By Marshall Auerback, a portfolio strategist and hedge fund manager. Cros posted from New Economic Perspectives.
Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month. In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House. This isn’t just a “bump,” but a fully-fledged New York City style pot hole.
First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations. In addition the prior two month payroll increases were revised down by -44,000 overall. That’s weak – but not terrible.
Dig a bit deeper into the data and it looks absolutely awful: The household measure of employment fell by -445,000. Okay, it’s a noisy number. But, as Frank Veneroso has pointed out to me in an email correspondence, this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three.
But it gets worse: The work week was down one tenth. Overtime was down one tenth. The labor participation rate at 64.1% was the lowest since 1984. The broad U6 unemployment rate rose from 15.8% to 16.2%. In other words, as Frank suggested to me this morning, “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”
Are there seasonal factors which could explain this? Perhaps, especially in the gap between the BLS and ADP payroll numbers. But as Philippa Dunne of “The Liscio Report” suggested:
After the release, some bulls turned to that old reliable excuse – bad seasonals. According to one analysis making the rounds, had the BLS used last year’s factor – computed, of course, using exactly the same concurrent technique as this year’s factor – the gain would have been 221,000! (Whoever did this made a mistake by comparing the NSA and SA levels for the two months–you have to compare the over-the-month changes.) Still, if you’re going to play this game, you should be consistent, and apply last year’s seasonals to several months, not just one. If you do that, May’s gain of 25,000 would turn into a loss of 19,000, and April’s gain would be a mere 73,000. In any case, why should you do that? The seasonals are recomputed every month based on recent experience and calendar quirks, and should be more aggressive in a recovery. (Hope we won’t be using the trend set in the depth of the recession as the bar going forward.) Also, there is no adjustment to the headline number – the sectors are adjusted separately (96 different industries at the 3-digit NAICS level, to be precise) and the total is the sum of those components. The whole argument is bogus.
Many of us who contribute to this blog have been concerned about these trends for months. We expressed concern that the prevailing deficit hysteria and corresponding cutbacks in government spending (based on a wholly misconceived notion of “national solvency” or “fiscal sustainability” – whatever that means), would engender precisely the kinds of economic conditions that we’re seeing today. Unfortunately, the President, his ineffectual Treasury Secretary and Congress all remain in thrall of Wall Street Pollyannas and mainstream economists, who have continued to predict significantly above trend economic growth quarter after quarter after quarter.
Yet quarter after quarter after quarter growth has come in less than they expected. Why? Because of this persistent tendency to diminish the importance of fiscal policy and an irrational belief in the efficacy of gimmicks such as QE2. The reality is much more grim: Growth has come in at less than a 2% rate in the first and second quarters of this year, and instead of responding to the real crisis of unemployment, our policy makers remain fixated on deficit reduction, and cutbacks in “unsustainable” entitlement programs, in effect withdrawing even more income out of an economy steadily heading back toward the precipice of recession.
And with a deal on the debt ceiling likely to include yet more cuts in government spending, and a major squeeze on real consumer incomes from commodity prices buoyed by speculation to the point of manipulation, the Administration inexplicably continues to forecast, yet again, a resumption of significant growth, because its fundraising buddies on Wall Street continue to reassure them that this will be the case.
Not if we keep proceeding along the path we’re going down. Further declines a la Europe (where fiscal austerity remains fully in swing), gives some clue of where we are heading. Spanish retail sales have been a disaster. They were down 6.6% versus a year ago. That is much worse than the already horrible 4.4% decline during the prior five months. Spain’s unemployment rate is 21%. Greece, which has just implemented yet another round of cuts in government spending, has an unemployment rate above 16% and trending higher. And Italy is finally coming up in the headlines; per-capita income in that country has grown 0% over the last decade. Today the Bank of France put out their monthly business survey:
Industrial activity declined in June due to the weaker performance of the automotive, equipment manufacturing and other industrial goods sectors. The capacity utilisation rate fell. Order books were still considered to be above normal levels but appear to be in a less favourable position than in past months.” That’s the core, not just the periphery. It’s no longer just a problem of the “Mediterranean profligates.
The collective embrace of fiscal austerity has gone beyond perverse. It’s as if Josef Mengele was reborn as an economist, working on some weird new social experiment to inflict the maximum amount of damage on the maximum amount of people. It’s a sick variation on that old joke:
Patient: “Doctor, it hurts when I do this.”
Doctor: “Then keep doing it.”
Twenty eight developed governments have moved to get the oil price down to save the global economic recovery. Professional investors, speculators and fellow traveler manipulators have given these governments the finger over the last week and a half by bidding the oil price up. Given this report and the terrible front end economic data coming out of Europe lately, these governments had better find a way to keep food and fuel prices from taking off once again or its Great Recession Part II right around the corner.
But, hey, what’s the worry? Just a bump in the road! Let’s cut some more government spending (Social Security looks to be the next target) because of course the realization that we are “being responsible” about no longer “living beyond our means” will do wonders to restore confidence and get us out of the ditch in which 95% of the world finds itself. Or so our President will no doubt be telling us if and when he “celebrates” a deal on the debt ceiling. In reality, the only people who ought to be celebrating are the GOP hopefuls in the upcoming Presidential election, one of whom looks increasingly likely to turn Barack Obama into a one-term President.