Disappointing August Employment Report

September 5, 2014


After a couple of months of halfway-decent employment reports, the one released this morning by the Bureau of Labor Statistics was a disappointment, and the details are even more disappointing than the headline numbers.

According to the “establishment survey” portion of the report (which yields the headline number), the economy added 142,000 jobs – far fewer than the 200,000-plus jobs that analysts expected.  What’s worse is that, according to the household survey, the employment level (analagous to the establishment survey) rose by only 16,000.  Also, the June and July data from the establishment survey were revised downward by 28,000 jobs.

Despite the tiny gain in employment level, the “unemployment rate” declined again to 6.1%, thanks to the same old trick of claiming that the size of the labor force declined again by another 64,000, even though the population grew in August by 220,000.  As a result, the unemployment rate “detachment from reality index” (the difference between the official U3 unemployment rate and a more realistic figure that grows the labor force in proportion to population growth) rose again and remains at a near-record level.  Here’s the chart:  Detachment from Reality Index.

Because of the near-flat employment level while the population grew, the number of unemployed Americans rose by 96,000 in August:  Unemployed Americans.

And per capita employment fell for the first time in four months:  Per Capita Employment.

Both the number of unemployed Americans and per capita employment are at the same level as in June, 2009, a year-and-a-half into the “Great Recession.”

Manufacturing employment actually lost 1,000 jobs in August.

The average workweek was unchanged for the sixth consecutive month.  (Not a sign of improving labor demand.)

It’s beginning to look like the previous couple of months were a “flash-in-the-pan” catch-up period following the dismal, weather-impacted first quarter.  The economy is settling back into a low-to-no-growth mode that has characterized most of the “recovery.”  As I claimed would happen in my previous post, could this be the beginning of a slow slide back into recession?

Stage is Set for Next Recession*

September 3, 2014

The economy has been riding a crest as of lately. It should. Since the last recession began in 2008, between deficit spending by the federal government and monetary expansion by the Federal Reserve, over $10 trillion has been pumped into the economy.

But that’s come to an end. The Federal Reserve’s QE-whatever program has tapered to nearly nothing and ends in October. And perhaps more importantly, federal deficit spending has slowed to the point where it exactly matches the trade deficit. Check this chart of the growth in the national debt vs. the cumulative trade deficit:  Debt-Trade Deficit. The significance of this is that every time – every time – the growth in the national debt slows to the point where it begins to lag the trade deficit, the economy lapses into recession.

To understand why this happens, draw a line around the economy. Then add up the money flows that cross that line. Exports put money into the economy while imports take money out, meaning that a trade deficit is a net drain on the economy.  Taxes take money out of the economy while federal spending puts money back in.  So deficit spending (putting more money back into the economy than is taken out through taxes) has a stimulative effect on the economy while running a budget surplus is a net drain on the economy.  (The sustainability of deficit spending and the long-term effects are a whole separate discussion.)  Foreign investment puts money into the economy while American investment takes money out. In this case, net investment has consistently been a huge drain on the economy for decades as corporations have sunk all of their money into emerging foreign markets for a long time.

Add all of these up and we are now entering a phase where there is a net drain of money out of the economy. The problem is that economists and politicians lean on deficit spending to pull us out of recessions, but then grow nervous as the national debt soars. Eventually, the deficit spending has its predicted effect and the economy begins to recover.  Americans grow more confident, open their wallets, and take on more debt.  Federal revenue grows as incomes as corporate profits rise, and federal spending moderates as the need for social safety net spending (like unemployment benefits) decline, and as politicians grow eager to show fiscal restraint.

That’s all fine, but what economists and politicians alike fail to recognize is that, over the long haul, it’s impossible to balance the federal budget without first restoring a balance of trade. Otherwise, it’s inescapable that the net drain of money from the economy will drive it into recession.

It happened at the end of the Reagan-Bush era in the early ’90s.  It happened again at the end of the Clinton administration, when Clinton balanced the budget while simultaneously granting most-favored-nation status to China and sending our trade deficit soaring.  It happened again at the end of the “W” administration.

And now it will happen to President Obama.  He could avoid it, but he won’t.  He could boost spending, but that would forever label him as a reckless spender and give a boost to Republican candidates running on a platform of fiscal restraint.  Besides, Republicans in Congress wouldn’t stand for it, even if he wanted to do it.  Instead, he’ll fall into the same trap as his predecessors, hoping that history will remember him as one who did what needed to be done to end the recession, put the economy on solid footing and then restored fiscal sensibility – an economic trifecta that hasn’t happened before and won’t happen now because it can’t happen.

It may take a year or two for the net drain of money from the economy to bite, but it’s coming, so get ready.

* * * * *

* All “recessions” are determined by macro-economists to occur when the macro-economy, as measured by GDP (gross domestic product), shrinks for two consecutive quarters.  But there are actually two different kinds of such recession – the one we traditionally think of as being bad, and another kind that we’ve never witnessed that is actually beneficial.  The latter occurs when the decline in GDP is accompanied by a decline in the population when the population is above its optimal level, as it is in the U.S. and throughout most of the world.  In that scenario, the decline in population actually unleashes pent-up per capita consumption that has been strangled by over-crowding.  The decline in GDP is slower than the decline in population, resulting in an increase in demand for labor and rising incomes.  This is the recession that we’ve never seen before but should all be hoping for.

Manufactured Exports Lag Obama’s Goal by Record Margin in June

August 11, 2014


Last week the Bureau of Economic Analysis announced that the U.S. trade deficit fell by $3.1 billion to $44.1 billion.  It was the second monthly decline in a row, but there’s little evidence of a long-term improving trend.  Check out the chart:  Balance of Trade.  The general improving trend that was evident for a couple of years, beginning in early 2012, ended early this year when the rapidly worsening deficit in manufactured goods swamped a decline in oil imports.  Though the deficit in manufactured goods improved by $3.0 billion in June, you can see from the following chart that a quickly worsening trend remains in place:  Manf’d Goods Balance of Trade.

Most of the improvement in the manufactured goods deficit was driven by a decline in imports.  (Such declines are usually followed by a big jump the following month.)  But the improvement was also helped by a small $0.8 billion rise in exports.  In January of 2010, President Obama set a goal of doubling exports within five years.  Though he wasn’t specific about the type of exports, it’s reasonable to believe that the plan was for manufactured exports to contribute their fair share toward that goal.  It didn’t happen in June.  The $0.8 billion rise was less than half of the $1.8 billion it needed to rise in order to keep pace with the president’s goal.

Nothing new there.  That’s been true nearly every month for the past three years.  Exports have risen by only $0.7 billion since March of 2012, while they needed to rise by $42.4 billion to keep pace with the president’s goal.  The result is that manufactured exports now lag the president’s goal by $45.9 billion – a record shortfall that exceeds the entire trade deficit.    Here’s a chart that shows both manufactured exports and imports:  Manf’d exports vs. goal.

Contrary to all the hype about a “manufacturing renaissance,” the decline of the manufacturing sector of our economy has continued unabated during the Obama administration.  It’s not a surprise.  The president has ignored the import side of the trade equation – the side he has the power to affect if only he had the will and courage to do so, and instead took the chicken’s way out, setting a goal for exports, over which neither he nor anyone else in the U.S. has any control, since it’s determined solely by foreign demand.  In effect, he washed his hands of U.S. trade policy, but did it in a way that he hoped would give the appearance of being a champion for American workers.  Shame on him.



Why Incomes are Stagnant or Declining

August 5, 2014

OK, it’s time for something completely new and original.  This began with the release of 2nd quarter GDP (gross domestic product) a couple of weeks ago.  The Bureau of Economic Analysis (BEA) announced that the economy grew at a 4% annual rate in the 2nd quarter – the most impressive economic performance of the supposed recovery from the deep recession of a few years ago.  Of course, that slightly bigger pie is now shared by slightly more people – 1% more each year – so in per capita terms the economy grew by 3%.  But even that is decent growth.  Here’s a chart of real (adjusted for inflation) per capita GDP:   Real Per Capita GDP.  Looking at the chart, you can see that per capita GDP has recovered, but is barely above the level of 6-1/2 years ago.

Last week, the BEA also announced that the economy added more than 200,00o jobs in July, adding to a string of such results.  But the report also noted that wages barely budged in July, rising by only a penny per hour.  When you consider that the top 1% of wage earners are rolled into that data, you realize that wages for 99% of us are in decline.

What gives?  How is it that wages aren’t rising in an economic environment of 4% growth and consistent monthly job gains of 200,000 plus?  It’s a question that has vexed economists and the Federal Reserve.

It boils down to a question of what drives the demand for labor.  Growth in per capita GDP should translate into growth in the demand for labor.  But there’s another factor at work that I touched on in Five Short Blasts but I’ve barely mentioned since – productivity growth.  So I thought it would be interesting to go back and calculate the annual rate of growth in per capita GDP, minus the rate of growth in productivity.  Although GDP and population data go back further, productivity data is only available as far back as 1947.  So that’s the base year for my data, and is assigned a value of “1.”  Each succeeding year, that figure is reduced or increased, depending on whether the combination of per capita GDP growth and productivity growth yielded a slightly positive or negative percentage change in this “demand for labor.”  Here’s the chart of the results:  % Change in GDP per capita minus productivity.

From 1947 until 1963, there was a general downward trend.  Then, over the next 36 years, an upward trend reversed the losses of the previous 16 years, reaching a peak in 1999 at a level clearly above that of 1947.  But what really blew me away was what happened next.  Beginning in 2000, this figure fell like a rock and, in ten short years, wiped out all of the gains of the previous 36 years, and continued falling to a record low reached in 2010.  Since then, it’s begun to recover, but ever so slowly.  Last year it was still below the previous low reached in 1963.

Now this is a piece of data that rings true.  Doesn’t it feel like what’s been going on?  Remember the “jobless recovery” for which President Bush took so much criticism?  This shows you that it was real.  And it shows you just how much damage the recession that began in 2008 did to the economy.

What’s driving this decline?  The growth in per capita GDP has fallen dramatically since 2000.  It’s no longer keeping pace with the growth in productivity.  To illustrate the point, here’s the average change in per capita GDP by decade:

  • 1950’s = 2.43
  • 1960’s = 3.17%
  • 1970’s = 2.17%
  • 1980’s = 2.20%
  • 1990’s = 2.21%
  • 2000’s = 0.62%
  • 2010-2013 = 1.50%

Meanwhile, productivity growth has remained fairly constant at around 2.2%.

This slow-down in per capita GDP is even more remarkable when you consider the extraordinary measures that have been taken in the last few years to prop up the economy.  Since 2000, the national debt has more than tripled from $5.7 trillion to over $17 trillion today.  And, in the past few years, the Federal Reserve has poured in an additional $4 trillion.  That’s over $15 trillion of “stimulus” since 2000.

One has to consider the possibility that the inverse relationship between population density and per capita consumption is at work here, and we’ve reached the tipping point where leaning on population growth to fuel the economy is backfiring and eroding per capita GDP.


August 1, 2014


The Bureau of Labor Statistics (BLS) announced this morning that the economy added 209,000 non-farm jobs in July (according to the establishment survey) while the unemployment rate ticked up to 6.2% (according to the household survey).  Regarding the latter figure, the employment level rose by 131,000 while the civilian work force grew by 329,000.  In reality, population growth figures indicate that the labor force actually grew by 122,000.  The result is that per capita employment (or employment to population ratio) held steady at the depressed level of 45.9%.  Here’s the chart:  Per Capita Employment.

The jobs picture has definitely brightened in the past few years, but not as much as we’re led to believe.  While official BLS figures would have us believe that unemployment has fallen to 6.2% from a recession-high of 9.9% in April of 2010, those figures are skewed lower by claims that people have simply dropped out of the work force.  A more accurate reading, one that grows the labor force in proportion to the growth in the population (after all, people do need a source of income), shows that unemployment has fallen to 9.6% from a recession high of 11.9% in June, 2011.  The difference is what I call the “detachment from reality index.”  Here’s a chart of how the government’s figures have become more detached from reality since the onset of the recession, obscuring just how bad the employment picture has become:  Detachment from Reality Index.

There’s been a lot of excitement about the brisk pace of economic growth in the 2nd quarter, and much of that growth is real.  But it’s also a snap-back from the steep decline in GDP caused by the harsh winter in the first quarter.  Already, economic data is beginning to indicate that the 2nd quarter was a flash-in-the-pan, catch-up quarter and that growth is beginning to flag.

The other day, Reuters ran an article about the Federal Reserve being puzzled by stagnant wages, given the (supposed) growth in jobs and decline in unemployment.  (I tried to resurrect that article, but now can’t find it.)  The answer lies in examining the growth in GDP vs. the growth in population and  rising productivity.  More on that in an upcoming post.

“Scarcity” at Root of Political Polarization?

July 23, 2014


The above link will take you to a story that aired on the PBS Newshour on July 18th.  It’s a story about the political divide in Wisconsin and is followed by analysis by David Brooks (conservative and Wall Street Journal columnist) and Mark Shields (liberal commentator).

Brooks’ analysis was particularly poignant.  He explained that he once believed our polarization was a top-down, Washington-based phenomenon, but now sees it as a bottom-up movement, driven by “scarcity.”

The significance of this is that “scarcity” is a term used by economists, primarily to deride those concerned with overpopulation as having a “scarcity mentality.”  It’s an alternative to “Malthusian,” lest the latter term become trite.  You see, economists don’t believe in the concept of “scarcity.”  Man is clever enough to stretch resources and always assure that there is enough for all as our population continues to grow, say economists.

So it’s significant that someone of Brooks’ gravitas sees actual scarcity in our economy that is the driving force behind our polarization.  It’s not a scarcity of natural resources but a scarcity of jobs, a scarcity of income, a dwindling of resources needed to provide adequate health care and of government resources necessary to provide a social safety net.  Such scarcity now pits Americans one against another as they compete for these ever-more-scarce financial resources.  Each side now sees the other as a threat instead of as fellow Americans working toward a common goal.  The haves see the have nots as a threat to strip them of some of their wealth through redistribution schemes.  The have nots see the wealth of the haves as ill-gotten gains that have been taken from them unfairly with the collusion of their conservative politicians.  With each side  perceiving themselves as having their backs against the wall, neither is willing to compromise.  We’ve become like an overcrowded cage full of  animals where all was peaceful until the zookeeper began cutting back on the food thrown into the cage.

This scarcity is the direct consequence of the rising unemployment and worsening poverty that’s inescapable as overcrowding drives down per capita consumption and, with it, employment.  And it’s not merely a national phenomenon, but a global one, as labor forces continue to swell and compete for ever-more-scarce manufacturing jobs just to keep themselves out of poverty.

If Brooks is right (as I believe he is) that scarcity lies at the root of our political polarization, then the polarization and gridlock in Washington is only going to get worse.

Trade Deficit in Manf’d Goods Worsens Again in May

July 9, 2014


I’m still catching up from last week.  On Thursday the Bureau of Economic Analysis announced that the trade deficit in May moderated slightly to $44.4 billion.  (A link to the report is provided above.)  But the real news is that the deficit in manufactured goods set yet another record – $49.5 billion.  Here’s the chart:  Manf’d Goods Balance of Trade.

Manufactured exports rose slightly in May, but not enough to keep pace with the President’s goal of doubling exports by 2015.  Manufactured exports lagged that goal in May by a record margin of $45.0 billion.  In fact, manufactured exports haven’t risen in the past 26 months.  Here’s the chart:  Manf’d exports vs. goal.

Even if we give the president the benefit of the doubt and assume he meant exports of all goods and services, that figure also lagged the president’s goal by $66.3 billion.

Remember the trade deal that President Obama signed with South Korea two years ago, which he hailed as a “big win for American workers?”  Our trade deficit with South Korea set another record in May:  $2.7 billion.  In 2011, our trade deficit with South Korea was $13.2 billion.  Last year it was $20.7 billion.  So far, 2014 is on track to handily beat that record.  Thanks, Mr. President!  Please, if you’re not going to do something to restore a balance of trade, stay out of any further trade negotiations unless you hire someone competent in the subject.

We keep hearing talk of a “manufacturing renaissance” in the U.S., but the facts speak otherwise.  Our trade policy continues to drain ever more from the life of the manufacturing sector of the economy.  Trade policy is just one element of a clear pattern that has emerged over the course of the Obama presidency.  It’s a pattern of zero follow-through.  He very publicly proclaims lofty goals and draws red lines, but then sits back and does nothing toward accomplishing those goals.  He’s become the quintessential “bench-warmer,” filling the seat in the White House until he can be replaced, hopefully by someone with some drive and some competence.


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