Don’t Be Fooled By the 223,000 Payroll Increase
Don’t be fooled by the 223,000 increase in payroll jobs reported by the Bureau of Labor Statistics (BLS) on Thursday. The BLS also revised its estimates for April and May downward by a total of 60,000 jobs, making the net gain in payroll employment for June an anemic 163,000.
“Anemic” is also the right word for the 208,000 average monthly gain in payrolls during the first half of 2015. This is down almost 20% from the 260,000 monthly average for all of 2014.
While the BLS establishment survey numbers were anemic, the household survey figures for June would be better characterized as “horrendous.” The reported 0.2 percentage point decline in the “headline” (U-3) unemployment rate, to 5.3%, was pure fiction. Total employment actually fell. A net 432,000 working-age Americans fled the labor force during June, bringing labor force participation (LFP) down to the lowest that it has been since October 1977.
Adjusted to the LFP of December 2008, which was when the Obama team was drawing up its plans for economic recovery, the unemployment rate actually increased by 0.1 percentage point during June, to 9.8%. Think about that. After six years of economic recovery, the “true” unemployment rate is still 9.8%
Total FTE* employment plummeted by 242,000 during June, leaving America 14.1 million FTE jobs distant from full employment**.
June’s terrible employment numbers were not surprising. With real GDP (RGDP) contracting by 0.2% during 1Q2015 and growing slowly at best during 2Q2015 (at an annualized rate of 2.2%, according to the Federal Reserve’s “GDPNow” forecasting tool), it is actually surprising that there has been any jobs growth at all this year (the actual increase was 1.1 million).
How did we get ourselves into this sorry state? Let’s look at the evolution of the economy and the jobs market from December 1992 to the present.
Under Bill Clinton, RGDP grew at an average annualized rate (4Q2000 over 4Q1992) of 3.80%. During that time, America’s working age population increased by 20.0 million. The labor force rose by 14.7 million, and the number of FTE jobs increased by 18.1 million. Even though LFP was rising, the unemployment rate was cut almost in half, falling from 7.4% to 3.9%. When Clinton left office, America was only 0.9 million FTE jobs away from full employment.
From 4Q2000 to 4Q2007, RGDP growth averaged 2.42%. This slower-than-historically-normal economic growth led to a deteriorating labor market.
From December 2000 to November 2007, the nation’s working age population rose by 19.2 million. Of these, only 10.6 million of joined the labor force. As a result, LFP fell by almost a full percentage point, to 66.04%. FTE jobs increased by only 8.2 million during the period.
As a result, even during the “good part” of the Bush 43 presidency, America moved an additional 3.3 million jobs farther away from full employment, bringing the FTE jobs gap up to 4.2 million.
Since November 2007, both the economy and the labor market have been the worst in living memory. Between 4Q2007 and 2Q2015 (30 calendar quarters) average annualized RGDP growth was only 1.18%. This is about half of the lowest growth rate seen for a comparable period since the end of WWII (which was 2.30%, for the 30 quarters ending with 3Q1980).
Between November 2007 and June 2015, FTE jobs increased by only 0.7 million and the labor force expanded by only 3.2 million, despite a rise in the adult population of 17.7 million. The net effect was to push America another 9.9 million FTE jobs away from full employment, bring the total employment gap to 14.1 million.
Why did the economy and the jobs market perform so much worse during the first 7 years of Bush 43’s presidency than they did under Clinton? And, why did both the economy and the jobs market do so badly after November 2007?
The short answer to this is, “The Fed did it.” Specifically, the Federal Reserve’s transition to a rules-free, 100% discretionary, fly-by-the-seat-of-your-pants monetary policy did it.
A modern economy is exquisitely complex. The actions of America’s 300 million consumers and 148 million workers, as well as the decisions regarding the use of the nation’s approximately $53 trillion worth of productive assets, are coordinated via price signals.
As George Gilder noted in his important 2013 book, Knowledge and Power, signals require a communication channel. And, if there is noise in the channel, the signals can get lost or distorted.
The communication channel for price signals is “money.” If the real value of the dollar were absolutely stable, there would be no noise in our monetary communication channel at all.
A good indicator of the real value of the dollar is the CRB Index***. Accordingly, a good measure of the amount of noise in our monetary channel is the standard deviation of the month-end CRB Index values during a given period.
During the Clinton years, the Fed kept the monetary communication channel relatively free of noise. The standard deviation of the monthly CRB Indexes (SDCRB) was 7.99% of the CRB Index average for the period.
Of course, the Fed’s performance in delivering a stable dollar was even better under the Bretton Woods gold standard (1948 – 1971). The SDCRB was only 6.47% during this period, and RGDP growth averaged 3.90% annually. However, monetary stability during the Clinton presidency was “good enough.”
Monetary stability deteriorated markedly under Bush 43. The SDCRB for the period from January 2001 through November 2007 more than doubled, to 18.56%. And, as noted earlier, America’s economic growth rate and jobs market deteriorated along with it.
This period witnessed a housing boom, followed by a housing bust, followed by massive losses on mortgage-backed securities. Boom/bust cycles result from malinvestment, and malinvestment is caused by capital allocation decisions made on the basis of distorted prices signals. Accordingly, boom/bust cycles are an expectable result of a noisy monetary channel.
The SDCRB for December 2007 to June 2015 was also very high, at 17.13%. However, this number does not fully capture how unstable the dollar was during this period.
During the 18-month period of the most recent recession (January 2008 – June 2009) the Fed produced an SDCRB of 27.36%. By way of comparison, the highest SDCRB for any 18-month period under Clinton was only 8.58%, and the maximum comparable number for the period from January 2001 to November 2007 was 9.45%.
An SDCRB of 27.36% means extreme dollar instability. The violent swings in the real value of the dollar that occurred in 2008 – 2009 produced the worst economic crash since the Great Depression.
So, what should we do now?
Republican presidential candidate Jeb Bush has called for raising America’s RGDP growth rate to 4%. The 3.80% growth achieved under Bill Clinton suggests that, with a stable dollar, this goal should be within reach.
Other economic reforms, such as eliminating the corporate income tax and ending President Obama’s regulatory jihad, would help greatly in realizing Jeb Bush’s 4% growth goal. However, monetary stability is the biggest single missing element in our economic equation right now.
The first order of business for a newly inaugurated Republican president must be to demand that the Fed stop worrying about interest rates and NAIRU****, and simply stabilize the dollar against the CRB Index. This will take the noise out of our monetary channel, and make prosperity possible.
*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
**Full employment is defined as the conditions that existed in April 2000, when the ratio of FTE jobs to our total working age population was 0.5958.
***The CRB Index is a commodity price index comprising: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gasoline, and Wheat.
****NAIRU is the “non-accelerating-inflation rate of unemployment.” This construct is based upon the Keynesian superstition that high employment and rising wages cause monetary inflation.
Originally posted on RealClearMarkets.