Boy oh Boy...I'm going to make a killin on this thread! ;)
Posted on 09/24/2003 5:09:34 PM PDT by Starwind
The Daily Reckoning PRESENTS: The strong, compelling evidence of an economy that is as far away from a recovery as its disastrous job numbers.
EMPLOYMENT DISASTER
By Kurt Richebächer
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.
Regards,
Kurt Richebächer, for The Daily Reckoning
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.
Boy oh Boy...I'm going to make a killin on this thread! ;)
;-(
So, note in the table below (my construction from the linked reports), if you read up a given column, you can see the increased revisons in NonFarm Payroll losses. Every month, except for January) a NonFarm Payroll loss was reported and a larger loss reported as a revision in the following months. April seems to be one exception were the revisions were smaller. The appearance being that in the initial reporting month, losses aren't as severe as they are later revised.
Nonfarm Payroll (1,000s) Aug July June May April March Feb Jan August report -93 -49 -83 July report -44 -72 -76 June report -30 -70 -22 May report -17 unch -151 April report -48 -124 -353 March report -108 -357 Feb (March revison) -308 203 Jan (March revison) 185
Bull-oney. In the eighties, once the value of the dollar had been stabilized, inflation virtually ended while growth accelerated -- despite growing deficits.
So, in short, unemployment as a result of job flight is worsening the recession, rather than the recession causing job losses.
That my theory and I'm sticking to it (I'm sure others have thought of this, but maybe not stated it in quite this way).
Interesting article.
Well, technically the recession ended Nov '01, but rising unemployment is indeed a drag on recovery, subtracting ui payments, bankruptcies, repos, etc., from GDP and not adding production and taxes.
But unemployment doesn't cause recession (which I don't believe you argued), but falling employment is often a leading indicator of recession. I believe we will slip back into recession for reasons which will become apparent after companies disclose their true fiscal problems, of which offshoring and layoffs continue to be a leading indicator.
There will come a point when we pass the point of no return, and it wont be easy, or it may even be impossible to get back our manufacturing and high tech.
Fair trade would be directed toward general development both of United States and trading partners like China and India while raising standards in the later two countries. This would be a positive sum game.
The race toward the bottom and contraction of economies might hurt India and China too. This is a negative sum game.
Moderate tariffs with lowered payroll tax would reward businesses hiring American workers and treating them well. And fair trade would allow China and India to grow and compete in a sustainable way.
This works both ways. Falling employment can deepen recession in a vicious circle.
"Them" is a wide collection of writers. Richebächer lives in Cannes and is very negative on the economy, US and global, but I don't recall him targeting Bush.
That said, these problems started a decade ago for which Greenspan is largely to blame. Bush's reappointment of him and leading the largest deficits on record are arguably Bush's fault.
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