Economic Old Age, Part 5: 40% Unemployment Ain't Awesome

The chart below reflects the boys and girls and robo-traders of Wall Street enjoying their last game of chart-point Ping-Pong. As is evident, the squeeze is on, and we don't think this particular triangle "resolves" with another breakout into the financial stratosphere.

When the market peaked at 2873 on the S&P 500 back on January 26, there were 170 points a daylight between the 50-DMA and the 200-DMA.

Since then, the range has drastically narrowed. As the market has progressively lost its mojo, the 50-DMA (blue line) has steadily declined---even as the statistical momentum of the blow-off top in January has carried the 200-DMA  slightly higher.

So now the spread is just 67 points---meaning that the children are running out of playground. And that means, in turn, that a hissy fit can't be far behind.
^SPX Chart

The reason is simple: Both props which have levitated the stock market into the nosebleed section of valuation history are now coming undone.

To wit, the Fed has decisively pivoted to QT (quantitative tightening) and will be draining massive amounts of cash out of the bond pits for the first time in modern history; and the Awesome Economy narrative is fast reaching its sell-by date as the current octogenarian business expansion runs out of time and energy.

As to the latter, the fraudulent nature of the Awesome Economy story was again on display this AM with the release of the monthly jobs report. Embedded in it were two juxtaposed charts that in theory can't happen under the Fed's bathtub economics macro-model----bone-headed as it may be.

On the one hand, the BLS report claimed that the April unemployment rate had reach 3.9%. That's its lowest point since December 2000 and represents full-employment and then some by any conventional standard.

On the other hand, the rate of hourly wage gain for production and non-supervisory employees came in at just 2.6% on a year-over-year basis.

That's the same level its been at for four straight years--even as the unemployment rate has steadily fallen; and it's far below the 4-5% rates of wage gain which prevailed at the turn of the century when the U-3 unemployment rate last penetrated the 4% threshold.

Needless to say, if the U-3 unemployment rate actually measured labor "slack",  wage rates would be rising smartly.

In fact, it actually measures little more than the statistical noise which emanates from the BLS' deeply flawed employment models; and is just another component of the statistical pabulum from which the entire Awesome Economy narrative is confected.

To be sure, the talking heads had no trouble espying those missing wage gains as being just around the corner. But that's the same malarkey they have been peddling since at least 2014 when the U-3 rate first dropped below 6%, which in his wisdom Bernanke had then defined as the border line of the full employment zone.

So what we are dealing with here is not simply a matter of degree or spin: The Awesome Economy narrative is actually built on institutionalized lies that service the needs of Bubble Finance on both Wall Street and at the Fed---until the don't.

Then, when financial bubbles inexorably burst, ex-post rationalization stories are fabricated to explain the breakdown.

Last time it was the 100-year "contagion" flood that supposedly upended the Fed's "goldilocks economy". As shown in the second chart above, the latter was smoothly chugging into the Keynesian nirvana of U-3 full-employment at the end of 2007, and on a pathway virtually identical to the present.

It is more than evident, of course, that Wall Street desperately wishes to be fooled twice by the goldilocks postulate, and that's why the trading bots will thrash around inside their chart points and moving averages until this cycle's version of the Black, Orange or Red Swan , as the case may be, makes its unscheduled appearance.

In the interim, however, the Awesome Economy narrative gets more threadbare by the month. As Jeff Snider astutely observed in his commentary on today's report---at some point it gets pretty hard to hide 16.6 million missing workers.

What he means is that if the labor force participation rate had not plunged from more than 67.0% to the 62.8% level reported again for April, there would be 16.6 million more persons employed in the US economy today at the ostensible 3.9% unemployment rate.

Here in the United States, the Bureau of Labor Statistics (BLS) sends us another farce. These payroll Friday’s were always a little overwrought, but in the past four years they have become ridiculous spectacles. It’s not the fault of the BLS (apart from questions about their estimates for 2014), mainly it is the same issue as in Japan. What should be obvious is misinterpreted sometimes intentionally.

According to the latest figures, the unemployment rate in the US is now down to 3.9%. The reason it crossed the 4% line in April was perfect. Not in the manner of what a 3.9% unemployment should indicate, rather it was all the wrong things that expose the unemployment rate for what it is – meaningless.

The primary reason for its drop was another monthly subtraction from the labor force. Down for a second month in a row, in April by 236k, the HH Survey managed to increase by all of 3k. The result: a perfectly representative decline to 3.9%.

The Keynesian gummers reject Snider's point entirely, of course, on the vague theory that retirements and the aging demographics of the US explain away much of the change in the participation rate.

As a matter of fact, they don't. And, besides, the whole BLS employment/unemployment reporting framework and model is essentially a pile of garbage that might have been relevant during the days of your grandfather's economy, if even then.

That is, it is built on the flawed notion that labor inputs can be accurately measured by a unit called a "job" and that an economic trend in motion tends to stay in motion.

To the contrary, in today's world labor is procured by the hour and by the gig---meaning that the "job" units counted in both the establishment and household surveys are a case of apples, oranges and cumquats. The household survey, for example, would count as equally "employed" a person holding:

  •  a 10-hour per week gig with no benefits;
  •  a worker holding three part-time jobs adding to less than 36 hours per week with some benefits; and
  •  a 50-hour per week manufacturing job (with overtime) providing a cadillac style benefit package.

Beyond that, the underlying monthly surveys are tiny, primitive and utterly lacking in quality control among respondents. As a result, the statistical wizards at the BLS smooth it all over with ad hoc adjustments and guesstimates (e.g. the notorious birth-death model) and trend-cycle statistical models that essentially project into the current month the statistical trend line then underway.

In short, the monthly jobs report is not an accurate empirical snapshot of where the real world labor market actually is; it's a modeled projection of where it should be.

So when Hampton Pearson (CNBC) reports the number as coming in where it should be, the bobble-heads all wag enthusiastically about another "solid" jobs report.

And that's also why the BLS jobs confection is useless at turning points in the business cycle. During the 2008-2009 employment collapse, for instance, it over-reported the monthly level by nearly 500,000 jobs per month.

Stated differently, the natural tendency of a capitalist economy is to expand if the work force is growing and if the state does not excessively retard investment and productivity growth.

Those natural recovery forces have been at work in tepid form since the recessionary correction of 2008-2010. They account for the recovery of some 8.5 million jobs which were lost in the Great Recession and the modest incremental gains that have been generated since breakeven was achieved in 2014.

But what is important is the growth rate of actual labor units employed and the relationship of that to the available potential labor force---not simply the BLS "jobs" model. The latter basically floats on the back of the natural capitalist business cycle expansion and enables the monetary politburo in the Eccles Building to claim credit for what are really nothing more than statistical proxies.

Needless to say, we think there is a far more insightful and accurate way to look at labor utilization and to assess whether or not an awesome state of affair has actually been achieved.

To wit, back in December 2000 (the last time U-3 hit 3.9%) what we consider to be the comprehensive unemployment rate was 34.6%. Today it stands at 40.0%.

Since the turn of the century, therefore, there has been enormous deterioration in the US economy's use of its potential labor supply. Yet as the Baby Boom rapidly ages and the Welfare State burden soars, that is a very bad thing.

Stated differently, the US has not utilized the last 9 years of so-called recovery getting back to Awesome as implied by today's BLS report.

Instead, it has wasted a crucial decade in front of the retirement bow-wave---continuing to peddle backwards with regard to its underlying capacity for economic growth and rising real incomes. If nothing else, the latter are absolutely essential to pay the taxes that will be needed to prevent the US Welfare/Warfare State from fiscally capsizing in the decades immediately ahead.

And that's extremely relevant to the stock market, too, and the chart-point Ping Pong being played by the robo-machines at today's 24X nosebleed multiples.

That is, nothing in economic logic or history says you can you capitalize endlessly growing earnings (which is what 24X current profits does) when an economy is heading for the flat-line or worse on the growth front and a generational fiscal crisis that will bring down the whole $69 trillion house of debt cards on which the US economy currently teeters.

In this context, we measure the potential labor force as the US population 20-69 years of age and assume that in theory every adult could work 2000 hours per year in the monetized labor market.

That avoids the obvious problem in the BLS statistics that count three jobs for a two-earner family which hires a full-time housekeeper, but just one job for the same family where one spouse works in the monetized economy, one-stays home and neither hires a third person to do the home chores.

The same logic applies to the 30-year old still in graduate school living on Uncle Sam's student loans versus holding a job in the monetized economy; or the former office worker on disability who got a bad back and corporal tunnel bending over a typewriter; or the 60% of able-bodied recipients on foods stamps who do not currently hold a job; or the millions of millennials in mom and pops basement who sell empty beer bottles on eBay.

Many factors drive whether potential labor hours get sequestered outside of the monetized economy in housework, studentdom, on the welfare rolls or in moms basement. But the interest rate on overnight funds is surely the least of them.

Nevertheless, all things equal under today's demographic and fiscal circumstances requires that the comprehensive unemployment rate needs to be dropping---so that Uncle Sam can find the tax receipts needed to prevent a complete societal civil war a few years down the road.

But it's not happening. In December 2000, there were 175.5 million adults aged 20-69---meaning that the implied potential labor force amounted to 351 billion labor hour per annum. During that same month, the BLS measured 229.5 billion hours actually employed in the non-farm economy at an annual rate.

Accordingly, unemployment amounted to 121.5 billion hours or 34.6% of the potential available hours.

By contrast, the adult population 20-69 years of age is now 210.2 million and available hours total 420.5 billion per annum. Against that, the BLS most recent measure shows 252.5 billion hours actually employed---implying 168 billion unemployed labor hours and a 40.0% comprehensive unemployment rate.

Stated differently, between the two 3.9% anchor points on the U-3 unemployment during the last 18 years, the level of unemployed US labor has increased by 47 billion hours per annum, and the rate has risen commensurately.

More importantly, potential labor grew by 70 billion hours or at a 1.05% per annum rate during that period, while actually employed hours rose by only 23 billion and 0.55% per year.

And that's exactly the skunk in the woodpile. By contrast, during the 1980 to 2000 peak periods, the potential labor force grew by 2.2% per annum, and labor hours actually utilized rose by nearly an identical 1.9% annualized rate.

So we are now at the opposite end of Awesome. In 1980, the Baby Boom was just beginning to flood into the labor force, and female participation rates in the monetized economy were rising rapidly; and those hours were put to work.

By contrast, employed hours have grown at only one-quarter that rate since December 2000 and the unemployment rate has steadily risen.

The reason for that is not hard to find. Fed policy has badly damaged the main street economy via its massive inflationary incentive for off-shoring of high value production and jobs while turning the C-suites of corporate America into predatory dens of financial engineering.

At the same time, Welfare State policy has further drained labor resources from the monetized economy with massive increases in food stamp, disability, Medicaid and other welfare programs.

In Part 6 we will elaborate further on why the comprehensive unemployment rate is likely to keep rising---even as the Baby Boom retirement wave swamps the fiscal system.

The result is sure to be very different than Awesome.




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