This morning the stock market is soaring on news that the economy added 165,000 jobs in April (slightly more than expected) and unemployment fell to 7.5%. These aren’t stellar numbers. The jobs added barely exceeded the rate necessary to keep pace with population growth, and the unemployment rate’s “detachment from reality” index (more on this later), inched down only slightly from the record high set in March.
You have to wonder: is Wall Street reacting so positively because the news is so good or because it isn’t? What’s really been driving this bull run on Wall Street is the Federal Reserve’s quantitative easing policy, pumping trillions of dollars into the markets. And the Fed has tied the end of that policy to an unemployment rate of 6.5%. Is Wall Street cheering the fact that the official unemployment rate crept down by 0.1% in April, or that it didn’t drop more?
Speaking of the unemployment rate – what’s known as “U3” – it’s a calculation of the “employment level” divided by the “civilian labor force,” factors determined by the monthly household survey conducted by the Bureau of Labor Statistics. It’s a simple matter to make the unemployment rate look lower than it really is by claiming that workers have dropped out of the labor force and given up looking for work. Of course, that’s nonsense. Whether they’re looking for work and not finding it, or have given up looking because there’s none to be found, they’re just as unemployed. A more accurate gauge of unemployment – what I call “U3a” – holds the work force at a constant percentage of the population. After all, everyone needs a source of income.
Over the past two months, the “civilian labor force” has declined by 290,000 while, at the same time, the population has grown by 350,000. This kind of creative accounting has resulted in an unemployment rate that is ever more detached from reality. Here’s a chart of these unemployment rates: Unemployment Chart. And to drive home the widening gap between U3 and U3a, this month I’m introducing a new chart, what I call the unemployment “detachment from reality index” – the difference between U3 and U3a. Here’s the chart: Detachment from Reality Index. As you can see, it’s barely off from the record set last month. Instead of 7.5% unemployment, a more realistic figure is 10.5%.
The economy isn’t getting better. If anything, it may be getting worse, as all of the other economic indicators have been telling us. Only an hour-and-a-half after this unemployment report was published, the monthly report of factory orders fell by 4%, corroborating other reports that show a slowing manufacturing sector.
Even this supposedly rosy employment report had some bad news. No jobs were added in either manufacturing or construction in April. And the average workweek slipped by 0.2 hours.
Don’t buy all the economic hype. Unemployment isn’t getting better. Our trade policy is as broken as ever and rampant immigration is aggravating overcrowding and declining per capita consumption. I doubt that this illusion can be maintained much longer.