not that the number is bogus, it’s just that the measures suggesting stronger growth are reported earlier in the quarter and those suggesting weaker growth are not available under later in the calendar quarter. This means the estimates start high but come down to Earth as the quarter progresses.

The Atlanta Fed GDP estimate is useful but you have to know how to interpret it. In the first quarter, the estimate showed 5.4% growth but declined to 2% by the end of the quarter. (The actual reported growth was 2.3%, not too far from the Atlanta Fed estimate).

The same thing is happening again. I expect Atlanta’s number to decline from 4% today to 2% by mid-June, near the end of the quarter. That’s the same-old, same-old weak growth we’ve had since 2009. Nothing to write home about.

As for that stock market rally, it’s a temporary blip. Investors should be reminded that the stock market peaked on Jan. 26, 2018, and is down about 10% since then notwithstanding occasional one-day rallies. The market has traced out a series of “lower highs” after each rally. That’s a sign of a dying bull market and more declines to come.

So don’t believe the TV happy talk. Rigorous analysis of employment, debt, deficits, growth and stock markets reveals a dismal picture. Investors should lighten up on equities and increase their allocations to cash and gold.

Events will probably get worse from here.

Comments

takeaction Sat, 05/12/2018 - 12:58 Permalink

Some things are going great...many Service Sectors.  Other sectors...Disaster...such as RETAIL.

And here in Portland Oregon....we have a BOOM on homeless population, so shopping cart sales along with demand for needle clean up crews is through the roof.  Some win and some lose in this "New" economy.

 

mkkby SACRED-COW Sat, 05/12/2018 - 14:08 Permalink

95 million on welfare and only 1.4 million looked for work in the last year.  So 94 million are worthless, special snowflakes who'd rather watch TV all day than better themselves.

If welfare were cut off tomorrow, 94 million would find a job FAST.  There's a lot to do if you just try.  It might not be fun if you have no skills.  But even a drunken bum can wash dishes or mop floors.

Let's cut off welfare now.  But first get rid of the illegals and H1Bs.  Force employers to train for the skills they need instead of taking the easy route and just importing someone.  That would MAGA.  The socialist dream was just a vote buying scam dreamed up by libtards.  It never had a chance to work.

In reply to by SACRED-COW

takeaction Bitchface-KILLAH Sat, 05/12/2018 - 13:06 Permalink

Talk about inflation.....I am over here right now in Maui...on a business trip at the Sheratan.  $400 to $800 per night.  Breakfast is $72 for their little buffet.  Dinner is $184.00 Scoop of Ice cream $7.  Parking for your car is $21 per night.  And the place is very busy...packed.  Again...as I travel and see places like this very busy all over....many people are doing very very well.  You can really see the difference...either you are homeless or headed that way...or you are very wealthy....or just financing your ass off on the ride down the hill....I don't understand it.

In reply to by Bitchface-KILLAH

Sonny Brakes Toxicosis Sun, 05/13/2018 - 08:27 Permalink

I agree 100%. Without debt, this shitshow falls apart. I've managed to stay out of credit card debt and all debt. My savings are dwindling fast and the value of those savings have less purchasing power than they had when I saved them. Inflation keeps being extracted from my purchasing power.

All of the vendors I am dealing with are passing their costs onto me, the consumer/end-user. If the vendor's customer base contracts they are forced to distribute their costs on to fewer customers and those customers each pay a little more every month.

I've managed to stay out of debt, but sooner or later I will resort to using my credit cards to survive from day-to-day, but I'll be trying to improve my circumstances before I go full retard on credit card debt.

In reply to by Toxicosis

swmnguy takeaction Sat, 05/12/2018 - 14:34 Permalink

That's the key.  That's corporate money packing the high-end hotels.  My work involves coordinating fancy-pants business meetings in places like that.  It's all corporate money.  And the corporate sector is rolling in money, spending it like it's going out of style.  

My industry collapse in November 2008 and was pretty dormant throughout 2009.  Sometime around 2012-2013 it regained the level it had achieved in late 2007 and it's been going great guns ever since.

I don't pay for my travel, hotel, or about half my meals.  $75/day per diem doesn't cover anything past Breakfast, as you mention.  I'll bring a bottle of scotch and a lot of snacks with me in my luggage and save some money that way.

Convention/resort hotels are jam-packed out at least one year, but none of the attendees are paying those prices.

In reply to by takeaction

Giant Meteor swmnguy Sat, 05/12/2018 - 16:36 Permalink

Speaking of Orwellian ..

Why a record $4 trillion in corporate debt isn’t scary

Published: May 11, 2018

The ability of U.S. corporations, who have about $4 trillion in debt maturing over the next five years, to deal with higher interest rates isn’t as alarming as the headline may appear.

Sean Darby, chief global equity strategist at Jefferies, asserts that U.S. companies’ ability to cover payments remains healthy thanks to “decent cash flow and corporations’ pricing power.”

https://www.marketwatch.com/story/why-a-record-4-trillion-in-corporate-…

Heh, money is no object ..

In reply to by swmnguy

MoralsAreEssential SACRED-COW Sat, 05/12/2018 - 16:29 Permalink

I'm really suspicious of reports targeting Trump.  Especially when they come with Brit accents.  The UK is a satanic socialist invaded and soldout land with a decent population just like in the US.  Trump's maneuvers are just that, MANEUVERS and Kabuki Theatre because what's going on behind the scenes IS correcting as much as possible and "allies" and "enemies" are words without meaning.

I thought your link would be to a video about the human and organ trafficking in the MULTIVERSE and YES, we are eaten on this planet by "others" especially blonde, blue-eyed little children (can't hlep it if the Eaters are also racists) who are also trafficked by pedos.  It's an ugly picture and no one in a uber power position is innocent.  Let's just hope Trump rather than Satan's adherents WINS.

In reply to by SACRED-COW

itstippy Buckaroo Banzai Sat, 05/12/2018 - 15:18 Permalink

Many peoples' goalposts are unrealistic today.  For two generations middle-class children have been raised to anticipate having a "career," not a "job".  They expect to support themselves by working at something that's satisfying, fulfilling, empowering, and validates their self-worth.  They will earn enough money to live in comfort and security by doing something they enjoy doing.  It's what they're told awaits them when they're young.  Young men will be like Mike Brady, and young women will be like Mary Tyler Moore.

"You can be whatever you want to be" and "Follow your dreams" are, for the most part, dangerous bullshit.  Life as portrayed on TV is unmitigated bullshit.  The Equal Opportunity For All movement of the 1960s was valid - everyone gets a level playing field and you make it or break it on your own merits and luck.  The current "Social Equity" movement is a bunch of unrealistic crap.  A mediocre person with mediocre skills and mediocre ambition is not going to be a successful and happy architect who can support six kids, a wife, and a full time maid in a big house.  They aren't going to go to the Big City and make it on their own in a newsroom.  It's not going to happen, and they are not being cheated somehow because it doesn't happen.

 

In reply to by Buckaroo Banzai

swmnguy itstippy Sat, 05/12/2018 - 15:46 Permalink

People's heads are full of nonsense about jobs and work and careers.  How many employees even know their employer pays the other half of Employment Tax?  How many of them have any idea what their total compensation, the full cost to their employer to employ them, is?

People think about skills and careers, and then assume somebody owes them a certain level of pay.  They think if they buy the right college degree, they should get the right career.  

I was born poor, without the luxury of such self-delusions.  I realized my task was to get somebody with more money than I had, to give me some of that money.  I decided it would help to make it as easy and pleasant as possible for that person to give me their money.  I observed in each job, what tasks weren't getting done, which nobody wanted to do, that their not getting done caused trouble.  I asked questions, and soon enough was able to figure out how the money flowed in the business, all the better to get more of it for myself.  I learned my true value to the business, and looked to improve my value while decreasing the liability to employ me net/net.  I'd go into pay reviews with a better understanding of the business than my boss had.  Once I was even accused of snooping in the paperwork, I had such an accurate picture of cash flow.

I don't have a college degree and I didn't even really finish high school (before computerized college registration, you could just show up and it would be a few semesters before they caught you).  But I earn about 3x median income doing a silly and fun profession that doesn't have formal training or credentialing.  Most of my fellows have a lot more skills than I do, but following my "make it easy and pleasant for people to pay me" credo, I understand that many of my clients aren't looking for an expert; they're looking for somebody to come in, take charge, make decisions, and reassure them that everything's going to be OK and they're not going to get fired if I can help it.

Business is largely psychology.  Economics is entirely psychology.  Understanding what people really want, as opposed to what they think they want and especially what they tell you they want, goes an awful long way.

In reply to by itstippy

Ecclesia Militans Sat, 05/12/2018 - 13:02 Permalink

And yet there is so much VC and PE money sloshing around right now, regardless of where it's coming from people are starting new businesses (they just need a fraction of the labor that legacy industry needed years ago.)  Trump's administration claims that a 3.9% growth rate is paying for the tax cut - who knows what to believe anymore?  But using employment numbers just seems like 20th century theorizing applied to 21st century realities....