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Fed chairman Ben Bernanke surprised the markets yesterday when he hinted that his policy of easy money would continue.
"Further significant improvements in the unemployment rate," he said, "will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies."
Translation? Roughly: "The unemployment picture is worse than a lot of people think. To bring it down, the economy has to grow faster than it is right now. And to make sure that happens, I need to keep my foot on the gas."
So we may yet see another round of "quantitative easing," where the Federal Reserve uses bond purchases, and other maneuvers, to inject liquidity in the economy.
Judging by the reaction, this was a surprise to markets. But should it have been?
For the last two months, investors have been growing increasingly complacent about the economic recovery. After all, the official unemployment rate has come down from a peak of 10%, in 2009, to 8.3% now -- the lowest rate since early '09. Payroll data has been pretty good.
The consensus on Wall Street was that the economy had finally turned the corner, jobs were growing, and we were back on the path to normality. This is why stocks are up.
The jobs picture is certainly brighter than it was. But the headline numbers may flatter to deceive.
There are many reasons to distrust the unemployment figures. The most obvious is that those who give up looking for work no longer count among the official "unemployment." (Extraordinary, but true.)
But we know Ben Bernanke looks at the raw data.
What is he seeing?
Take a look at a chart I produce from time to time. It is drawn directly from the government's own reports. But instead of relying on their headline numbers, or various other bits of spin or presentation, I go to the raw data itself.
The chart focuses on just one simple number: The percentage of adult men, age between 25 and 54, who are in full-time work.
Let's call it "the Guy Rate."
It's not a perfect measure of the jobs market, but it's a key one and it cuts out a lot of noise. It ignores most kids in grad school, early retirees, and new mothers who choose to stay at home. It counts as unemployed a former $80,000 a year machinist who has given up looking for work. It also counts the one who is still stuck working one night shift a week at his local Shell station.
It focuses only on men of prime working age, it counts all of them, and then deducts only those who are in full-time work.
As you can see -- and as Ben Bernanke surely sees -- the picture remains grim. Just 75% of these guys are in full-time work -- or, to put it another way, one in four men of prime working age in America lacks a full-time job.
It's been down there since the financial crisis really hit the real economy, in January 2009. But what's really ominous is that it doesn't seem to have improved very much. The low was 73% in January 2010. Today it's barely two percentage points higher.
Worse: the Guy Rate today is lower than it has been for most of the economic crisis. It was 76% in August 2010. It is down a percentage point since November.
Certainly there are caveats. The figure may be a lagging one. The Guy Rate may be the last jobs indicator to pick up when the jobs market does. Part-time workers, young people, and women may see improvements sooner. And there's a touch of seasonality to the number -- it has tended in recent years to be slightly lower in the winter than the summer, though not by much.
Nonetheless the Guy Rate tells a gloomier story about jobs than you hear from the Vicodin brigade on Wall Street.
And this is, of course, despite the tsunami of money that has been thrown at the economy, which raised total non-financial debt to $38 trillion. Household debts remain sky high. At $13.2 trillion, they are still higher than they were as recently as early 2007, and four times what they were twenty years ago. Household debts actually rose again in the fourth quarter of last year.
Where does this leave investors?
It's hard to look closely at the data and be quite as cheerful as the Vicodin crowd. And yesterday's market reaction was hardly cause for cheer. We'd like to see the stock market powered higher by rising earnings, not by the hope of further liquidity. Wall Street rose about 1%. So did gold. So did the euro. In other words, the stock market in these circumstances is just the inverse of the currency.
Maybe we need QE III. Maybe it will work. I've met enough economists to know you can find one to support any policy or position. But if you can print your way to prosperity, why isn't Zimbabwe the richest country in the world?
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