By Bruce Krasting and David Stockman.
Bruce sent this piece earlier today. David Stockman followed up with additional comments, posted below Bruce’s.
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The Labor Force Participation Rate (LFPR) is a key economic statistic today. Changes in the LFPR are shaping the direction of the capital markets, federal economic policy, monetary policy and, most importantly, politics.
The LFPR hit a new record low on Friday. The key question that must be answered is:
If the current LFPR is, in fact, the new normal (I think it is), it has profound implications on the macro economic outlook for the USA. Virtually all of the economic models used by CBO, OMB, SSA and private economists are assuming that the long-term LFPR will be in the mid-to upper 60s. The consensus is 2-3% higher than where it is today.
If you plug in a rate of 63% versus 67% over the next ten-years, it makes a huge difference on the size of the deficit and the public debt. It would cause the deficits at Social Security and Medicare to explode. The percentage of GDP attributable to the government would inevitably rise. The economy, and society in general, would be socialized.
I don’t think there is a macro economist or economic policy deep-thinker out there that does not recognize the significance of the LFPR, or that it’s hitting new lows.
Let me confirm the data. This from the BLS, Note that January’s reading fell 0.3% to a multi-decade low:
This chart is also from the BLS. The trend is obvious:
I think most of the Biz press had the story right. The drop in the LFPR was highlighted (accurately) by many:
Okay, I hope I’ve convinced you of two things. 1) The LFPR is a very important statistic, and 2) The BLS reported on Friday that the LFPR had fallen to a new record low in January.
Now listen to what Larry Summers had to say about the LFPR this morning on ABC’s This Week show. (This is a painless, no commercial, 90 second video.)
Larry Summers is a possible candidate as the next Treasury Secretary. He has all the credentials. He knows where the bathroom is; he’s had the job before. But he blew it on the issue of what happened to the LFPR this month. He gave the wrong answer, with 10mm people watching.
Looking at the macro picture, anyone that is worth their salt should not have gotten this wrong. It’s too important. Possibly an explanation by Mr. Summers will be forthcoming.
from David Stockman:
Bruce– Great job on the Summers catch, but I’m wondering if this goes much deeper. I don’t particularly believe in tin foil hats, but all of these mainstream economists treat the BLS and BEA data like it’s holy writ—when it’s evident that the reports are so massaged, estimated, deemed, revised, re-bench marked and seasonally adjusted that any month-to-month change has a decent chance of being noise. What deep secret might they be hiding?
So on the labor force participation rate they say, “No it didn’t go down in January because the 2012 numbers are re-bench marked for the 2010 census,” but for some reason the BLS didn’t bother to update the 2011 civilian population numbers, including December. Thus, the BLS published apples-to-oranges numbers on this particular variable and the footnote says the December participation rate would have been the same as January, if they had revised it!
Yet on another variable— the establishment survey jobs count—they were also busy re-benchmarking–but here they did update the
originally reported numbers for every month of 2011. Even then, it is hard to say what got updated because the originally reported numbers each month are then revised during the next two reporting months—with any excess or shortfall reallocated to earlier months outside the three month window, which are not published on a revised basis, even though they have been revised! This reflects a wacko thing called the concurrent seasonal adjustment method.
Anyway, like Summers did in his TV riff, you can always pick and choose a half dozen noise points in every monthly report to support
your favored trend. But obviously, your point is that the longer-term trend of the labor force participation rate is really bad, and this
truth is absolutely validated by the January report. Except it would have been equally bad in December had it been reported with the new census data. As Gartman says, the trend is from the “upper left to the lower right”, and it’s heading off the page.
But the mainstream narrative never gets to the trend. In this case, the plain fact is that we are warehousing a larger and larger
population of adults who are one way or another living off transfer payments, relatives, sub-prime credit, and the black market. My
suspicion is that this negative trend and many others like it get buried by the monthly change chatter from mainstream economists and on bubble vision, and that these monthly deltas are so heavily manipulated as to be almost a made-up reality. Call it the economists’ Truman Show.
The attached series for the “raw” or unadjusted establishment survey employment change for January goes back to the 1980s and makes me wonder. Since 2000, the January job loss against a December payroll of between 130 and 135 million has varied within a tiny range of about 150,000. Other than January 2009 when the economy was being smacked by the post-Lehman melt-down in the financial markets, this means that the unadjusted January payroll count declined within a super-tight range of 2.00% to 2.20% of the December payroll.
Really? Granted the U.S. economy is a regular fellow, but how could there be such astounding uniformity every January, year after year in the raw numbers, as in the following sequence for January 2001 thru January 2012, respectively: 2.16%, 2.19%, 2.05%, 2.03%, 2,03%, 1.96%, 2.03% 2.19%, 2.73% (2009 outlier), 2.20%, 2.18% and 2.02%.
After all, you have weather aberrations, huge fluctuations in year to year economic conditions, the weak, random nature of the establishment survey, the constant fiddling with the birth-death adjustment which is carried in the raw numbers, the Christmas shopping season variation from red hot-to-punk across the years, the timing of the survey week and much more. And the dice always lands on almost exactly a 2.03% change from December. Right.
This is meant to be a long-winded encouragement to you to apply your patented numbers forensic skills to the monthly BLS reports or any of the other market movers. In the last 7 years, for example, the Christmas shopping season has been all over the lot and presumably, retail hiring, too. But the unadjusted retail jobs reduction in January vs. December has not varied by much more than 150,000 from a base count of 15 million. That’s a 1% variation, notwithstanding the huge shopping season differences they report on bubble vision.
In short, if you spend a little time with these numbers you will know that they are being made up. Funny thing that I remember during the depths of the 1982 recession Reagan read in Human Events one night that the seasonally adjusted numbers were being manipulated and one should look at the unadjusted numbers, instead. The next morning during an economic update briefing Reagan said, he wanted to talk about the “unadjusted” unemployment rate. Marty Feldstein turned white as a ghost, and then talked him out of it. Hmmm!