The employment numbers that came out today (Friday) were very bad and caught most economists and analysts by surprise. Nothing the Fed has done has worked. Once again the ranks of the unemployed grow, wages flatten out, manufacturing weakens, GDP declines, and savings are spent to maintain lifestyles. The U.S. and much of the rest of the world is heading toward stagnation, if not recession. Yet, despite the failures of central bank policies, they will persist in doing the same wrong thing again. Here we review the data and explain why things are heading south.
The U.S. recovery appears to be tracking a similar pattern of the past three years, in which the economy gains steam during the winter only to run down in the spring and summer. But the situation this time is puzzling, given that there hasn’t been a gas-price spike—prices instead have fallen–or a disaster, such as last year’s Japanese earthquake and tsunami.
The above comment is from the Wall Street Journal’s story on today’s poor employment report from the BLS. Piled on top of this was news that manufacturing is softening, wages and hours are declining, and the manufacturing PMIs for the UK, Eurozone, and China are declining. And we were informed yesterday that GDP is sinking. The U.S. markets reacted badly: most were down about 2.5%, with the Russell 2000 down 3.2%.
The given explanations for these events are all wrong and they have been wrong since 2008 as mainstream economists are “surprised” on a regular basis. The news media on Friday offered no valid explanations of current events, and as I listened to the news, commentators were making it up as the went along, trying to make sense of what looks like a worldwide slowdown. Our fellow homo sapiens can’t not try to explain events they don’t understand.
What is causing the worldwide slowdown are not natural events but rather the result of manmade policies from central banks and governments. Yet economists continue to recommend the same policies that caused the economic decline. Will things ever change?
Let’s examine the data first.
Employment, the chief motivator of politicians and central bankers, was “surprisingly” (again, that word) weak. Here is a quick summary from Econoday:
New job creation was weak, the unemployment rate increased, hourly earnings were weak, disposable personal income was weak, the work week went down, and the all-important (to the Fed) PCE price index declined (April). This is not what our leaders expected. Here’s a picture:
For those of you looking for the detail on U-6, long-term unemployed, here is the table:
If I were Ben Bernanke or President Obama, I would like to see these data going the other way if I wanted to keep my job.
There is always a lot of controversy about the actual rate of employment as reflected in the number of employed versus the population at large or as compared to the workforce population. The official numbers are as follows: the population to employment ratio is 58.6% and the workforce to population ratio is 63.8%.
My fellow blogger Mish always does an excellent take on the dubious BLS calculations based on the birth-death model of business creation, the real ratio of a growing population to employed, and the dropout rate. I would refer you to his excellent article on these data.
Whatever the real story is, it isn’t good.
Part of the data that I believe is most important, other than the headline numbers of growing unemployment, is the PCE price index and the personal savings rate.
As I mentioned above, the PCE price index went down in April (+0.1%) compared to March (+0.2%). To the Fed this smells like (i) recession and (ii) deflation.
The personal savings rate went down as well, to 3.4% in April as compared to 3.5% in March. This tells us that consumers are funding PCE with savings, since disposable personal income is flat (+0.2% in April, same as March).
What the fallout of these data is for planning purposes is:
1. The Administration is seriously concerned since an election is only 5 months away.
2. The Fed is seriously concerned since none of their monetary policies are working as planned.
3. “Inflation” as the Fed defines it is looking more like the much feared “deflation.” The Fed will not let “deflation” happen.
4. The only thing the Fed really knows how to do is print money, and since the inflation hawks on the FOMC have nothing to complain about, it makes another round of quantitative easing likely. And soon.
5. The decline in savings further diminishes the chances of a recovery since what the economy needs is (i) to liquidate the bad investments made during the boom (malinvestment) and (ii) capital from real savings to make it grow again. While one could argue that such “savings” are the product of two prior rounds of QE and not “real savings” as defined by Austrian economic theory, I don’t think that is the case. A substantial part of these savings is “real savings” and it is being destroyed.
Mainstream economists treat our current mini-cycles as somewhat natural events, divorced from any action by the Fed and the Administration (see opening quote). One only need to look at Fed policies (QE, ZIRP, and money supply) as we “Austrians” do to get the real answers.