WhatTheyThink    WhatTheyThink.com    Blogs    PrintPlanet


Is the Economic Situation Starting to Crack Again?

By on April 10th, 2013

Last week’s unemployment report was like one of those snacks that looks great when it’s on the shelf in the store, but when you open the package at home, it’s quite different. The picture on the package looked tasty and appetizing, the stuff on the inside was stale and tasteless. The decrease in unemployment to 7.6% was just like that package. Then we looked inside and saw that the labor force shrunk by -496,000 workers, the number of employed workers fell by -206,000. Remember, the formula for the unemployment rate is

100% – (number employed) / (number of people in the workforce)

The workforce is defined as the number of employed persons plus the number of unemployed job seekers.

So, the number of employed workers fell but the number of job seekers fell more. That made the denominator shrink, so the unemployment rate calculation improved.

The Bureau of Labor Statistics has two employment surveys. You may have heard that employment went up by +88,000. That’s from the payroll survey; the numbers mentioned above are from the household survey. Think of it this way: the payroll survey is the count of workers who get W-2s. The household survey covers those workers and freelancers who get 1099s, proprietors and partners, and others, who submit their income on Schedule C and similar pages of their tax returns. The household survey is broader, and that’s why it’s used to calculate the unemployment rate.

The table below compares the latest unemployment report with that of January 2008. The recession was declared by the academic panel that concerns itself with such matters as beginning in December 2007. The BLS updates its population estimates every January, so it is judicious to use those 2008 data to represent that moment because it is just a month after the recession began and would include corrections to data that they had been working on in all of 2007. (click to enlarge; it may also be worthwhile to print out so it is easier to follow the discussion in the rest of this blogpost).

unemployment analysis 041013

Since January 2008, employment is down by nearly -3.1 million, and the labor force has risen by almost +1 million workers. The participation rate is down by 2.9 percentage points. The number of unemployed workers has increased by about +4 million workers, with the unemployment rate moving from 5% to 7.6%. Full employment is generally considered to be between 4% and 6%. The number of long-term unemployed (27 or more weeks) has more than tripled, moving from about 1.4 million workers to more than 4.6 million. They went from 18% of the unemployed to almost 40%, and are almost 80% of the total increase in the unemployed workers.

The BLS offers a wider definition of unemployment that includes discouraged workers, referred to as “U-6.” That has increased from 9.2% to 13.8%. Finally, the number of persons no longer in the workforce has increased by 11.4 million. Even the U-6 calculation drops unemployed workers out of its estimate eventually, and this appears to be what is happening.

This slow economic period has lasted a long time, and there are many analysts who believe that the economy never ended its recession. The date of a recession is set at the last high of economic measures like GDP and employment; they do not use just one factor, as recession dating is by consensus of an academic panel that assesses many factors. When the economy reaches its lowest point, that is the end of the recession and the start of a recovery. When the recovery passes the levels that were seen at the start of the recession, the recovery is over, and a new cycle begins. A “double dip” means that the economy started to recover and then fell again, or that the period of recovery was very short. According to GDP data, the recovery began in June 2009 and was completed with the fourth quarter of 2010. From a GDP perspective, if a recession should start now, it would be a new one, and would not be a “double dip.” Technically, there is no such thing as a “double dip” in economic terms, but it is a useful metaphor in describing what’s happening to non-economists.

For those who believe that the recovery never completed, their strongest argument is that employment has actually contracted. Their contention usually relates to GDP and other data series being adjusted for inflation using a method that understates inflation and therefore makes those measures seem better than they are. It’s always been my contention that no one has to manipulate the data with nefarious intentions because the data are bad enough on their own.

One of the key problems in making historical economic comparisons, however, is not just inflation, but also population. The US population grows at a rounded rate of 1% per year, but it’s actually closer to 0.9%. In those terms, 2008 was a long time ago. Adjusting the 2008 data for population growth of 0.9% per year yields a more accurate picture of where the economy needs to be to replicate the employment conditions of January 2008, just a month after the recession started. With that, the economy should have about 9.8 million more workers than it has today with a labor force that was approximately 6.1 million larger.

GDP for the fourth quarter was around 0% or 0.1%, depending on which revision you last saw and will be revised yet again sometime in June when historical adjustments are made to the data series. The first estimate of first quarter GDP data will be out in about two weeks, and should be at least in the 2-3% range. So the directions of employment and GDP will be different yet again. The lack of confirmation of economic growth in employment data should be disconcerting from an analytical standpoint, but is common when economies insist on moving sideways. There is always some comfort that even low growth is better than a decline, but low growth rates provide no cushion against a downturn, and makes its chances greater.

I still believe that there will be no out-and-out recession, but that the sluggish economy is a great burden, and creates longer term problems as businesses focus on efficiencies in their current operations and are fearful of expanding into new ones. Only clear-cut expansion opportunities with big after-tax and after-inflation returns get funding, while other opportunities are perceived as so risky that even Treasury bonds that pay 2% or less, and do not keep up with inflation, are considered as “safe.” It takes a while for that psychology, and those calculations, to change.

# # #

  1. 7 Responses to “Is the Economic Situation Starting to Crack Again?”

  2. By Terry Tevis on Apr 11, 2013 | Reply

    Hi Joe:

    Once again, thanks for the better explanation of the data that is so necessary so folks can understand the foundation of our economic model. Those of us leading companies continue to look for solid ways to expand yet with a sense of guarded optimism when we take the time to look behind the numbers. The talking heads on Fox have us going down the sewer and those of a more liberal bent jump up and down at 7.6% unemployed. I printed out the chart to remind me to keep a close look at the economy and take the time to read a careful analysis like this.

    Many thanks and look forward to any time you comment on our industry or economy.

    Terry A. Tevis
    CEO
    Coloredge

  3. By Donald French on Apr 11, 2013 | Reply

    I think the continuing malaise can be attributed to a blind pursuit of efficiency in the marketplace, no matter the cost. The export of American manufacturing capbilities during the past several decades in pursuit of more efficient production has created a situation where there is no center to the world economy, hence no clear economic leader to start a true recovery. We may well have entered a period similar to Medieval times where there is no place with wide reaching heft sufficient to restart world economic growth.

  4. By Patrick Henry on Apr 11, 2013 | Reply

    This is one of the best and therefore one of the most depressing analyses of the employment situation that I’ve read in a very long time. I agree with Terry–that chart ought to be printed out and posted for all to see like those old THINK signs. Thanks, Dr. Joe, for letting us look under the hood at a picture that’s vastly more revealing than the simplistic sound bites we typically get from the general media.

  5. By Joe Polanco on Apr 11, 2013 | Reply

    Joe,

    As always, good solid information that helps all of us to understand that numbers don’t tell the whole story unless you comprehend how they are derived.

    As I observe our industry, I believe that we hit the bottom of the U and are still there. Until we see our political and economic leaders make decisions that truly support economic growth — we’re not going anywhere.

    Yet, there is a glimmer of hope. As Terry implied, for those who closely observe the macro side of economics, decisions to make their business successful are less stressful and more likely to succeed.

    Regards,

    Joe Polanco
    PIA MidAmerica

  6. By Scott Tilden on Apr 11, 2013 | Reply

    I’m pretty sure that Dr. Joe financed his recent move to Carolina by selling off silver linings.

    That being said, I agree wholeheartedly with Terry, Patrick and Joe that his insights into how to read the numbers are invaluable.

  7. By Dr. Joe Webb on Apr 11, 2013 | Reply

    Efficiency always has a cost, but that cost leads to the conservation of other resources which are then deployed elsewhere. What I still find interesting is that non-manufacturing businesses are generally more complex and pay better wages than manufacturing ones, excluding the food and accommodations industries. The counting of manufacturing jobs is not as easy as one might assume. Let’s say a manufacturing company has a plant with a cafeteria, payroll department, an inplant printing department, a delivery department, and a security department. The company realizes that it can’t keep up with those areas and wants to focus on manufacturing. So it makes a deal with various providers of these services, and those companies agree to take on the current employees. As long as the workers are employees are part of the company, they are considered to be manufacturing employees, even though they are making food, doing payroll, printing, and patrolling. But as soon as they start to work for Host Marriott, Paychex, Xerox Business Services, UPS, and Pinkerton, they have magically become service employees, even though they are exactly the same people conducting their work in exactly the same company. So the count of manufacturing employees goes down, despite that. The way jobs are counted, it’s where you work, not what you do.

    Manufacturing is not what it was because manufacturing’s essence has changed through automation and especially communications. I have contended for some time that when historians look back at the period of the 1990s to now and see a surge in capabilities in logistics and the movement of goods and services that they will be shocked was not appreciated at the time.

    This article has always been a favorite of mine http://www.andykessler.com/andy_kessler/2004/12/wsj_we_think_th.html especially how it explains the profit flow of the then marvel of Apple, the iPod. It’s hard to believe Kessler wrote it almost 10 years ago.

    As long as there are resources and people there will always be division of labor and comparative advantage. One of our problems in the public perception of economic issues is that they seem to consider these as static and fixed, when they are constantly changing in their nature and their geography. Worldwide communications makes it likely that comparative advantage will become more subtle and changeable, more easy to detect, easier to shift. To do so, an economy needs a steady flow of savings and investment for constant renewal of its capabilities. When that is discouraged, the installed capital equipment becomes less and less relevant and less and less productive. In a world of 7 billion people there’s always someone who needs to take advantage of that.

  8. By Dr. Joe Webb on Apr 12, 2013 | Reply

    Since the subject came up, right on cue Time magazine has an article about manufacturing
    http://www.time.com/time/magazine/article/0,9171,2140793,00.html