This past Friday, investors awoke to news that, according to the U.S. Labor Department, employers added 248,000 jobs last month. In addition, job numbers for previous months were revised upward, and the jobless rate fell to 5.9% from August's 6.1%. These numbers had the mainstream media cheering that "economic victory" was nigh and stocks were propelled upward.
However, these encouraging headline numbers remain a statistical mirage that obfuscate the problems that remain with the economy. For example, the chart below shows the official unemployment rate as compared to the number of workers no longer considered part of the force as a percentage of the working age population (15-64 years of age).
While many economists try and argue that the drop in the labor force participation rate is a function of retiring "baby-boomers," the data does not support those claims. Currently, more than 45% of the working-age population is simply no longer counted as part of the domestic labor force.
The rising number of individuals that have simply disappeared from the labor force are also obscuring other employment measures that are heavily relied on as leading indicators of economic health such as "jobless claims." It is assumed that falling initial jobless claims are a function of a growing labor market. While this is true to some extent, it is more of an issue of "labor hoarding" rather than growing demand for employment.
"In order to file for unemployment benefits an individual must have been first terminated, by layoff or discharge, from their previous employer. An individual who 'quits' a job cannot, in theory, file for unemployment insurance. However, as companies begin to layoff or discharge fewer workers the number of individuals filing for initial claims decline. This is shown in the chart below of the 4-month average of layoff and discharges versus the 4-week average of initial jobless claims."
The mistake is assuming that just because initial claims are declining that the economy, and specifically full-time employment, is markedly improving. In any economy, it is ONLY full-time employment that matters as it provides enough income to support household formation, increased consumption and higher levels of personal savings rate which leads to increased productive investment. Unfortunately, as shown below, full-time employment as a percentage of the working-age population remains elusive despite falling jobless claims.
Furthermore, the issue of "labor hoarding," combined with the huge pool of individuals outside of the labor force, is an important phenomenon that obscures the real weakness in the underlying economy. These forces combine to reduce aggregate demand on businesses that in turn resort to productivity increases to stretch the current labor force further to protect profitability.
The "good news" is that for those that are currently employed - job safety is high. Businesses are indeed hiring, but prefer to hire from the "currently employed" labor pool rather than the unemployed masses. The "bad news" is that for those unemployed full-time employment remains elusive, and wages remain suppressed due to the high competition for available work.
The impact of the truly weak nature of real employment in the domestic economy is best seen in the level of governmental assistance programs as a percentage of real disposable incomes. If employment was truly improving, by creating more full-time jobs, the number of individuals participating in social benefit programs should be on the decline rather than hitting historic highs.
Of course, these economic underpinnings are also belied by surging asset prices due to massive interventions by the Federal Reserve. The financial markets are a representation of the businesses that operate in the domestic economy. Therefore, the market capitalization should be a reflection of the underlying economic activity. However, in recent years in particular, this detachment from real economic activity has been exacerbated.
Nowhere is real economic growth seen more clearly than in inflation. If the economy was truly on the mend with levels of employment, demand and wages rising faster than population growth; then pricing pressures would be on the rise. Unfortunately, as shown in the composite inflation gauge below, inflationary pressures continue to remain suppressed as global economic weakness remains a hallmark of the current recovery.
Even the very "liberal left" have started to question the current economic recovery. A long time supporter and cheerleader of the current Administration, Chris Matthews, recently penned:
"The unemployment rate is so low that some members of the Federal Reserve believe that we’re close to reaching the 'natural rate of employment,' or the level economists estimate is about as low as you can get without stoking inflation.
Yet, at the same time, a whopping 72% of Americans believe we are still in a recession, according to a recent poll from the Public Religion Research Institute. So how do we reconcile these two very different trends?
The total number of jobs created, which had been a good enough metric to estimate the state of the economy, just isn't cutting it anymore. The number we need to be looking at, which is also released in the monthly Employment Situation Report, is income. And unlike the jobs picture, there's been little to no improvement when it comes to average hourly earnings."
In a recent New York Times column, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joe Biden, wrote:
"There are at least two special factors that are distorting the unemployment rate's signal. First, there are over seven million involuntary part-time workers, almost 5% of the labor force, who want, but can't find, full-time jobs. That's still up two percentage points from its pre-recession trough."
Secondly:
"Once you give up looking for work, you're no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we're trying to measure, it artificially lowers unemployment, making a weak labor market look better."
The problem with looking at the unemployment rate and making judgements about the economy is that in theory if enough individuals keep dropping out of the labor force, the unemployment rate could fall to ZERO. This would hardly suggest that the economy was running full-throttle with 1/3 of the population not working. Furthermore, as discussed at length in "Don't Blame Baby Boomers For Not Retiring," the decrease in the labor force participation rate is not a function of "baby boomers" retiring en masse. Unfortunately, the highest number of individuals post-age 64 continue to work because they simply have no other choice.
The current detachment between the financial markets and the real economy continues. The Federal Reserve's interventions continue to create a wealth effect for only a small minority of the total population - those at the upper end of the pay scale that are employed. For the broad majority of the population, the economic recovery only been seen in the statistical headlines.
Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “The Lance Roberts Show," Chief editor of the X-Factor Investment Newsletter and the Streettalklive daily blog.
