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Is the Unemployment Rate Misleading?

The April employment statistics were released by the Bureau of Labor Statistics (BLS) last Friday.  The official U.S. unemployment rate for April 2012 dropped to 8.1%.  It hasn’t been this low since January 2009.

According to the BLS, 115,000 new jobs were added to the workforce in April.  Certainly that is good news for the 115,000 who are now employed, and after three years of high unemployment, it’s encouraging to see the rate dropping.

The report has been out for a week, which has given people more opportunity to dig into the numbers.  Unfortunately, the headline is much more encouraging than some of the supporting data.  Here are a few facts to consider

  • 310,000 people left the workforce in April (that’s nearly 3 times as many jobs which were created).  People who are no longer looking for a job contributed more to the reduction in the unemployment rate, than those who obtained a new job.
  • There are 968,000 people looking for work, who are classified as “discouraged.”
  • 7.8 million people are working part-time for economic reasons.
  • 5.1 million people have been unemployed for more than 39 weeks.
  • 324,000 women dropped out of the labor force in the past two months.

So is the unemployment rate misleading?  Personally, I don’t think it’s misleading, but you also shouldn’t take it at face value.  A deeper understanding of the supporting data will provide a better picture of what’s really happening.

Realize the unemployment rate is only an estimate.  No one knows for sure how many people are truly unemployed and looking for work.  For example, many people think it’s misleading to exclude those who have given up looking for work.  While that may be the case for discouraged and frustrated people who can’t find a job, what about those who retire, start their own business or decide to stay home to take care of a family member?  Those people may have no intentions of re-entering the workforce, at least in the near term, so it would also be misleading to count them as unemployed.  Thus, the quandary of who should be classified as unemployed.

I don’t think the unemployment rate is misleading, unless the BLS changes its data collection and classification measures, which happened at the beginning of 2011 (read more here).  Since the BLS hasn’t changed their methodology recently, the drop in the unemployment rate can be considered legitimate.  However, you should investigate some of the supporting data, and draw your own conclusions about the U.S. employment situation.

Since it’s an election year, expect politicians and political pundits to quote the rate as a measure of their job performance or some other elected official and make their political argument for supporting a particular candidate.  Don’t be misled by a headline or political statement, since they rarely tell the whole story.  The unemployment rate may not be misleading, but other people can be.

Paying for Stimulus II

President Obama unveiled his latest jobs plan before a joint session of Congress last night.  Click here to read the summary of the proposals included in the American Jobs Act.  Since many of the proposals are essentially the same as the $827 billion Stimulus Bill passed in February 2009, many people consider the recent proposal to be Stimulus II.

The debates and discussions about the effectiveness of such the programs can be tackled later.  In this article, I simply want to explore the way the government is going to pay for any new spending, should it pass Congress.

Although many of the details are still being hammered out, President Obama estimated the cost of his proposals to be $450 billion.  He expects to pay for the additional spending by closing corporate tax “loopholes” and raising taxes on wealthier Americans.  Closing loopholes usually involves minor tweaks to selected tax provisions, and typically don’t raise huge amounts of revenue.  For the past few months, President Obama has been touting the need to close a “loophole” for corporate jets.  The “loophole” is all about depreciation, which is merely a timing issue.  Jet owners will still get to depreciate their aircraft, but it will take a little longer.  The additional tax revenue from closing this “loophole” is estimated to be $3 billion, over ten years, or the equivalent of $300 million a year in additional revenue.

See the graph below of the total government revenues.  You’ll notice total tax revenues are approximately $2 trillion annually.  Thus, total tax collections would have to increase by nearly 25% to raise an additional $450 billion.  Congress will need to close a lot of “loopholes” and increase rates substantially to raise an additional $450 billion, which is extremely doubtful in the current political environment.

Although this may seem like simple arithmetic, but there is a twist.  You need to understand Washington code to decipher what President Obama really means.  Just like the $3 billion in savings from closing the corporate jet depreciation “loophole,”  the $450 billion will come trickling in over the next decade, not next year.

Members of Congress and the President frequently talk about the current budget and the 10-year budget horizon simultaneously and interchangeably.  It most applications, it means spending will be paid in the current year, and any additional revenues or spending cuts take place over the next decade.

Time will tell if I’m correct, but I expect the President wants us to borrow the $450 billion over the next 12 months in an attempt to spur economic growth and pay it back over the next decade.  Given our current economic situation, you may think this is a wise decision and/or necessary.  I’m not convinced.  With a $14.7 trillion debt, which is growing by $100 billion a month, I’m not sure adding another $450 billion is the best for our long-term financial future.

Before you decide if it’s a good idea or not, at least make sure you know what the President and Congress want to do.  Like so many other things in Washington, you may think they mean one thing, only to find out our leaders meant something else.

If anyone says the American Jobs Act will be fully paid for, check to see how and when.

Cost of a Job

What is the cost of a job?  Priceless… if you’re without one.

The American Recovery and Reinvestment Act of 2009 (a.k.a., the Recovery Act or the Stimulus), was enacted in February 2009 to create jobs and stimulate business investment in the recession which became severely pronounced at the end of 2008.  The original cost estimate was $787 billion. The most recent estimate is a $862 billion price tag.

President Obama and the supporters of the Stimulus argued that unemployment would exceed 9% without the Stimulus, but it would never be higher than 8% if the Stimulus was enacted.  Sadly, the unemployment rate reached 8.2% in February 2009, the month the Stimulus was passed, and exceeded 9% in May 2009. The rate has remained above 9% for over two years, except during February and March of 2011.

The Stimulus proponents have maintained that it was beneficial, and things would have been much worse without the Recovery Act.  This may be true, but it’s a difficult argument to make.

On July 1, 2011, the President’s Council of Economic Advisors released the most recent report on the progress and effect of the Recovery Act.  The report touted the Recovery Act’s success in creating or saving 3.6 million jobs.  Even if you accept the inclusion of a “saved job”, which is a controversial claim itself, the average cost per job is currently estimated to be $278,000.

The opponents of the Stimulus seized on this number to further criticize the Stimulus.  In their mind, the cost per job is highly excessive and is further proof of the government’s inability to spend money efficiently and effectively.  The White House argues the calculation was skewed, and the Recovery Act was intended to do much more than create jobs.

Despite all of the rhetoric coming from all sides of the political spectrum, the long-term benefits of the Recovery Act remain questionable.  One long-term effect is easily quantifiable – the additional debt incurred to fund the Recovery Act.  Since the government didn’t have $862 billion of extra cash on hand, we had to borrow it.  Thus, every American is responsible for an additional $3,800 of debt as a result of the Stimulus.

The effectiveness of the Stimulus may be debated a long time to come.  Whether we are better off or not, no one will ever truly know.  However, one thing is probably clear.  We’re not likely to see another $800 billion Stimulus Bill anytime soon.  With a $14 trillion debt, which is growing by over $3 billion per day, we simply can’t afford it.

If your job was created or saved as a result of the Stimulus, you probably think it was money well spent, although I doubt you actually got $278,000.  If you did, let us know how you achieved it.  Then again… maybe you better keep it to yourself.

Do we really want to be European?

Let me start by stating that I’m not anti-European.  I have European roots, European friends, and am fascinated with their rich history and heritage.  I really enjoy the cuisine, cobblestone streets, outdoor cafés and centuries-old buildings.  I also respect their current government and political structures, but I happen to disagree with some of their fundamental economic philosophies.

I often hear politicians and friends say that we should be like____ (insert name of European country).  It was one of the biggest arguments for passing Obamacare (i.e., we were the only major industrialized country without socialized medicine).  People seemed to forget who leads the development of new medical products, procedures and technology, but that is a separate matter.

I’ll admit, that there are days when I would enjoy a 35 hour work week, 4+ weeks of vacation (holiday) and a 13th month pay, but I know that it comes with a cost.

  • Gasoline and diesel prices are nearly double the U.S. pump prices
  • Accommodations are small and vehicles even smaller
  • High taxes
  • Complex and intrusive government regulations
  • High unemployment

Since the recession hit in 2008, the U.S. unemployment rate has been on par with the European Union.  However, the U.S. unemployment rate has historically been considerable lower than France, Germany, Italy and Spain.  The United Kingdom is the notable exception.   We may be contending with a 30-year high rate, but unemployment in France and Spain has barely dipped below 8% in the past five years.

As economic recovery has dragged along, the unemployment rate remains high, which has caused many economists to speculate that we may have reached a new level of “full  employment.” You can read this article for a greater discussion on the rationale for this speculation.

Time will tell if this is true, but there aren’t any indications that unemployment is going to dramatically decrease in the near future.  This may be an unintended consequence of our drive to be more European.  Concerns of higher taxes, more regulation and mandatory health coverage may be causing employers to refrain from expanding their workforce.  You may argue the merits of such structural changes, but it will definitely require a shift in the American psyche for us to accept 7-9% constant unemployment as normal.

I’m not advocating for the Europeans to change their social or economic structures.  It’s great if it works for them, but that doesn’t mean it is right for the U.S.  I also don’t believe that we have all of the good ideas.  We can definitely learn from our international brethren.  However, we must be careful in trying to reshape our economy and society to be like someone else.  Albeit different, every nation has its challenges and struggles.  There is no utopian society.

Consequently, we should ponder whether we really want to be like the Europeans or any other nation for that matter.  Embracing our differences doesn’t mean we have to stop celebrating what makes them or us great.

The Crushing Power of Debt

If you’re like me and a lot of other people, you’re a little concerned with the ever-increasing government debt.  According to the most recent estimates, the U.S. Government will rack up a record-breaking $1.6 trillion deficit this year.  This doesn’t include the billions of dollars of current deficits and $2.4 trillion of debt by our state and local governments. 

I would encourage you to read this Washington Post article.  It analyzes the current debt levels with those in 1946, immediately following World War II.  Keep in mind that the Washington Post doesn’t have a reputation as a conservative news organization.  In my opinion, it’s significant that people from both ends of the political spectrum are sounding the alarm about the national debt.

I particularly liked the quote by Robert D. Reischauer, former director of the nonpartisan Congressional Budget Office.  He said that the debt accumulated by 1946 “was for a very different purpose, which was to preserve freedom and democracy versus totalitarianism rather than to throw a huge party and put it on the credit card.”  Like every other party, the celebration eventually ends and someone has to clean up the mess, which I think is a good description of our current times.

I’m not a pessimist or an alarmist, but I do agree with the general premise of the article – there are tough times ahead. I believe the economy is incredibly resilient, and I don’t think an economic apocalypse is on the near horizon. However, I do believe that it’s possible.  Call me crazy, but I know that we can’t continue overspending at the current rate without severe consequences.

You only need to look at the devastating effects of the recent mortgage crisis to realize the power debt has to inflict financial and personal ruin.  You may believe people are suffering from the consequences of their poor decisions, and you may be right.  However, a lot of innocent people have also suffered, through no fault of their own.

If you’re a student of history, you know that the fall of mighty and powerful nations can have far-reaching impact.  The fall of the Roman Empire was followed by the Dark Ages.  The Great Depression may have been born in the U.S. but soon affected people worldwide.  The economy is much more globally intertwined than ever.  Although the mortgage meltdown was primarily triggered by the collapse of the U.S. housing market, investors all over the globe lost billions.  As the largest economic engine in the world, the U.S. economy and government have tentacles that reach into the lives of people worldwide.  The faltering of the U.S. economy and government will have a global effect.

You may believe it would be a good thing if America lost some of its dominance in the world, and that may happen.  However, if history repeats itself, which it often does, the process of transition may not be very pleasant.

The overall economic recovery that has occurred over the past 18 months has been a mixed blessing.  The good news is that it proves the resiliency of the economy.  The bad news is that it can give us a false sense of security that we as a nation are invincible and too big to fail as well.  As strong as our economy and government may be, debt has the power to crush them both.  It’s not inevitable that it will occur, but if we don’t’ change course soon, it might.  If debt has the power to crush you, it can also crush our nation.

The Real Unemployment Rate

The Department of Labor (DOL) issued its December labor report today.  If you’re looking for some light reading, click here to access the full report.

Here are some of the highlights.

  • The unemployment rate for December decreased to 9.4% from 9.8%
  • There were 113,000 new private sector jobs created in December; government  shed 10,000 jobs; for a net increase of 103,000
  • Weekly new claims for unemployment rose by 18,000 and seasonally adjusted continued claims decreased by 47,000
  • The final jobs tally for October and November 2010 were revised upwards by 70,000

Depending upon your perspective, expectations and analysis, the report can be seen as positive or troubling.

  • It’s good that 113,000 new private sector jobs were created, but most analysts and economists expected the number to be at least 147,000.
  • On average, there were 128,000 new jobs created in each of the past three months.  However, this is roughly the number of new jobs required to keep pace with the population growth. 
  • The four-week average of new jobs claim is approximately 411,000.  Economists describe modest job growth when the number falls below 425,000, and many believe it must drop below 375,000 to see any appreciable change in the unemployment rate.
  • The 0.4% decline in the unemployment rate is primarily attributable to a change in the way the DOL calculates the rate.  The key driver of the decline is the exclusion of people who have stopped looking for work.

Listen carefully to the pundits and politicians.  Many will trumpet the decline as a sign that their policies are working.  At the same time, they’re cagy enough to proffer a warning not to expect the unemployment rate to dramatically decrease any time soon. 

Even with the current job-growth trends, most economists don’t expect the unemployment rate to drop below 9% until 2012. The reason – as the job market improves those who have given up looking for work will return to seeking employment.  Once they resume their job search, they will be included in the unemployment stats and will be counted as unemployed until they find a job.  Bottom line… if you’re unemployed, discouraged and not actively looking for work, you’re not counted as unemployed.  You’re only counted if you’re actively seeking employment.

The unemployment rate is only an estimate, and it’s acceptable for the DOL to change the methodology.  However, I think it’s disingenuous to argue that things are getting much better when all you have done is change a statistical method and exclude a certain group of people.

Truthfully, no one really knows what the unemployment rate really is.  However, the expectation that the rate isn’t going to change significantly in the near term, despite positive job creation numbers is a tacit acknowledgement that the rate is higher than 9.4%, maybe much higher.

Fiscal Austerity: Easier Said than Done

Although there is still a lot of political posturing and wrangling to be done, it appears that a deal has been made regarding the extension of the Bush tax cuts.  Like most Washington deals, it’s a compromise where all sides get to claim victory. 

Here is a quick summary of the major points of the plan:

  • 2-year extension of all current tax rates
  • Reinstatement of the Estate Tax for estates in excess of $5 million
  • Extension of unemployment  benefits for an additional 13 months
  • Reduction in the employee’s portion of Social Security taxes of 2% for one year
  • Extension of several expiring tax provisions

The price-tag of this bill: $800 billion – all of which will be funded by additional U.S. debt.

There are arguments to be made for the economic and social benefits of each of the provisions.  However, while the machinations may be different, there is still an overriding principle to consider… Congress continues to spend money it doesn’t have.  While many people oppose various elements of the agreed framework, all of the politicians and economists I have heard comment on this matter support deficit-spending of some sort. 

The sluggish economy, the rapid expansion of government spending and national debt were hot issues during the recent 2010 elections. Candidates made promises of fiscal restraint and austerity.  There was a lot of drum-beating and chest-thumping over the debt and deficit and many promises to reign in government spending. 

It’s interesting how quickly Washington returns to business as usual, or remains oblivious to the wishes of the voters.  Granted, many of the new elected officials have yet to take office, but the recent tax legislation is a clear example of the challenge that lies ahead.  However, the stark reality is that fiscal austerity measures are easier said than done.  As this article in The Economist points out, President Obama and Congress have punted on fiscal austerity once again. 

The progress of the lame-duck session of Congress is a good indication that we should not expect to see a dramatic shift in the way Washington works or spends money.  Political posturing continues to take precedence over what’s best for the country. Furthermore, when faced with the choice between making tough financial decisions and pandering to certain constituencies, fiscal responsibility loses every time.

Whether anyone wants to admit it or not, hard decisions will eventually be required.  You only need to look to the recent events in Greece, Ireland, Spain and Portugal to realize that sooner or later a nation must put its fiscal house in order.  As these countries and their citizens have discovered, it won’t be pleasant, but you can’t continue to spend more than you take in forever.

Fiscal Austerity is easier said than done.  It’s also easier if it’s tackled sooner than later.  At this point, I’m not sure we can count on either.

Repeating History: The Predictability of Economic Indicators

Baseball is a sport that relies heavily upon history.  Managers make decisions about pitchers, hitters, runners, etc. based upon historical statistics.  If a certain batter has a lower batting average against a left or right-handed pitcher, the manager may make a pitching change.  The batter may still hit a homerun, but statistically it’s less likely.

Much like baseball, leading economic indicators are based upon the premise that economic history will repeat itself. Leading economic indicators are various statistics or observations that are intended to give an indication of the future direction of the economy.  As written in a previous article, they can be a nationally publicized economic statistic or someone’s instinct of what’s coming next.

Ben Bernanke, the current Federal Reserve Chairman, is considered to be a leading authority of the Great Depression.  He has dedicated a lot of his career studying the causes and remedial measures of the Great Depression.  His intent… to learn from history and avoid making similar mistakes.

The assumption is that economic output will react the same way to similar measures.  As a simple example, raising the discount rate will slow the economy and curtail inflation, and lowering the rate will encourage lending and growth.   The same principle was the basis for passing the $787 billion Stimulus Bill in February 2009.  The premise goes all the way back to President Roosevelt’s plan for ending the Great Depression with the passage of the New Deal.  The ultimate effect of the New Deal and the Stimulus Bill will be debated for years, but the assumption is that if it worked in the past, it will work again.

This theory influences the way economists, investors, politicians and policy-makers approach the economy.  The historical economic results of certain changes in economic indicators form the basis for how they make current decisions.

The difficulty arises when the economy reacts differently.  Economic conditions are as unique and unpredictable as people.  Although statistics may point a certain reaction, the economy doesn’t always function as expected.

Oil prices are a great example of this.  When oil prices spiked in the early 1970’s and 1980’s the economic effects were staggering.  The economy fell into a great recession and inflation took off.  From the beginning of 2007 to the middle of 2008, oil went from $61 per barrel to over $140, a 130% increase.  Although people grumbled and businesses scrambled, the economy didn’t fall into a great recession.  A major recession started in the third quarter of 2008, but it was more a result of imploding real estate and financial markets, than the price of oil.

In this case, history didn’t repeat itself.  Yes… oil prices may have been a contributing factor, but I don’t believe it was the primary cause, like it was in the 70’s and 80’s. 

I’m not suggesting that there is no value to leading economic indicators, but their utility in predicting future economic results is limited.  To the extent you study economic indicators and listen to pundits espouse their opinions of the implications of economic measures, keep this one principle in mind – leading economic indicators assume history will repeat itself, but the economy is like people… it is unpredictable.

New Housing Starts: A Sign of the Times

 Real Estate has become a major component of wealth and the economic engine of the United States.  A robust construction and real estate sector fueled economic growth for over a decade. The true significance wasn’t understood until the housing market started to unravel in 2007.

Delinquent mortgages and foreclosures nearly collapsed the world financial system.  Plummeting real estate values, and the related property taxes, have created substantial fiscal challenges for state and municipal governments.   And… the dramatic reduction of new construction projects has rippled throughout the economy… in a harsh manner.

Consequently, the number of new housing starts is a closely monitored statistic.  The Conference Board’s composite index of ten economic statistics, includes housing starts.  Their number includes both permits and the actual start of construction for single-family housing units.

Real estate activity comprises nearly 10% of GDP.  The current real estate crisis therefore is contributing to the continued economic recession, and its slow recovery is one of the reasons that the economy is not likely to rebound anytime soon.

New home construction affects many areas of the economy.  The most direct impact is on building supplies and labor markets.  I recently heard one analyst state that the U.S. manufacturing jobs lost over the past two decades essentially transitioned to construction jobs.  This statement seems to be validated by the unemployment rates of the states hardest hit with distresses properties – Arizona, California, Florida and Nevada.  All except Arizona had unemployment rates well above the national average.

Consumer spending also accounts for 70% of GDP.  While it may not be easy to measure, new housing indirectly affects consumer spending.  Appliances and fixtures are often part of the new home cost.  However, there is a lot of indirect spending related to occupying a new home.  If you’ve ever moved into a new home, you know the amount of money you spend for new drapes, curtain rods, furniture and décor decking out your new digs.

In short, new housing construction is significant in the overall contribution and strength of the current U.S. economy. The glut of existing homes on the market, combined with a tight credit market and millions of Americans with poor credit, doesn’t create an environment conducive for new housing construction.  Therefore, do not expect to see any significant improvement in new housing starts anytime soon.  As such, the road to economic recovery will likely be longer and slower as a result of the lack of new housing starts.

The Unemployment Rate: An Economic Indicator

 The unemployment rate is probably one of the most frequently talked-about economic statistic of 2010.  Despite all of the discussion and efforts to put people back to work, the rate has hovered between 9.5-10.0% all year.  What can you interpret from the unemployment rate?

Bottom line:  If you’re unemployed and looking for a job, any number is too high.  

Aside from that, the rate means little by itself, but it can be useful in understanding the economic conditions when the rate is increasing or decreasing; the percentage change; and assessing the general sentiment of economic conditions.

Did you know that the unemployment rate is only an estimate?  The rate is calculated from two monthly surveys.  One is a survey of 60,000 households seeking employment information about the inhabitants.  The other is a payroll survey of 140,000 employers, who are required to report certain payroll information.  Statisticians will contend that survey samples of this magnitude are extremely reliable.  They may be correct, but it’s still only an estimate.

The process is even further complicated by adding the seasonally-adjusted factor.  What’s that?  It’s a statistical adjustment that is applied to the raw data to account for things like holidays, the effect of inclement weather or highly seasonal businesses (think beach and ski related industries).

The unemployment rate is often thought to be a leading economic indicator, but it’s not included in the Conference Board’s composite index of ten economic statistics.  Instead the Conference Board looks to the average manufacturing workweek and the number of initial jobless claims to determine the direction of the economy. 

Beyond the initial jobless claims, I believe that the number of jobs lost or created in a given period is a good indication of economic direction and health.  Adding jobs is a good sign, and job losses are troublesome.  Taking it a step further, you should look at the types of jobs being added or lost.

This secondary level of analysis led to a lot of discussion in the summer of 2010.  The unemployment rate dropped and the number of jobless claims declined, but it was primarily due to a substantial increase in temporary US census workers.  The rate has subsequently crept upward over the past three months, as those workers have been terminated. 

Public sector jobs are considered good jobs these days.  Base pay has increased to be more on par with the private sector, the benefits are usually quite generous, and there is generally better job security.   Government jobs may be good jobs, but they aren’t a sign of a robust or healthy economy.  An increase in full-time private sector jobs is an indication of economic growth and stability. Private sector job growth has been anemic over the past two years, which has led to a tepid outlook on the overall economy.

Changes to the unemployment rate make great news headlines and political fodder, but it’s probably not the best indicator of economic health or direction.  The number of jobs lost or created in the private sector is probably a much better measure of what’s currently happening in the economy, and what’s about to happen.