So, yes, the US unemployment rate was released this morning, and no real surprises there - up .1% to 6.1%, the highest level in 9 years. Economists actually expect the rate to continue to climb over the next few months, even if the economy turns around, as only phenomenal economic conditions could accommodate the millions of high school and college graduates expected to enter the job force this summer.
But the real story is the one mentioned here yesterday, newly instituted changes in the "Establishment Survey Data", which essentially counts the number of jobs created or eliminated in any given month. Not only does the BLS plan on using these new "adjustments" going forward, but it plans on revising previous data as well. I got my first clue as to just exactly what that might mean from this snippet in this morning's AP report on the jobless numbers:
Payrolls fell by 17,000 in May following a revision in April, in which no jobs were lost (my emphasis). Industries driving the cuts were manufacturing, transportation and government.
Now, I seem to remember that somewhere around 50,000 jobs were reported to have been lost in April, but I couldn't pull up that data on the BLS website, as, in place of the usual archives, I found this notice:
The data from the Employment, Hours, and Earnings from the Current Employment Statistics survey (National) program is currently unavailable. We will restore the data as soon as possible. For immediate assistance, contact our data specialist listed below. Thank you for your interest in BLS data, and we apologize for the inconvenience.
Well, fortunately, I wasn't kidding yesterday when I suggested people download the old data, and took my own advice. Lo and behold, when I looked up it up in my trusty Excel spreadsheet, as of yesterday, prior to today's "revisionism", the BLS reported a loss of 48,000 jobs in April. I sometimes hate it when I'm right.
I guess it's one more thing to add to the list of MIA under this Administration:
WMDs in Iraq
The Child Tax cut for the working poor
Indictments for Ken Lay
BLS reporting of jobs
The European Central Bank cut it's benchmark lending rate 1/2 percentage point to 2% yesterday, more than the 1/4 point expected. The Euro responded by rising nearly two cents against the dollar to $1.1842. Normally, one would expect the Euro to decline after an cut in EU interest rates, but the official version today is that the market expects the weak economy to compel the Federal Reserve to match the ECB move with at least 1/4 point cut in the Fed Funds Rate later this month. Shorter-term government bond rates have already fallen below the Fed Funds rate, indicating the market views this as a near certainty.
Alan Greenspan has not said much to counter this expectation, noting that while the economy seems to be about to recover, the Fed could cut rates again as "insurance". The recent economic data seems to be very convincing regarding taking out a policy or two. Jobless claims up, retail sales down, durable goods orders waaaaay down. U.S. employment for May is expected by economists to have dropped by 30,000-50,000 and the unemployment rate is expected to rise to 6.1%.
Earlier today on Wampum, I hinted as to some developing controversy regarding tomorrow's unemployment numbers. This has its roots the Cassandra Complex (tm) I unfortunately developed back in January, when I first began to read the raw unemployment reports from the BLS. I noted back then that January's employment picture looked particularly rosy not due to any major upswing in the economy, but because the Administration had altered the way it was collecting and reporting data, conveniently skewing results in the process. February and March's results were also tampered with, but decidedly less so than January's. Then, in April, I noticed that the BLS had planned in June to once again institute major changes to the employment reports. Whether these changes will effect the spinning of tomorrow's unemployment report, I can't say. But it's also a question I noticed was asked by at least twomedia sources today:
Before investors react to Friday's report, however, they may spend some time scratching their heads about it. The Labor Department is revising the numbers in its surveys of employers' payrolls.
In addition to changing seasonal adjustments and updating benchmark figures, the department is shifting some job descriptions and moving some jobs from manufacturing into services in what it says is an effort to more accurately reflect the current economy.
Economists, on average, expect employers cut 39,000 jobs outside the farm sector last month, according to a Reuters poll, down from 48,000 job cuts in April -- but prior data, going all the way back to 2001, are being revised, so comparisons to prior months might be difficult.
When I went over to the BLS press release on the changes, it stated that reports were being revised back to at least 1990! Talk about having the ability to rewrite economic history. In fact, for the sake of the historic record, maybe it's time to start downloading the old data.
Since only CNN Asia and the Post noted the changes today, I'll be curious to see how the report is spun tomorrow, particularly if it differs substantially from the 30-50K job loss forecasted by analysts and the market. But then again, if the unemployment rate jumps more than .1%, I suspect some great WMD (Weapon of Media Distraction) to suddenly appear.
[Update] I've been thinking about what these changes in the report might entail from a political perspective, and this fictitious exchange popped into my head:
Fox News, June, 2004
Sean Hannity: So, Terry McAuliffe, what again are these charges you're making against our fearless leader's stewardship on economic issues?
Terry McAuliffe: Under George Bush's watch, this economy has lost 2.7 million jobs.
Hannity: 2.7 million? Who says?
McAuliffe: The Bureau of Labor Statistics.
Hannity: Really. Well, I'm looking at the website right now, and its says that George Bush has created 2.7 million jobs.
McAuliffe: Yes, but, but, but... that's only because last summer, he had the BLS change all the numbers.
Hannity: Yes, sure he did, Terry (winking to the camera.) By the way, Terry, have you seen my Pulitzer, er, Peabody?
Okay, so now maybe I really am suggesting that people do in fact download the current statistics at the BLS website. Just in case.
First-time claims for state unemployment insurance benefits, a guide to the pace of layoffs, rose to 442,000 in the May 31 week, its highest in over a month, compared with a revised 426,000 the prior week, the Labor Department said.
Analysts were expecting 420,000 first-time claims.
The good news
But productivity is also up, which explains continued growth in the face of rising joblessness (that is, fewer people producing more stuff). Productivity, though a nice thing (actually the nicest thing in the long-term), doesn't tell me so much about demand, which is the real problem in assessing the economic recovery.
U.S. non-farm productivity climbed 1.9 percent in the first three months of the year, the Labor Department said, an upward revision from the previously reported 1.6 percent gain. The number met analyst expectations and followed an increase of just 0.7 percent in the final quarter of last year.
Unit labor costs, a closely watched measure of wage pressures, were revised down to a 1.5 percent increase, just below analyst forecasts for a 1.6 percent rise.
The more good news
The service sector is also growing, which IS suggestive of rising demand and an actual recovery. Oil is down, the dollar is down, and the stock market is rising, certainly, pricing in a recovery. Yet I am still cautious. A housing bubble, low demand for automobiles, and low treasury prices suggest more troubles ahead.
The Institute for Supply Management's reading of non-manufacturing activity came in at 54.5, compared with 50.7 in April. Any reading above 50.0 indicates growth in the sector. Economists, on average, expected a reading of 52, according to a Reuters poll.
The ISM's "new orders" index jumped to 54.7 from 50.6, but its employment index rose only to 48.7 from 48.2 -- indicating businesses were still laying workers off, though at a slower pace.
The Wall Street Journal is reporting today that the European Union will cut their benchmark lending rate 1/4 point to 2.25% on Thursday. This appears to be a coordinated effort with the Federal Reserve to cut U.S. interest rates by 1/4 point at their June 24-25 meeting as an "insurance policy" against deflation. Both Fed Chairman Alan Greenspan and ECB Chair Wim Duisenberg spoke at a monetary conference in Berlin on Tuesday. The ECB seems to have already intervened at least once to cap the Euro at $1.18 to the dollar. Maintaining the interest rate differential between the EU and the US is intended to prevent any undue pressure on the Euro/Dollar exchange rate.
Two-year U.S. Treasury yields fell to record lows on Tuesday, breaking beneath the Federal Reserve's 1.25 percent funds rate as investors bet the central bank would have to cut interest rates yet again.
Yields began to slide after Federal Reserve Chairman Alan Greenspan said deflation would be on the agenda at a meeting of the central bank's policy-setting committee later this month. He noted that while deflation was unlikely, taking insurance against it would not cost much.
The comments sparked speculation the Fed might decide to take preemptive action against deflation -- a sustained fall in the general price level -- either by cutting rates or perhaps buying longer-dated Treasuries.
"Oddly, Greenspan was quite optimistic on the economy but whenever a Fed guy mentions deflation, the (bond) market takes off," said Drew Matus, senior financial economist at Lehman Brothers.
"On the face of it, his comments would seem to lessen the odds of a cut, but you have to note that whenever the two-year yield breaks the funds rate it's been a pretty reliable omen of an easing. The market's forcing the Fed to follow," he said.
I have no idea how to interpret this data.
posted by Matthew |
10:43 AM |
Bubble, Bubble, Deflation and Trouble, Part One
The "D" word, deflation, is springing up once again in the economist vernacular. While the Federal Reserve has been addressing this possibility since their analysis of Japan's deflationary experience in June 2002, an infamous speech by Fed Governor Ben Bernanke in November of the year, and Alan's latest inquisition by Congress, it was the April declines in the Consumer Price Index (-0.3%) and Producer Price Index (-1.9%), that brought the reality home, even to McPaper. Nearly all living Americans have experienced a single, profoundly negative experience with deflation: The Great Depression. Other nations, most recently Japan and Argentina, have not fared much better in their rare glimpses of deflation. Given that experience, it is only natural that U.S. policymakers do not wish their constituents to experience deflation a second time and will try and do something about it.
While some economists might disagree, the conventional wisdom is that deflation, like inflation, is a monetary phenomenon. The problem with deflation is in the balance between the stock of money and the stock of goods. There is too little of the former and too much of the latter. As a result, prices fall to insure all goods are purchased. (Keynesian economists might argue that what I said above is a Monetarist argument, but as their solution is the same as the Monetarists, I'm not going to quibble over ideology and instead analyze the policy response.)
With that framework, the policy solution to deflation is straightforward: the Federal Reserve is charged with printing more money and the Federal Government should run a deficit to absorb the excess goods (either using consumers via tax cuts or spending the money themselves). Plenty of other writers on this site have dealt with the effectiveness of the President's tax cut, so I'll concentrate this post on the effectiveness of expansionary monetary policy.
Economists with an Austrian bent (such as myself) have serious issues with the ability of the Federal Reserve to prevent deflation by simply "running the printing press". The first issue is that the "money" in question is really debt. Whether the Fed increases the Treasury debt by purchasing bonds with printed money or the banking system makes loans to expand the money supply further down the line, all the reserves injected into the system ultimately reside as a string of obligations - loans, to be serviced out of future income. Austrians feel that only productive investment (investment in capital to produce more goods and services) will generate the income required to pay these debts back. But as the initial assumption is that there are "too many goods" (or in Keynesian terms "insufficient demand"), the extra money will not be used for productive investment, but on consumption or speculation.
As a result, an Austrian economist would expect two things to happen if the Fed tries to print us out of deflation: the return on all assets will gradually fall and the amount of indebtedness will gradually rise. The "return on all assets" can be expressed as savings/debt (consumers), profits/debt (business), (lending spread - default rate)/debt (financial sector) and budget surplus/debt (government). The rate at which these ratios decrease will depend on what the Fed-injected money is used to finance and how the falling returns on assets impact each sector, as well as our overall trade and financial balance (which represents our net income flowing in or out from abroad). If expansionary monetary policy is used repeatedly to fight recession and deflation, as the Fed has done, we would expect each attempt at "reflation" to have smaller and smaller marginal benefits.
It's pretty clear from looking at the economic data that the economy is evolving exactly as the Austrians would predict. Savings rates, profit rates, the return on lending, and government surplus' have all fallen as debts have steadily risen over the past decade. Extremely accommodative Fed policy was only just enough to get us out of the 1991 recession, and so far 13 rate cuts and 10% annual money growth has failed to stimulate any sustained economic growth after the recession in 2001.
Austrians would prefer that the Fed do nothing to prevent deflation. By allowing production to contract (a recession), the unprofitable excess production is removed through bankruptcy and a sufficient return on investment is restored. More liberal Austrians (such as myself), see a extremely important role for the government in expanding social support programs and redistributing income in order to reduce the human costs of this economic adjustment. Regardless, while trying to print one's way out of the problem may work in the short run, the increase in debt stock and decrease in income generated by continually pumping liquidity into the economy is ultimately unsustainable. Either the entire credit system collapses due to an economic shock that prevents people from paying their debts (default) or the monetary system collapses as nobody wants to hold debts denominated in the local currency (devaluation). In Argentina's case, the result was both.
In addition, there is a great possibility, since monetary policy is ultimately credit related, that the economy could succumb to a Credit Bubble. A Credit Bubble is where the creation of credit becomes a self-perpetuating cycle, usually by financing asset markets. An asset begins to rise in value far above the new income being generated to purchase it. Lenders and borrowers create new credit to fill the void because the lending makes creditors richer and the asset rises in value to fund the debtor's borrowing. The new lending causes the asset to continue to rise in value faster than income, thus requiring even more credit to be generated. The cycle continues until the amount of new lending is insufficient to keep asset prices rising. At that point, the bubble pops and the process reverses itself - asset prices fall and credit growth contracts, resulting in more declines in asset prices. We already saw a tremendous bubble pop in the U.S. stock market. A number of economists of all persuasions have recently worried about the U.S. housing market, not only because housing prices and mortgage debt is spiraling upward, but also because in Japan's experience, their housing bubble popped four years after their stock bubble popped. I'll address that issue and the destabilizing effects of monetary in part two of this post later.