that's a great read, hope zonder avails herself to it
:)
.....i almost posted it yesterday...i emailed john for permission to post it and he said go ahead only asked that i link it back to his site...
2000wave.com
so here it is
Those Magic Unemployment Numbers
By: John Mauldin, Millennium Wave Advisors
The Bureau of Labor Statistical Magic
The Structure of Unemployment
That loud boom you heard Friday morning coming from the futures pits was the job report imploding the dollar and sending interest rates tumbling. The consensus estimate was for 125,000 new jobs and it came in at a meager 21,000. Most economists think that we need 150,000 new jobs created per month to actually gain ground with population growth.
This signals the potential for a weaker economy in the future, thus interest rates drop. A weaker economy also hurts the dollar, and thus the market reaction. Perversely, the stock market seemed to think lower rates are good for stocks in the future, so the broad market ended up sideways, except sadly for Martha Stewart Omnimedia.
We are going to follow up last week's thoughts on trade with a look at employment and the lack of job growth. These are two of the three critical issues the country will deal with in the coming election cycle, with Iraq and the War on Terror being the third. We are going to look at three different research reports and then see if we can draw some conclusions, as well as look at the magic of numbers from the Bureau of Labor Statistics.
The reasons for the jobless recovery are complex. They stem from a structural shift in the US and global economy, capital labor ratios and productivity, among other factors. It's not just job-outsourcing to China and India, the favorite whipping boys of the month.
Now, I want to put this letter in the context of an economy that is growing by over 4%, where US household wealth hit an all-time high last month, where there is a slight slowing of the rate of increase in household debt growth and that productivity growth is slowing, which as the Wall Street Journal noted "The gradual slowing in productivity suggest that employers are running out of ways to milk their workers for more output and may be inclined to hire more in the months ahead." I recognize that there are a lot of good things happening. We are simply going to focus this letter on one part of the economy where things are not doing as well.
Last week, I argued that productivity was a large reason for the jobless recovery. From that letter: "Here are the facts, conveniently brought to us by Martin Wolfe in the London Financial Times. First, American manufacturer employment has dropped 2.6 million jobs between March of 2001 and January of 2004. By January of 2004, employment in manufacturing was 17% below what it was in June of 2000, the peak month for manufactured output in the last cycle.
"Outsourcing? Offshore manufacturing? On the surface, it seems to be the culprit. It makes for good copy, as it is easy to see a manufacturing plant closing in Wisconsin and opening in Shanghai. But it is not that simple. If we look at the numbers, I think we can find another perpetrator. There was a 17% rise in worker productivity over the same periods noted above, with just a 3% drop in production. We are producing roughly the same amount of 'stuff' with a lot fewer workers. We produce almost twice as much as we did just 24 years ago."
But it is more than that. There are longer term structural changes at work and a shift in the nature of business investment, which we will look at. Plus, I think we can offer a few reasons why consumer confidence is going down, even as US household wealth hit a record high this last month. This has important implications for the economy and public policy and ultimately for our investment portfolios.
The Bureau of Labor Statistical Magic
First, some would argue that we should not be whining about unemployment. It is, after all, only 5.6%, which is historically not all that high. But current headline Bureau of Labor Statistics unemployment rates are not the whole story. The magic of statistics is that if you get to define the terms, you can make the numbers say what you want them to say.
No great conspiracy here, but the unemployment numbers are developed in such a way that unemployment is understated. If there was some conspiracy, we would not be able to look at the detailed way in which the numbers are developed. The fact that most commentators do not look beyond the headline number is not a conspiracy. It is laziness. Big difference.
The unemployment numbers are useful as they give us a direction of employment, which has been improving, and a basis for historical comparison. But there is more when you look at the underlying actual numbers that make up the statistics and how they are counted.
For instance, the BLS does not include people in the category of unemployed who want a job but have not looked for one in the last four weeks. If you add in the people who want a job but are not counted as unemployed, the unemployment rate goes up to 8.8%.
There are also 4.4 million people who are working part-time but would like a full time job. If you add those in also, we have 11.8% of the population who are unemployed or are under-employed.
But the statistics are even more ambiguous than that. If you look at the actual numbers for February 2004 (www.bls.gov) you find that the total number of people classified as unemployed went down by 127,000. Doesn't that mean we created 127,000 jobs?
The answer is no. Let me throw you some odd statistics. First, since November, the actual labor force (according to the BLS) has dropped by over 700,000, even though the population rose. The number of people actually employed dropped by a seasonally adjusted 265,000. The number of people who are now considered not in the workforce rose by over 500,000.
Yes, in the world of government statistics, we can have a rising population, the number of employed go down and still see the unemployment rate drop. We simply use a definition for unemployed which ignores many of those who are in fact unemployed and would like a job.
The number of people not in the work force has risen by almost 1.7 million in the last year. Part of the rise in the number of people not in the labor force is due to retirement, going back to school and other natural forces, but a significant part is simply reclassifying people as not part of the labor force because they have not looked for a job in the last four weeks. The labor participation rate is 62.2%, down by 0.2% from this time one year ago, yet supposedly the unemployment rate has dropped almost 1%.
We will come back to this in a minute, but let's look at some other studies first to give the numbers come context.
The Structure of Unemployment
Many economists are looking at historical charts of recoveries and predict that any day now we will see employment rise substantially. That is because in past recoveries, by 18 months after the end of the recession the employment numbers were soaring. Even in 1991, which was the first jobless recovery, the job growth started later than the typical recession cycle, but eventually took off.
To get a clue as to what's so different now, let's go to a study from the New York Federal Reserve entitled "Has Structural Change Contributed to a Jobless Recovery?" by Erica L. Groshen and Simon Potter. I am going to pull several paragraphs directly from the paper, rather than summarizing, as they do a very clear job for economists in explaining their research. (http://www.newyorkfed.org/research/current_issues/ci9-8.html)
"The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change--the permanent relocation of workers from some industries to others--may help explain the stalled growth in jobs.
"A surge in payroll jobs used to be a reliable sign of the end of a recession--but not any longer. When the National Bureau of Economic Research (NBER), the accepted arbiter of business cycle dating, recently designated November 2001 as the end of the nation's latest recession, it based its decision largely on the growth of output (GDP).1 By the end of June 2003, GDP had risen 4.5 percent from its low in the third quarter of 2001 and significantly exceeded its pre-recession peak. While the members of the Bureau's dating committee saw the strong growth of this indicator as persuasive evidence that the downturn was over, they acknowledged that their decision was made very difficult by the 'divergent behavior of employment.' What troubled the committee was that payroll employment, which would normally rise in tandem with output, had shown no sign of recovery. Indeed, the payroll numbers fell almost 0.4 percent in 2002 and another 0.3 percent through July 2003. In this edition of Current Issues, we explore why the recovery from the most recent recession has brought no growth in jobs. We advance the hypothesis that structural changes--permanent shifts in the distribution of workers throughout the economy--have contributed significantly to the sluggishness in the job market.
"We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment."
They further explain what they mean by structural versus cyclical change:
"At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.
"Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.
"A preponderance of structural - as opposed to cyclical - adjustments during the most recent recession would help to explain why employment has languished during the recovery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions."
They go on to analyze industry by industry the nature of job losses and do indeed conclude that there is a significant amount of structural change. In past recessions, roughly 50% of the job losses were cyclical and thus poised to come back swiftly and the other half were structural. During this last recession, the amount of structural job losses was 79%. Think telecom and manufacturing, as examples, not to mention all the jobs which technology and mergers have eliminated.
The last recession has had to overcome a far deeper permanent loss of jobs than any post-war recession. Given that, we should not be surprised at the job-less recovery.
They give us three reasons as to why there might be such a significant increase in structural job loss. First, over expansion in industries to the enthusiastic boom of the 90's, then the possibility that the Fed actually reduced the problems of cyclical job loss through its easy money policy, and finally the simple decision by management to run leaner operations.
Here is what I think is he central part of their conclusion:
"The largely permanent nature of this recession's job losses could explain why jobs have been so slow to materialize. An unusually high share of unemployed workers must now find new positions in different firms or industries. The task of finding such jobs, difficult and time-consuming under the best of conditions, is likely to be even more complicated now, when financial market weakness and economic uncertainty prevail. In such an environment, firms may hesitate to create new jobs because of the risks involved in expanding their businesses or undertaking new ventures. Some support for this interpretation comes from the findings of the Job Openings and Labor Turnover Survey, which suggest that the current shortfall in payroll growth owes more to low job creation than to widespread job elimination." |
