Economy adds 228,000 jobs in November, unemployment holds at 17-year-low rate of 4.1%, but wages are stagnant. Why?

December 9, 2017

Yesterday morning the Labor Department announced that the economy added another 228,000 jobs in November and the unemployment rate held steady at 4.1% – the lowest rate in 17 years.  Yet, wages remain stagnant.  Everyone – economists, the Federal Reserve, business analysts – everyone, seems totally baffled by this phenomenon.  Why isn’t this supposedly strong demand for labor beginning to drive up wages as employers compete for workers?

The answer is that the unemployment rate isn’t really 4.1%.  It’s 7.1%.  The Labor Department would like you to forget that the rapid drop in unemployment following the “Great Recession” in 2008 was fueled in large part by its “mysteriously vanishing labor force” trick, claiming that vast swaths of workers were simply dropping out of the labor force, so they were no longer included in the unemployment calculation.  Take a look at the following chart.  It’s a little confusing, so I’ll explain.

Labor Backlog

Look first at the blue and orange lines.  The blue line tracks the actual growth in the labor force due to growth in the overall population.  The orange line tracks the labor force growth as reported by the Labor Department.  Note that in all but three of the past ten years did the Labor Department’s reported growth in the labor force exceed the actual growth.  It usually significantly under-reports that growth.  The result is a growing “backlog” of unreported workers, represented by the yellow line on the chart.  That backlog peaked at 6.4 million workers in 2014 and fell to 5.1 million in 2016 but, so far this year, has actually begun to rise again, hitting 5.2 million workers in November.

Now, look at the green line, which is the growth in the employment level.  If that growth matches the growth in the labor force, then unemployment will hold steady.  If it exceeds that growth, then unemployment will fall.  Compared to the blue line – the real growth in the labor force – it has consistently exceeded that blue line by a small amount each year, beginning in 2011 – the start of the recovery from the “Great Recession.”  But if you compare the green line to the orange line – the fake growth in the labor force reported by the Labor Department – it has beaten that growth by a significant amount every year beginning in 2010.  The result of that growth in the employment level relative to the fake growth in the labor force is the Labor Department’s reported unemployment rate, represented by the purple line.  Note that it has fallen precipitously to its current bogus level of 4.1%.

That’s why wages are stagnant, because there is a huge, unreported backlog of labor force which eagerly snatches up any extra jobs that are created each month.  The labor force is still pretty grossly out of balance with the demand for labor.  Until that backlog of workers is employed, wages will remain stagnant.

Just to drive home the point about how phony the official unemployment rate is, take a look at these next two charts:

Per Capita Employment

Unemployed Americans

The first chart tracks the employment level relative to the total population.  It’s analogous to what the Labor Department reports as the “participation rate.”  As yo can see, it’s been very slowly recovering from the 2008 recession, but still hasn’t gotten back to its pre-recession level in 2007.  (You can see that, even then, it was already plummeting.  I can’t tell you what it was before that since I didn’t begin tracking it until then.)  In November of 2007, per capita employment was at 48.4% and the unemployment rate was 4.7%.  Last month, per capita employment was at 47.2%, but the unemployment rate was 4.1%.  How in the world could unemployment have fallen at the same time that per capita employment fell?  Sounds pretty bogus, doesn’t it?

The second chart above shows a similar phenomenon.  It tracks the number of unemployed, assuming that the labor force grew along with the population.  In November of 2007 there were 7.2 million unemployed workers.  Last month there were 11.8 million.  And yet the unemployment rate fell?  Baloney.

While some see nothing but good news in yesterday’s employment report, I see some warning signs.

  • The employment level grew by only 57,000, far less than the reported growth of 228,ooo jobs.
  • Per capita employment fell slightly for the 2nd month in a row.
  • An honest accounting of unemployment (one that’s honest about growth in the labor force) finds that unemployment rose for the 2nd month in a row to almost 7.2% after reaching a low of 6.8% in September.  That’s a notable jump.

So now you know why wages are stagnant.  The demand for labor hasn’t caught up to the backlog of unreported growth in the labor market.

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Trade Deficit in Manufactured Goods At Record High

December 7, 2017

The trade deficit in manufactured products* rose to a record high of $64.6 billion in October, surpassing the previous record of $63.3 billion set in March of 2015.  Take a look at this chart of our monthly deficit in manufactured goods:  Manf’d Goods Balance of Trade. Exports of manufactured goods haven’t risen since September of 2011 (in spite of Obama’s laughable proclamation in 2010 that we would double exports in five years).  In the meantime, imports have soared by almost $30 billion.  It’s a dubious distinction for President Trump who, during his inaugural address in January, spoke of “…rusted-out factories scattered like tombstones across the landscape of our nation…” and proclaimed that “This American carnage stops right here and right now.”

To be fair, Trump didn’t mean that it would happen on the spot.  His administration has been taking steps to address our trade problem, trying to renegotiate NAFTA (the North American Free Trade Agreement with Mexico and Canada), imposing tariffs on some products and, most recently, blocking China from rising to “market economy” status with the World Trade Organization.  Aside from the work on NAFTA, which may conclude soon with the U.S. walking away from that ill-conceived agreement, the rest amounts to little more than the token steps taken by previous administrations.  The net result is that the plight of the manufacturing sector of our economy grows steadily worse.

Enough is enough.  It’s time to walk away from both NAFTA and the World Trade Organization and begin implementing tariffs.  Any tariffs would be better than our current trade policy, but smart tariffs that address the real cause of our trade deficit – attempting to trade freely with badly overpopulated nations characterized by bloated labor forces and anemic markets – would be much more effective.  As an example, it was reported yesterday that Canada, angered by their treatment in the NAFTA negotiations, has canceled an order for Boeing-made fighter planes.  Why are we treating Canada this way?  Sure, we have a trade deficit with Canada, but it’s due entirely to oil.  In 2016, our biggest trade surplus in manufactured goods, by far, was with Canada – $44 billion, more than double any other country.  Canada is our best trading partner.  Why anger them?  Why not tell Canada that our beef is with Mexico, with whom we had a trade deficit in manufactured goods of almost $68 billion in 2016 – our third worst behind China and Japan – and that they’ll get just as good a deal from the U.S. without NAFTA?  Slap the tariffs on Mexico, not Canada.

We could completely wipe out our trade deficit in manufactured goods by applying tariffs to only ten countries – China, Japan, Mexico, Germany, Ireland, Vietnam, South Korea, Italy, India and Malaysia.  These ten countries, all more densely populated than the U.S. (all but Ireland are many times more densely populated), account for all of our trade deficit in manufactured goods.  While we have defiicts with others, they are much smaller and are offset by surpluses with the rest of the world.  The point is, we don’t have to anger the entire world with tariffs – just ten out of the more than 220 countries in the world.  So let’s be smart about how we do it, but the time has come, Mr. President.  Stop delaying the inevitable.  Do what you know needs to be done.

* The trade deficit in manufactured products is calculated by subtracting services, trade in petroleum products, and trade in foods, feeds and beverages from total trade, as reported by the Bureau of Economic Analysis in its monthly reporting of international trade.


Ending NAFTA Would Hurt U.S.?

December 1, 2017

https://www.reuters.com/article/us-nafta-economy/ending-nafta-would-hurt-growth-competitiveness-of-united-states-canada-report-idUSKBN1DR1D4

The above-linked story appeared a few days ago, warning of a 0.2% “hit” on U.S. GDP (gross domestic product) if the U.S. walked away from NAFTA, the North American Free Trade Agreement, which has resulted in a huge trade deficit with Mexico.  The argument is that the U.S. will be less competitive with the rest of the world without access to the cheap labor in Mexico.  Making autos and parts in the U.S. will raise costs, making American autos more expensive relative to imports from Japan, South Korea and Europe.

That’s probably true, but the answer to that is fairly simple.  Raise tariffs on products from those regions as well.  The trade deficit has never been about “competitiveness.”  Rather, it’s the result of attempting to trade freely with badly overpopulated nations who come to the trade table with a gross over-supply of labor and markets plagued by low per capita consumption.  I’ve always maintained that a piece-meal approach to addressing this problem can never work.  Tariffs need to be applied universally to every country whose emaciated markets are out of balance with their over-supply of labor.

One might question whether this will result in higher prices for American consumers.  Sure it will.  But the explosion in the demand for labor to make all these products in the U.S. once again, as we did decades ago, would drive wages higher even faster, making products more affordable in spite of higher prices.

President Trump has long promised to “put America first” in trade by withdrawing from NAFTA and even the World Trade Organization, and by then levying tariffs as necessary to restore a balance of trade.  During his recent trip to Asia, he made it clear once again that that will be our approach to trade from now on.  This is exactly what’s needed to halt the parasitic drain of the life blood from our economy.  The time has come, Mr. Trump.  Do it.