A pal who trades bonds for a living sent me his thoughts on the NFP numbers. An interesting take. His thinking on the birth/death adjustment in July is an early warning of what will come. I also like his comments re: QE2 and a short term back up in rates. Just another view; this guy has been good.
Quick Take: the numbers are not great. Some will want you to believe that we are 10-12mos into a recovery – we should not be losing 125k jobs at this stage.
Worse, Weekly Hours Worked edged down 0.1%. (This is a leading indicator to employment, though we cannot read all too much into one month’s data. Though if we see a tick down again next month, look out.)
The Unemployment Rate went down – great news, right? Not when it retreats by way of Labor Force Participation loss:
“The civilian labor force participation rate fell by 0.3 percentage point in June to 64.7 percent. The employment-population ratio, at 58.5 percent, edged down over the month.”
We actually have 301,000 less people working this month than last month (139,420 May vs 139,119 June), but since the labor force decreased by 652,000, less were actually counted as unemployed, and that helped the headline number:
May calculation: [14,973 Unemployed] / [154,393 Labor Force] = 9.7%
June calculation: [14,623 Unemployed] / [153,741 Labor Force] = 9.5%
That’s not improvement. It’s a faulty data point to consider: the UE Rate is not capturing what’s going on. We should not be looking at it.
Consider that the Labor Force has flat lined over the last 3+ years. This is due to discouraged workers, not because the population stopped growing:
Had the Labor Force Participation rate not dropped so severely over the last 3 years, we’d have a Labor Force around 157,500. This would equate to a UE around 11.6%. So we have nearly 2% of UE shaved off by Labor Force Participation alone.
The alternative measures of UE:
U-6 to 16.5% from 16.6% seasonally adjusted.
U-6 to 16.1% from 16.7% NOT seasonally adjusted.
Private Payrolls were up 83,000 though, so that’s improvement, right? We’ll see – without the birth/death “guess” of how many new small business were started this month, we’d have been at -64,000. Birth/death is added every month, and then adjusted in Jan and July, with hindsight, for ‘wrong’ guesses. Birth/death has added 728,000 jobs since February. Next month comes the adjustment – the last adjustment was in January, when they took away 427,000 of the previously added jobs. We’ll find out next month if the BLS found they were too optimistic in 1H2010.
With a Zero interest Rate Policy, Census hiring, QE and Stimulus mostly behind us, we’re heading the wrong way. While I have been, and still firmly am, in the deflation/lower rates camp, watch out for another head-fake and a period of higher rates like we saw in the fall and winter. In my opinion, should be very concerned about Bernanke/Obama feeling backed into a corner and going “all in” with another massive round of QE (and I mean massive). In fact, considering the election cycle, I’d be very surprised if this does not happen. We need to take our medicine, but what we’ll get is another dose of methadone, dragging this out for years more….
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Good post Bruce.. and I agree. But can't help but wonder how the US will be able to 'drag this out for years more'.. given their already nasty debt problems. I figure we'll see a QEII program in the $3-$5T range.. they will go for "shock and awe", but the bond market might see it more as an "all in bet with a nothing hand".
ReplyDeleteThanks for the always great posts.
Gubbmint Cheese
Gubbmint Cheese, the U.S. government possesses this marvelous new invention called the PRINTING PRESS. It's *only* existed since 1450AD, so I know that's relatively recent in conservative terms, yet it exists. U.S. Treasuries are denominated in dollars and buyers of these Treasuries know that they're 100% certain to be paid back even if the Fed has to print the money to do it. Sure, maybe in inflated dollars, but can you point to any investment today where you're 100% certain to not lose money?
ReplyDeleteAs a result, as long as there are idle dollars looking for a safe place to land, there will be no shortage of dollars to buy Treasuries. And once the economy starts looking up and the interest rate on Treasuries starts rising, then we can raise taxes and reduce Treasury purchases and print sufficient money to handle the upswing in economic activity by having the Fed buy Treasuries -- thereby driving the interest rates on Treasuries back down again.
In short, the U.S. has no (zero) debt crisis. I find it astounding that people with a $100K income who owe $200K on their homes somehow think that a nation with a $14T economy who owes $4T to external parties (as vs. owing the money to itself) somehow has a problem. Reality is that it *is* possible for the U.S. to have a debt problem... but we're nowhere near there, and given that Treasury rates are still huddled close to 0%, only someone who is utterly delusional could think we're anywhere near there.
BTW - if U.S. taxes were anywhere near the OECD average, or even near the Canadian average (which is slightly below the OECD average), the U.S. would have a *surplus*. So much for the "debt crisis"... what we have is a TAXATION crisis, not a DEBT crisis. 24% of GDP (current U.S. taxation at all level of government from local school board to the Federal government) simply will not supply sufficient funds to provide the schools, roads, retirement security, and other services that Americans demand. There is no free lunch, if we Americans want these services, we will have to pay for them -- and given that the free market has failed miserably for most of these (quick, who here did *NOT* lose half of their 401K's value to the recent crisis?!), taxes are how we're going to have to do it.
- Badtux the Economics Penguin