Falling unemployment - everything's fixed now?

The latest unemployment report was released on Friday, showing the unemployment rate in the US steady (at a still elevated but falling) unemployment rate of 8.3%. I've long maintained that Employment is arguably the biggest problem that the Americans face today, as if you somehow manage to get people back in the workforce, all the other "problems" over time will fall into place. Government defecits, budget defecits, trade defecit, consumer confidence etc etc should all improve with an improvement in the labour force data. The US economy is a consumer led economy; however, for a real recovery, and confidence to return to allow the economy to get back on track, a real improvement in the jobs data is surely a pre-requisite.

Surely then falling unemployment can only be good news? Not necessarily.

Firstly, just to appreciate just how far we had fallen off a cliff, and what the rebound has looked like, lets compare the current cycle to previous ones.

We see quite clearly the extent of job losses in the current employment recession is in a league of its own when it comes to previous downturns in the job cycle; both in terms of extent and duration.

Surely though, a falling unemployment rate can only be a good thing?

The red line, shows the unemployment rate. 8.3% and sharply falling, yes, that is certainly an improvement. However, to be confident that a fall in unemployment will feed through to the real economy, one would like to see that the fall in unemployment rate would be accompanied by a rise in the participation rate, basically that the fall in the unemployment rate would be felt by a higher proportion of the population. Alas no. Extrapolating from the graph, the US is well on its way to becoming the first country with no unemployment, yet nobody participating in the labour force!!!

Yes, jobs ARE being created. But not enough. The steady/flat black line (employment/population ratio) is indicative that the number of jobs being created are only enough to keep up with the increase in population. 

But the news gets worse. The unemployment rate, and all the other statistics/graphs shown only deal with the quantity, they do not account for quality. Problem number 2, is that as with all statistics, the output is only as good as the input or assumptions made. The data in the labor force data, is subject to many revisions, often with a many year time-lag. Additionally, numbers are often not comparable, as a later consensus will suddenly show an additional x million people that previously hadn't been accounted for.

When looking at the quality of jobs generated, I prefer to go to the Feds website and look at tax data. Those figures are not played with whatsoever, there are no seasonal adjustments etc, nor is the data dependent on any population census. The numbers are reflective of the income tax received by the Government. No fudging whatsoever. A rising number is indicative of rising employment, and/or rising wages. And the numbers are startling.

The table is one that I made based on figures taken directly from the Feds website. They take 2 corresponding periods, the 4 month period from 1st October 2010 until 31st January 2012, and the corresponding period the following year. We can see that in the first period, the Government received $592.985B and over the course of the 4 months, there were an additional 571,000 jobs created. In the corresponding period the following year, the cumulative tax received by the Government FELL to $592.676B, despite an additional 715,000 new jobs created. Over the entire period, between 30th September 2010 and 31st January 2012, a period in which there were an ADDITIONAL 2.5 million jobs, aggregate tax revenue received fell. This means that yes, DESPITE new jobs being created, they were lower paid, poorer quality.

This is not a healthy state, and it seems to me to need some catalyst, to end this cycle. This has serious and substantial ramifications to the Treasury's forecasted debt issuance schedule. When issuing new debt, the Treasury works on many models, one of them being the rate of unemployment. Their working assumption of lower unemployment is going to need serious modification if the current trend of falling Government revenue despite falling unemployment continues.

And whilst I have focused on, and highlighted the negative trend in the US employment, Europe is in a far worse state.

  In the US, whilst the unemployment trend is very much down, in Europe and the UK it is still on the way up.

What goes up ....... must come down!

Not been the best few days in terms of economic data coming out of the States:

Consumer Confidence: pretty much non existant! Consumer confidence is now lower than at any point in recent history, including all of the previous disasters, financial crises and tragedies, including the 87 crash, the collapse of Lehman Brothers and 9/11. And dont forget the re-election campaign kicks off in earnest, with the USA full of unhappy and unconfident people! QE3 anyone?!!!

ADP Non farm employment: a downward revised figure of 177k for April was followed by a puny 38k for May, on expectations of 178k. A deceleration in employment, while disappointing, is not entirely surprising. In the first quarter, GDP grew at only a 1.8% rate and only about 2¼% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.

ISM Manufacturing: Lowest reading since September 2009, the first reading below 60 in 2011. Granted, 60 is the level at which the ISM typically peaks, but the worry is the sheer slide towards a reading of 50, below which is in contraction mode once more.

Downgrades: As expected, the "experts" are downgrading their view of the economy, with Goldman Sachs, Morgan Stanley as well as JP Morgan (TWICE IN ONE WEEK!) all downgrading the US economy.

Bank Stress Tests: Then we've had the news that the 2nd round of stress tests for European banks has been delayed because of "errors" and "unrealistic assumptions". How comforting! Especially since the whole point of the Stress test round 2 was to instill confidence in the European banks!!!

The stock market, and Fed, and just about everyone in between is seemingly caught in a catch 22 situation: QE3 is seemingly being priced in by stocks ...... however for QE3 to actually happen, stocks would have to fall approximately 15-20% from their current elevated levels!!!

-------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!