The Federal Reserve Thinks Unemployment Is Too Low!

September 13, 2018

https://www.reuters.com/article/us-usa-fed-rosengren/fed-says-it-whipped-u-s-unemployment-maybe-too-well-idUSKCN1LT0F0

As reported in the above-linked Reuters article, Boston Fed bank president Eric Rosengren worries that the Federal Reserve has been “too successful” is lowering unemployment.  He explains:

“The recurrent pattern (of recessions) was one where the tightening of monetary policy was expected to slow the economy down gently…to full employment,” Rosengren and three Boston Fed co-authors noted. But “Once the unemployment rate starts to rise by a relatively modest amount, dynamics take hold that tend to push the economy into a recession.”

The Fed considers an unemployment rate of 4.5% to represent “full employment.”  The current rate of unemployment, as reported by the Labor Department on Friday, is 3.9%.  So the Fed worries that there’s no place for the unemployment rate to go but up, and even a small rise could start a recessionary downward spiral in the economy.

This is ridiculous for two reasons:

  1.  The Fed ignores its own role in choking off the economy and precipitating recessions by constantly tightening monetary policy (i.e., raising interest rates) as unemployment drops, and
  2.   The Fed has bought into bogus employment figures propagated by the Labor Department in an effort to stabilize confidence in economic policy in the wake of the Great Recession.

Regarding point 2 above, consider the following:

  • In November of 2007, just before the collapse of Lehman Bros. triggered the Great Recession, 48.4% of the U.S. population was employed and the unemployment rate stood at 4.7%.
  • As of August of 2018, the U.S. population has grown by 25.6 million people.  But, according to the Labor Department, the work force has grown by only 7.9 million workers, and the nation’s employment level has grown by only 8.9 million workers.  And in August of this year, only 47.4% of the population was employed.  Yet, thanks to the unnaturally low rate of growth in the labor force reported by the Labor Department, instead of rising, official unemployment has fallen to 3.9%
  • An honest accounting of the labor force that grows proportionately with population growth would produce a current  unemployment rate of 6.8% – nowhere close to “full employment.”
  • In spite of the decline in unemployment, wages have barely risen, confounding economic experts.  They haven’t risen because unemployment is still quite high – not anywhere close to being low enough to put upward pressure on wages.

Even the definition of “full employment” used by the Fed – 4.5% – is subject to debate.  If that level is “full employment,” how do you explain that some states and some countries routinely operate well below that level?  During World War II, unemployment fell to approximately 1% in the U.S.

The Federal Reserve is making a big mistake with its program of hiking interest rates just because the economy is doing better.  President Trump has been right to criticize its policies.  How can he “Make America Great Again” when the Fed’s policy is to “Let America Get Just a Little Bit Better – But Not Much?”

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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.


Nearly 600,000 Jobs Lost in a Week

January 22, 2009

http://www.reuters.com/article/ousiv/idUSTRE50L36C20090122

The Labor Department reported today that nearly 600,000 people filed for unemployment last week.  That’s an annual rate of over 30 million workers losing their jobs – over 20% of the work force. 

I thought you might be interested in some anecdotes from the state of Michigan.  It was reported yesterday that in one month, from November to December, unemployment in Michigan rose by a full percentage point to 10.6%.  And it seems that the unemployment offices have been completely overwhelmed.  Phone lines are jammed.  The web site has crashed from overuse.  People are forced to take their questions directly to the unemployment office.  The local news showed a line at one such office that appeared to stretch for a full city block.  I’m reminded of pictures of the unemployed waiting in lines during the Great Depression.  And many of these are highly skilled people.  One guy interviewed had two master’s degrees and worked in an IT department.  Yet, some politicians still offer up “job retraining” as the solution.  Retraining to do what?  Where is the huge demand for labor that’s going unmet because Americans are too uneducated to fill the positions?  The only retraining needed around here is how to fill out unemployment application forms. 

I’m also reminded of a visit to Michigan by Mitt Romney during the Republican primary campaign.  He told Michiganders condescendingly that we’re in a “one-state recession.”  Well, it isn’t a one-state recession any more, is it?  It makes you wonder whether the state of Michigan is the canary in the coal mine for the U.S. economy.  If we are, the rest of you had better hunker down because it’s going to get much, much worse!


Job Losses Mount as Trade Deficit Wreaks Havoc on Economy

November 7, 2008

On Friday, November 7th, the Labor Department announced the loss of another 240,000 jobs in October.  Buried in the announcement was an upward revision of another 179,000 jobs that had been lost in August and September.  (Makes you wonder if October’s loss will be revised up to 400,000 next month, doesn’t it?)  The running total for the year is now 1.2 million jobs lost. 

Not mentioned in these figures is the fact that the labor force grows by about 150,000 per month, due to growth in the overall population.  Because of this growth in the labor force, during the January-October time frame, the economy would have needed to add 1.5 million jobs just to hold unemployment steady.  So add these 1.5 million new workers to the 1.2 million jobs lost, and you have a shortfall of 2.7 million jobs.  That’s about 1.8% of the labor force, which explains the increase in unemployment to 6.5% during the year. 

But, of course, that 6.5% unemployment figure is a gross understatement.  When 480,000 workers file for first time unemployment benefits every week, an annual rate of 25 million workers, or 17% of the labor force, it makes the official unemployment rate look pretty suspect, doesn’t it? 

And it’s all due to the trade deficit.  American assets have to be sold off to finance the deficit, the 5% of the economy that we give away for nothing in return.  In the ’90s, stocks were the investment of choice for our foreign creditors, fueling a stock market bubble.  When that bubble burst, all of those trade dollars had to find a new home.  And “home” is exactly where they went.  The government saw the housing sector as the next best way to keep those trade dollars coming.  Lower lending standards led to a boom in mortgages, which were then repackaged and sold to foreign investors as mortgage backed securities. So the stock market bubble gave way to the housing bubble.

Now our foreign investors are really angry have grown leery of any and all American investments, and the credit needed to keep our debt-addicted economy going has dried up.  Still the trade deficit marches on, sapping another $2 billion from our economy every day, and now the government is forced to simply print money to keep the economy going. 

Nearly every day, I read reports from around the world of other nations experiencing a trade deficit.  Often they are nations who scoff at us on the rare occasion that we express even the slightest concern about our own huge trade deficit.  In every case, the articles report alarm among  their economists and government leaders.  It seems that every nation on earth except the U.S. understands just how damaging a trade deficit can be.  When it comes to economics, American economists and leaders may just be the dumbest people on earth.


7th Straight Month of Job Losses in July

August 4, 2008

The Labor Department released its employment report on Friday for the month of July and the numbers were grim once again. Another 51,000 jobs were lost from the economy, inluding losses in manufacturing, construction and services. This is the seventh straight month of job losses, bringing the total for the year to 463,000.

Not mentioned in the report is the fact that, thanks primarily to our extreme rate of legal immigration – a policy used by the government to keep labor in a state of over-supply and keep wages depressed – the labor force grew by about 150,000 per month. So, year to date, our economy is now 1,513,000 jobs behind where it needs to be to keep unemployment from rising. This has added about 1.0% to our unemployment rate, which jumped to 5.7%. (It’s actually much worse, but the government uses gimmicks to make the number more palatable.) Separately, the government reported that weekly jobless claims soared to 448,000. Multiply that by 52 weeks and you have an annual rate of 15.5% of the labor force filing for unemployment every year – almost one out of every six workers. That’s a much more accurate picture of how bad job prospects are.  Take a look around at the five people working around you at work.  Odds are, one of you will be visiting the unemployment office during the next twelve months!

As our population continues to grow beyond the optimum level – the level at which per capita consumption begins to decline out of the need to conserve space as people are forced to crowd together (as explained in Five Short Blasts) – matters will only get worse. Unemployment will continue to rise and wages will fall further behind the cost of living. Hope for a better life for your children and grandchildren becomes more of a fading memory.

If you’re worried about the direction of our economy – as everyone should be – you really need to read my book, Five Short Blasts, if you haven’t already.

With the auto manufacturing sector now in a state of total collapse and construction declining further, look for more jobs losses in August and another rise in unemployment to at least 5.8%.


More Job Losses in June

July 9, 2008

http://www.reuters.com/article/companyNewsAndPR/idUSN0345446720080703?sp=true

The Labor Department released its employment report on Thursday and the numbers were grim once again. Another 62,000 jobs were lost from the economy and, were it not for the government adding 29,000 jobs, the picture would have been even worse. This is the sixth straight month of job losses, bringing the total for the year to 438,000. The job loss figures for April and May were also revised upward.

Not mentioned in the report is the fact that, thanks primarily to our extreme rate of legal immigration – a policy used by the government to keep labor in a state of over-supply and keep wages depressed – the labor force grew by about 150,000 per month. So, year to date, our economy is now 1,038,000 jobs behind where it needs to be to keep unemployment from rising. This has added about 0.7% to our unemployment rate, which held steady at 5.5%. (It’s actually much worse, but the government uses gimmicks to make the number more palatable.) Separately, the government reported that weekly jobless claims soared to 404,000. Multiply that by 52 weeks and you have an annual rate of 14% of the labor force filing for unemployment every year – one out of every seven workers. That’s a much more accurate picture of how bad job prospects are.

As our population continues to grow beyond the optimum level – the level at which per capita consumption begins to decline out of the need to conserve space as people are forced to crowd together (as explained in Five Short Blasts) – matters will only get worse. Unemployment will continue to rise and wages will fall further behind the cost of living. Hope for a better life for your children and grandchildren becomes more of a fading memory.

If you’re worried about the direction of our economy – as everyone should be – you really need to read my book, Five Short Blasts, if you haven’t already.

The following are high-lights from the article:

U.S. employers cut workers for a sixth straight month in June for the longest such streak since 2002 and the country’s vast service sector unexpectedly contracted, underscoring the economy’s frailty.

The Labor Department said on Thursday that 62,000 nonfarm jobs were shed last month, bringing the number of jobs lost this year to 438,000 as a housing market crash chilled growth.

… A separate report showed new applications for jobless benefits hurdling to 404,000 last week, a level associated with past recessions and that suggests the labor market continued to weaken.

… Downward revisions to both May and April’s jobs count took the combined losses for those two months to 129,000, compared with an early estimate of 77,000.

In addition, the creation of 29,000 government jobs helped support payrolls. Private-sector employment actually dropped by 91,000.