The US Economy: Myth and Reality

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Don’t drink the Kool-Aid.

The administration is boasting about a jobs report that is at best mediocre. The facts  are:

  • We added 200,000 new jobs last month. Prior to the 2008 crash, we the standard for a robust economy was 300,000 jobs.
  • Wages are stagnant.
  • The number of workers holding multiple jobs to make ends meet is increasing.
  • The number of people who are underemployed (working part time when they want full time employment, or at a job below their qualifications) is static.
  • Labor force participation remains at or near the low following the 2008 crash.
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Source: Bureau of Labor Statistics

As I’ve stated previously, the unemployment number is an artificial misrepresentation of reality. That number excludes anyone not activity seeking work. After 26 weeks, when unemployment insurance expires in most state, there’s no reason for anyone to report whether they are looking for work or not. These “long term unemployed” aren’t included in the unemployment rate calculation.   That’s why the labor force participation is the more meaningful number. (By the way, other countries don’t misrepresent unemployment the way the US does.)

The real numbers are buried in data reported by the Labor Department.

US non-institutionalized population:          255,155,000
In labor force:                                                  160,494,000 (b)
Unemployed in labor force:                              6,981,000 (a)
Not in labor force:                                             94,657,000
Want job, not in labor force:                             5,420,000 (c)

The unemployment rate as reported is a/b. That’s currently the widely reported 4.3% figure.

The more accurate rate is (a+c)/(b+c).  That’s 7.4%.  And that number doesn’t address under-employment.

A classic case of underemployment is the insurance industry. The industry primarily uses unsalaried “independent” agents (people who get paid on a commission basis) and the washout rate for first year agents exceeds 98%. Yet, until they washout, the government considers them employed.

Why the high washout rate? Well, as a ballpark, with supplemental insurance (accident, cancer, etc.), an agent makes $100 per policy sold. For a first year agent to make an income that exceeds poverty level requires the sale of 150 policies, not impossible, but not easy to do when there are millions of others trying to do the same thing, and a lot of viable prospects already have policies with which they are satisfied.

Another contrary indication about the economy is per capita gasoline use.  It’s down 18% from before the recession in 2008.  Of course there are several other factors contributing to that decline:

  • Improvement in car fuel economy and introduction of hybrid cars
  • Re-urbanization, and millennials move into city centers, with a reduction in car ownership
  • Replacement of car ownership with Zipcars, Uber and Lyft
  • The growing population of seniors who drive less
  • Replacement of face-to-face contact with social media and Skype

However, a key element underlying these factors is that cars have become unaffordable for many consumers. Between car payments, parking and insurance, the cost is simply too high for too many.

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Recovery? What recovery?

Prudence says to prepare for a slowdown in housing and another round of layoffs. 

Unless you see a mushroom cloud on the horizon on some future morning.

In that case, the economy will be irrelevant.

 


Sources:

  1. Pedro Nicolaci da Costa, “The number of Americans holding multiple jobs is sending a ‘troubling’ message,” Business Insider, 8 August 2017. https://www.aol.com/article/finance/2017/08/08/the-number-of-americans-holding-multiple-jobs-is-sending-a-trou/23070442/?brand=finance&ncid=txtlnkusaolp00002412
  2. https://data.bls.gov/timeseries/LNS11300000
  3. Jill Mislinski, “Gasoline Volume Sales and our Changing Culture,” Adviser Perspectives, 24 July 2017. https://www.advisorperspectives.com/dshort/updates/2017/07/24/gasoline-volume-sales-and-our-changing-culture

The Economy: Why Your Life and Government Data Disagree (UPDATE)

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A statistical model is a simplification of reality that focuses attention on a few items that people can control that might make a difference in what the model is trying to predict.

A model isn’t reality. Reality is way more complicated than most people want to consider.

When a model works, it should produce results (forcasts) that make common sense.

When a model doesn’t work, it produces results that contradict real world experience.

That’s where the Federal Reserve is now.

  1. The Fed thinks the economy is picking up. That should mean rising inflation — but it doesn’t, this time. After a spike at the beginning of the year, the consumer price index is showing growth of less than 2%.(1)
  2. The Fed thinks the labor market is strengthening. My the logic of supply and demand, that should mean increasing wages. That’s not really happening either. The current month shows an increase in wages of 2.2% over a year earlier.

Models fail for two reasons:

  1. Some factor or variable is missing that’s impacting reality, or
  2. The data used the calculate the model is wrong.

In this case, the problem might be with both.

Here’s my list of possible problems:

  • Measurement of inflation is wrong.  The CPI as it is currently calculated understates price increases in both healthcare/insurance and food.
    • The government measures food cost changes by looking at prices in the Washington, DC, area. That’s one of the most expensive regions in the US. When you divide an increase by a larger base number, you get a smaller percent change. This procedure is distorted, but it helps to reduce cost-of-living increases for people on Social Security.
    • The government understates the proportion of income going to healthcare and health insurance.
    • Bottom line: Inflation is higher than the government reports.
  • Measurement of unemployment is wrong. The government treats anyone no longer calling or visiting employers to find a job as no longer unemployed. Meaning if you’ve been looking for six months, have called everyone you know and are now puttering making bird houses to sell, you are no longer unemployed. If you’re on Social Security and need additional income to make ends meet, you’re not unemployed. The real unemployment rate is 2x to 3x what the government publishes.
  • The nature of work has changed. Workers are still being moved from higher-paying to lower paying jobs, and the “gig economy” means that jobs are short-term, unstable and include no benefits (e.g., health insurance). Plus more people are working part-time, which means the number of people working two or more jobs as increased. The Fed model doesn’t deal with that.

You may have more thoughts about what’s wrong with the government numbers. Tell me.


Sources:

  1. Lev Borodovsky, “What to Make of Softening Inflation,” The Wall Street Journal, 3 July 2017, B12.
  2. Jeffrey Sparshott, “Jobs Grow but Wages Stay Stuck,” The Wall Street Journal, 8-9 Juy 2017. A1.

Why the US Unemployment Rate is a Nonsense Number

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The US media are agog this morning with news that the unemployment rate has dropped to 4.3%, “the lowest in 16 years.”

Don’t cheer too quickly.

The US doesn’t calculate unemployment the way other countries do. The percentage is based not on total working-age population but on the number of people who are working or “actively looking for work.” In plain English, if you don’t have a job and you haven’t gone on a job interview in the last week, you’re not unemployed.

That definition of unemployment is consistent with the requirement that states have for collecting unemployment insurance. However, if you are out longer than 26 weeks, state unemployment insurance ends and there’s no point in bothering to report that you’ve looked for work in the last week. So you fall into that odd category of “not working and not unemployed.” People in that odd category are excluded from the calculation of the unemployment rate.

So, the way the US does it, you can be unemployed and not counted as unemployed.

That’s how you can have what actually happened this week:

  • The number of people working dropped
  • The new number of new jobs created by employers was “unexpectedly” low
  • The unemployment rate dropped.

The Wall Street Journal noted the anomaly in the numbers. In a truly tight labor market, one would expect to see wages increasing. However, annual wages increases have stayed around 2.5% despite the declining unemployment rate. The job market simply isn’t as good as the unemployment rate might lead you to believe.

In fairness, on the other side, we have people who work for cash that they don’t report to the IRS. That’s the “gray economy.” It includes people who report only a fraction of their income as well as those who report no income (and might even collect unemployment). It also includes income from illegal activities. We don’t know how large the gray economy is, but there is no question that making ends meet on what most states pay for unemployment is next to impossible.

Why would the US track a number that doesn’t mean anything? One possible explanation has to do with the myth that there are people who are lazy and would rather struggle on unemployment than have a decent job. If such people exist, you wouldn’t want to count them as part of the labor force. However, I’ve never actually met anyone like that, have you?


Sources:

  • Eric Morath, “Unemployment Rate Falls to 16-Year Low, But Hiring Slows,” The Wall Street Journal, 2 June 2017.

It’s Disposable Income, Stupid!

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Historically low interest rates have done nothing to grow economies in the US or elsewhere.  Why not?

Economists and politicians are doing everything in their power to avoid looking at the root cause of economic malaise.  They talk about “consumer confidence” as if that can be manipulated by interest rates.

They report statistics that are defined so as to skew perceptions of the reality consumers face.  Neither CPI nor the unemployment rate as reported in the US accurately represent the situation consumers face.  (I’ll talk about both of these problems in detail in future posts.)

The reality is that

(1) Western economies are based on consumer spending, and

(2) Consumers don’t have money to spend.

Consumers are tapped out because

(A) Historically low interest rates have not been passed along to most consumers.  Further, intelligent consumers are afraid of being squeezed when rates rise.  After been burned a number of times, people do learn.  (Unless they are politicians.)

(B) There has been no real effort to reform or reign in costs for healthcare, education loans or housing, and people are being told that they have to save for retirement at a much higher rate than in the past.  There’s no money left over for anything else in most households.

(C) Job downsizing is rampant, especially among those reaching the magic age of 50.  Corporations cut older workers to reduce salary and health costs, and don’t hire older workers for the same reason.  So, right when people are in the final push toward retirement, their income drops by 50% or more.  Historically, that was the age group with the most disposable income to support consumer spending, and now that’s gone.

(D) Regressive tax policies. Reductions in income taxes and increases in gasoline taxes and usage fees shift the tax burden to those who can least afford it.

The Federal Reserve can set interest rates any place it wants, and it won’t materially impact what consumers have to spend.  In this environment, the Fed has lost its ability to steer the economy.  Turn a car’s steering wheel when the car is stopped and tell me what the car does? Nothing.  Without consumer spending to push the economy forward, the Fed can do whatever it wants and nothing will happen.

What can you do?  Until Washington decides to confront reality, plan for a  stagnant economy.   Employees need to plan for what happens when they lose their current job.  In your 40s? You need to plan for a second career.  Employers are going to have to find ways to reduce costs and find growth through innovation.  The same-old, same-old isn’t going to get it done.  Mergers and layoffs simply worsen the situation.