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.
latest_numbers_LNS11300000_2007_2017_all_period_M07_data

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.

The Latest Bearing Sign for the US Economy

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The Federal Highway Administration reports that highway travel has declined from theben_franklin last quarter of 2016. That fits with weak consumer spending data from the first quarter of this year — but is a surprise to many economists.

Retail sales at gasoline stations are down 4.8% from this time a year ago. Those sales include gasoline, snacks and other items stations sell.

In reporting this, the Wall Street Journal speculates on a number of possible causes, including immigration enforcement.

The Journal doesn’t cite two obvious causes:

  • The decline in tourist visits to the US — down 16% from a year ago, and
  • Uncertainty about healthcare costs that may be causing consumers to cut spending.

The drop-off in tourism affects all industries that serve tourists:

  • Hotels and recreational facilities
  • Transportation, including air, rental cars and gasoline
  • Restaurants

The decline in this industry is a big deal and affects a lot of jobs as well as city and state tax  revenue.

It doesn’t look like consumer spending is going to drive economic growth.  If it doesn’t, is there anything else that can? Historically, the answer largely is no.

Further, Trump has alienated trading partners who might be interested in seeing our economy recover — Mexico, Canada, China, Germany. The downside of “America First” might be “America Alone”.


Sources:

  1. “Americans Tap Breaks on Driving,” The Wall Street Journal, 27-28 May 2017, p. B12.
  2. Kate Taylor, “Tourism in the US has drastically declined since Trump was elected,” Business Insider, 17 May 2017. http://www.businessinsider.com/trumps-rhetoric-hurt-us-tourism-and-retail-2017-5

Disposal Income = (Economic Growth)squared

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That’s not quite Einstein’s formula, but it’s worth remembering.

The front page of the Tuesday Wall Street Journal included a story, “Parents Are Drowning in College-Loan Debt.” (1) Subsequent days brought reports of subpar GDP growth (2), disappointing job creation numbers (4) and very low levels of consumer spending (5). Duh.

People spend money when they have money to spend. Really.

Apparently, that’s a difficult concept for retailers and many government officials. When you

  • Increase health care costs (doing away with subsidies and driving insurers to sharply higher premiums),
  • Increase taxes (doing away with tax deductions for state and local taxes will  wipe out any benefit from tax reform that most people get),
  • Cut back on Federal assistance with student loans, and
  • Get into trade wars that drive up the cost of things Americans buy

you reduce the ability of Americans to spend money on cars, vacations or anything else non-essential that helps to drive the US economy.

The stock market and the economy got a modest boost from the election. Now reality is rearing its ugly head.

  • Layoffs aren’t just for the retail sector; they’re reportedly happening even in big pharma companies like BMS.
  • Auto inventories are piling up and there have been reports of planned factory shut downs this summer.
  • Airline passenger load factors (passengers versus capacity) are down from a year ago.
  • There’s a new crop of college graduates with the wrong skill sets for what business needs.

The unemployment figures are political. The Bureau of Labor Statistics report from 7 April lists 7.2 million people as unemployed. However, there’s another 1.6 million who are unemployed but haven’t looked for work in the last four weeks and who aren’t counted as unemployed. Add them, and the unemployment rate shoots up, not down.

The most recent jobs report showed 98,000 people gaining work in March. Prior to the 2008 recession, the benchmark for a robust economy was 300,000 jobs per month — enough to keep up with growth in the workforce.  The last time the US came close that 300,000 figure was in June 2016. The last time the US surpassed that target was in September 2015.

Disposable income means everyone. It’s the ability of Joe Sixpack to buy a car that drives the US economy. Giving tax breaks to the Walton clan doesn’t help Wal-Mart sell anything.

Are we about to start the next recession?


Sources:

  1. Josh Mitchell, “Parents Are Drowning in College-Loan Debt,” The Wall Street Journal, 25 April 2017, p.1.
  2. Trading Economics, “United States GDP Growth Rate,” 28 April 2017. http://www.tradingeconomics.com/united-states/gdp-growth
  3. US Dept of Transportation, Bureau of Transportation Statistics, “U.S Air Carrier Traffic Statistics through January 2017.” https://www.transtats.bts.gov/TRAFFIC/
  4. US Dept. of Labor, Bureau of Labor Statistics, “The Employment Situation — March 2017,” 7 April 2017. https://www.bls.gov/news.release/pdf/empsit.pdf
  5. Douglas Gillison, “US growth hits 3-year low in Trump’s first quarter,” https://www.yahoo.com/news/us-growth-hits-3-low-0-7-trumps-132946497.html

US Economy: the incredible shrinking farmer

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The US has lost its dominant position in global agriculture. The Wall Street Journal reports that since 1985, the US share of global sales has shrunk from

  • Soybeans: 77% down to 38%
  • Corn: 56% down to 37%
  • Wheat: 30% down to 15%

Brazil alone farms the same amount of land for soybeans as does the US, and has almost matched the US in annual production.

US farmers are now watching weather and crop reports for Brazil in order to time when to sell crops.

While farming is much less important to the US economy than it was in the 1920s, weakness in the sector was cited as a contributor to the Great Depression. It certainly contributes to balance of payments issues today.


Sources:

  1. Jesse Newman and Jacob Bunge, “U. S. Farmers Fall Behind New Powers,” The Wall Street Journal, 11 April 2017, p.1.