Employment Disaster

The Daily Reckoning PRESENTS: The strong, compelling evidence of an economy that is as far away from a recovery as its disastrous job numbers.

There has been much talk to the effect that America has just had its slightest recession in the whole postwar period. That is measured in real GDP growth, being bolstered by many statistical tricks. Measured, however, by job losses, which certainly are the far more important gauge, it is already America's worst recession by far.

In June it was declared that the recession had ended in November 2001. Yet in the 20 months since, payroll employment has declined by a total of about 1 million jobs, or about 8%. In not one of the seven or eight postwar recoveries has there been any employment decline. Immediate strong job growth has been the regular characteristic of all business cycle recoveries. On average, payroll jobs increased 3.8% in the 20 months following the end of recession.

What's more, no letup in job losses is in sight. During the second quarter, widely hailed for its better-than-expected GDP growth, the household measure of employment slumped by 260,000. However, this figure concealed an even greater number of workers - 556,000 - who statistically quit the workforce because they have given up looking for nonexisting jobs.

This rapidly growing group of people no longer count as unemployed. What American job statistics really measure are not changes in unemployment, but changes in job seekers. Including the frustrated job seekers, the U.S. unemployment rate is hardly lower than in Europe. Certainly, it is rising much faster.

In addition, the Labor Department is employing month for month the same two practices that camouflage the horrible reality. In July, for example, it reported a decline in payrolls by 44,000, while job losses for June were revised upward from 30,000 to 72,000. For May, the retrospective upward revision was even from 17,000 to 70,000. As such upward revisions of job losses in the prior month have become a regular feature, this practice has the convenient effect of producing correspondingly lower new numbers every month. The same happens, at more moderate scale, with weekly reported claims.

There is still more spinning involved. The government adds every month some 30,000-50,000 imaginary workers to the job total. It is based on the assumption that in an economic recovery a lot of people start their own business. In normal recoveries, they have done so, indeed.

All it needs to activate this statistical job creation is a unilateral decision by the government that the economy is in recovery. Once a year, the statisticians reconcile their assumption with reality by a revision. When they did this in May of this year, 400,000 new jobs that had been reported earlier simply vanished. Such revisions, of course, take place outside the monthly reported job losses. Together, we presume, these statistical casuistries have reduced the reported job losses in the past two years by well over 100,000 per month.

It rather abruptly became the consensus view that in America the great recovery from protracted, sluggish growth is finally on its way. Record-low interest rates, runaway money and credit growth, new big tax cuts, record-high cash-outs by consumers through mortgage refinancing, increasing house and stock prices, and rising profits are cited as the compelling reasons for this optimism.

We are more than skeptical about the true impact of all these influences on the economy primarily for one reason: Most of them, if not all of them, have been at work for some time already, but with grossly disappointing overall effects on the whole economy, and now some of these influences are weakening or even reversing.

Think of the sharp rise in long-term interest rates that is most assuredly stopping the mortgage-refinancing bubble dead in its tracks. That, in our view, will not only abort any recovery but will also mean the economy's relapse into new recession.

As for fiscal policy, it clearly gave its biggest boost to the economy between the fourth quarter of 2000 and the second quarter of 2002. That is a period of six quarters during which the federal budget gyrated from a quarterly surplus of $306.1 billion to a deficit of $526 billion, both at annual rate. This year, the deficit is supposed to hit $455 billion. Most probably, it will come out much higher. But this follows a deficit in the last year of $257.5 billion. The fiscal stimulus is waning, not increasing.

In any case, actual, historical experience in the 1970-80s with large-scale government deficit spending has been anything but encouraging. It created more inflation than economic growth. Over time, rising deficits were rather recognized as impediments to economic growth. Japan's recent experience makes frightening reading. Since 1997, government debt has skyrocketed from 92% to 150% of GDP, rising every year by more than 10% of GDP. Yet nominal GDP keeps shrinking.

As to monetary policy, we have very much the same doubts about its efficacy in generating economic growth under current economic and financial conditions. It is the traditional American consensus view that monetary policy is omnipotent if properly handled. In this view, any recession, or worse, always has its decisive cause in the failure of the central bank to ease its reins fast enough. In this view whatever happened in the economy during the prior boom is irrelevant.

This time, both monetary and fiscal policies in America have acted with unprecedented speed and vigor. To people's general surprise, the economy's rate of growth abruptly slumped during 2000 from 3.7% in the first half to 0.8% in the second.

Starting on Jan. 3, 2001, the Fed slashed its short-term rate in unusually quick succession. Within just 12 months, its federal funds rate was down from 5.98 to 1.82.

Assessing the development, the first thing that struck us as most unusual was that this sudden, sharp economic downturn occurred against the backdrop of most rampant money and credit growth. Total nonfederal, nonfinancial credit grew by $1,144.3 billion in 2000, after $1,102.6 billion in the year before. This compared with nominal GDP growth during the year by $437.2 billion. The first important conclusion to draw therefore was that this sudden economic downturn had obviously nothing to do with money or credit tightness.

Ever since, nonfinancial credit growth has sharply accelerated. In the fourth quarter of 2002, it hit a record of $1,612.8 billion, at annual rate, followed in the first quarter of 2003 by $1,338.3 billion. This coincided with simultaneous nominal growth of $388.4 billion and real GDP growth of $224.4 billion, both also at annual rate. For each dollar added to real GDP, there were thus six dollars added to the indebtedness of the nonfinancial sector.

P.S. During the 1960-70s, by the way, there was on average about 1.5 dollars of debt added for each dollar of additional GDP. Just extrapolate this escalating relationship between the use of debt and economic activity. And think of it: the GDP growth of today is tomorrow a thing of the past, while the debts incurred remain. Plainly, Greenspan's policy has collapsed into uncontrolled money and debt creation that has rapidly diminishing returns on economic activity.

As we noted in these pages last week, the late economist Hyman P. Mynsky would call this a Ponzi economy where debt payments on outstanding and soaring indebtedness are no longer met out of current income but through new borrowing. Soaring unpaid interests become capitalized.

We've got unemployment of about 6.4%, and that's really not a whole lot more than the 4 to 5% that prevailed during most of the nineties.

That's only counting the number of people currently collecting UI benefits. Once they fall off the UI roles, they are no longer counted in that statistic, and you must turn to the Household survey data to get a full picture. The rate of total unemployed and underemployed is currently 10.0%:

From the THE EMPLOYMENT SITUATION reports I have accumulated table A12 Line U-6 data for May 2003 thru present, not seasonally adjusted.

Unemployment (Household Survey Data)
   
   The unemployment rate was 6.2 percent in July; the number of unemployed
persons was 9.1 million. 
 
                                                                 Not seasonally adjusted              

                                                                 August  May     June    July    August 
                                                                 2002    2003    2003    2003    2003     
 
  U-6 Total unemployed, plus all marginally attached workers,        
     plus total employed part time for economic reasons, as a        
     percent of the civilian labor force plus all marginally     
     attached workers.........................................    9.5    9.7     10.6    10.5    10.0 
    1 Data not available.
    NOTE:  Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want
  and are available for a job and have looked for work sometime in the recent past.  Discouraged workers, a subset of the marginally
  attached, have given a job-market related reason for not currently looking for a job.  Persons employed part time for economic
  reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.  For further
  information, see "BLS introduces new range of alternative unemployment measures,"  in the October 1995 issue of the Monthly Labor
  Review.  Beginning in January 2003, data reflect revised population controls used in the household survey.

I have read by those interested in the truth that we should ignore the monthly reported and wait till the "official" revision come in.

There is no recovery it is all smoke and mirrors and wishful thinking. On giving American jobs to the third world both parties are united, it is a massive payback to the big contributors of both parties.

Bush will make a little noise about the Chinese dollar to try to make believe he is actually interested in the unemployment cased by his policies ..but the floating of the Chinese dollar will not begin to compensate for the difference in costs between slave and free labor. (more smoke and mirrors).

As the job losses like more and more into the skilled and educated workforce..Bush will find he follows his dad out in one term. But unfortunately the Democrats will not be better.

The only thing that the American public believes about Bush is his dedication to the protection of America from terrorists. I suspect that is why Wesley Clark moved to the top (or near top) of the democrat choices. People will see him as trust worthy on this issue..

My husband just lost his job yesterday. We live in Nevada

Sorry to hear that...

Nevada and Arizona are the two fastest growing states in the Union.

I think that without that growth, the situation would be abysmal.

Much of why California is in trouble is because of Middle Class flight that was first noted in the "half decenial" Census Update in 1995. The article appeared briefly on Free Republic...IIRC, even then it was something like two million folks.

It seems to have accelerated since then.

Not really true. It's not unemployment benefits that you're talking about. You're talking about workers who have given up looking for work because they can't find it (discouraged workers). People who are still looking for work are counted even if their unemployment benefits have run out. Although it is true that the unemployment rate approaches 10% if you include discouraged workers, what you ignore is that back in the mid-seventies (which is the time period I was talking about), the unemployment rate would have approached 20% if you included those people. Even if you looked at the corresponding rate in the 90's, it would have been well in excess of 6% if you had included those people. You've got to compare apples to apples, oranges to oranges. If you compare apples to apples, then the 4-5% rate which prevailed in the latter half of the 90's should be compared to the 6.2% that we have now.

Increasingly, there is a subculture of corporatists, with urbane tastes, and social values ranging from liberal to utterly hedonistic, who view their sphere of existence as all of the "great cities" of the world. In fact, they wear their international assignments as if they were merit badges. In the days prior to a series of promotions I traveled extensively in the Far East, the PRC in particular, and met several of these characters. In my circle of acquaintances there are additional ones. To them, so long as there is a Starbucks nearby, a relatively new house / flat / highrise condo with DSL, and a good per diem, they are happy campers. They willfully ignore the lacks of freedom and Communist / cleptocratic / oligarchic structures in control of whichever country they live in and will go until they are blue in the face rationalizing how their "good works" of "spreading American capitalism" (or so they naively believe they are doing) far outweigh any macroeconomic adverse effects on the people who actually enjoy living in the USA, any empowerment of the USA's current and future enemies, and, any personal conflicts of interest that they have been roped into due to their job responsibilities and compensation objectives. They are like the corporate leaders who got sucked into this on a smaller scale vis a vis the USSR's NEP and later Nazi Germany; and as such they plan to drive their plans right up until the rockets are in the air. I spend a lot of effort on documenting it now, so that future generations can learn from it, assuming that we even win the war. Failing that, it might come down to monks hiding away the truth of our age, until some future days when the light emerges after 1000 years of darkness brought on by the conquest of the West by the Trans-Eurasian Axis.

I was not talking about UI benefits per se. I was talking about how the unemployment rate you rely on is measured and pointing out your chosen statistic ignores people who are unemployed, still looking for work (even if they have a part-time 2nd shift WalMart greeter job), but simply run out of UI benefits.

If you compare apples to apples, then the 4-5% rate which prevailed in the latter half of the 90's should be compared to the 6.2% that we have now.

Perhaps it would be educational if you were to show precsiely when and how the statistical collection changed such that the criteria for unemployed then is more stringent that the criteria applied today. Please?

You also have not considered that in the 90's laid off workers returned to jobs within months of the recovery starting. That has not happened today. The jobs are permanently gone and it is taking people in excess of 21 weeks (and growing) to find any replacement work (if they find it), whereas in the 90's it took more like 5-6 weeks.

Our trade deficit with China for July was $11.3 billion. That we could have a trade deficit with China as large as that with the E.U. is staggering, considering the respective sizes of their economies.

Anyway, I was bashing the United States and it's non-trade policy, not those countries, who are merely taking when we're giving away the store.

We had 35% unemployment in the Depresssion.

I've read it was more like 20% but maybe there were times it was 35% and times it was 20%.

I wonder how well we can compare figures from then and now because back then they didn't have the permanently unemployed welfare class (SSI etc) which is quite high now. In this region combined welfare and unemployment numbers already match the levels of unemployment in the Depression ---- welfare rates are very high.

For the life of me, I just can't figure out where Bush and the RNC are coming from when they push for more of the same trade polices that are destroying the industrial muscle that made America great while enriching communist countries like Red China. Countries that share none of our Western values but will most definitely pose a threat to us economically and militarily in years to come. It boggles the mind.

Mine too.

Well, of the several dozen acquaintances and friends I have in professional services and the manufacturing sector, ALL of them are "employed."

However, bonus/distribution income is virtually zero for many of them. Employment types (where I am) are doing very little--if anything. Enough to feed the families, but that's it.

Most businesses about which I am aware are deliberately NOT replacing managers, regardless of the criticality of the position--they're making do.

Sales types who move industrial goods are "employed" but not making quotas, and some are not making sales, period. Not because they are incapable--but because NO ONE BUYS.

During the last 12 months, construction contractors and most sub-contractors have kept busy--but are no longer straining; in fact, most are now scratching very hard for projects and will take them at break-even or a loss to keep their skilled people on the payroll for as long as possible. That did not prevent one major area electrical from dropping 400 journeymen last December, however. And the effect of the State/County/Local revenue problems has yet to hit the construction market--that will be next year.

So, yeah, everybody I know is "employed." Nobody is making money, and many are losing it daily.

It's crunch time up here. Happy to hear that the East Coast is hunky-dory.

Moreover, its share of employment has been declining as a whole for a lot longer than 37 months.

Manufacturing employment as a percentage of the whole will have shown declines from 1995-2003 for two reasons: first, in the '95-'00 period, the phenomenal growth of DotCom and services related to DOtCom.

The second half, however, has to do with the evacuation of jobs in manufacturing to offshore--Mexico some, but mostly the Far East.

Now the services sector is beginning to take it on the chops--CPA's, employment services, IT.

It's really hard to be an optimist.

Sorry to hear that. Most find work before the unemployment runs out. Good luck to you!

He is a programmer, lost his job 1 month after 9-11 and it took 10 months for him to get another. We only started to recover from that when it happened again. My advice to parents is for them to not let their children grow up to be a programmer. It has been on and off employment for the several years. I am soooooooooooo done with it!!!

They willfully ignore the lacks of freedom and Communist / cleptocratic / oligarchic structures in control of whichever country they live in and will go until they are blue in the face rationalizing how their "good works" of "spreading American capitalism" (or so they naively believe they are doing) far

Yep. Being a conservative, does not mean making money at the expense of freedom. Freedom is paramount, all else is secondary to a conservative.

The jobs are permanently gone and it is taking people in excess of 21 weeks (and growing) to find any replacement work (if they find it), whereas in the 90's it took more like 5-6 weeks.

One of the more startling figures I've seen is that the number of long term unemployed has grown from 700k in 2000 to around 2M now. But all you hear about is how the unemployment rate keeps on going down.

Back in August someone sent me a link to a virtual job fair for jobs in Shanghai and Beijing. Our Communist enemies are explicitly recruiting Western managers and engineers to come to the PRC, and to be duped into helping build the capabilities which, in concert with the ongoing Sino - Russian and Sino - Pakistani military - techno - industrial complexes, will ramp up the rate of armament to record setting levels. We will be shocked and awed by how quickly we have fallen behind in the new arms race; one in which we are not now even competing. Sadly, we are repeating our mistakes of the period 1919 - 1941 but this time the resultant pain level will be much greater.

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