Why Did the Jobs Number Surprise Anyone?

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The most surprising thing about Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) was that anyone was surprised by it. The economy has been decelerating for some time now, and it is not possible to sustain jobs growth without economic growth.

Although the BLS report should not have been unexpected, it was bad. While the Establishment Survey numbers were disappointing, the Household Survey numbers were dismaying. They depicted a labor market hitting the wall.

The number of FTE* jobs increased by only 51,000 during March. This was not nearly enough to match the growth in the working age population, so the nation moved 57,000 FTE jobs farther away from full employment.

The "Obama Exodus" from the world of work resumed during March, with the labor force shrinking by 96,000. This happened despite an increase of 181,000 in the working age population. Labor force participation fell back down to the levels of late 1977.

The Establishment Survey data suggests that the total number of hours worked actually declined during March. This conclusion is bolstered by the reported fall in the average weekly earnings of both "all private employees" and "production and non-supervisory workers."

The one bright spot in March was the continued rapid reduction in the number of people that have been unemployed for 27 weeks or more. During the 16 months since Congress refused to renew extended unemployment benefits, long-term unemployment fell by 36.9%, which is vastly more than the 21.8% decline seen during the prior 16-month period. Yes, incentives do matter.

So, why is jobs growth slowing down? Because GDP growth is slowing down. And why is GDP growth slowing down? It's because the Federal Reserve has allowed the real value of the dollar to rise sharply over the past nine months.

Both the general price level and wages are "sticky," and much slower to change than the value of our undefined, floating, fiat dollar. The transactions that comprise GDP involve exchanges of money for "stuff." So, a significant increase in the value of the dollar relative to the general price level will cause people to forgo transactions that they would otherwise have made, had the dollar remained stable.

In term of the CRB Index**, the real value of the dollar increased by 10.7% during 3Q2014, by 21.1% in 4Q2014, and by another 8.5% during 1Q2015, for a net nine- month increase of 45.5%. Meanwhile, it is likely that the GDP deflator increased by about 0.5% over this period.

Given the above, what happened over the past nine months is exactly what one would expect. Nominal GDP (NGDP) growth slowed from 6.67% in 2Q2014, to 6.27% in 3Q2014, to 2.36% in 4Q2014, to just about zero in 1Q2015 (based upon the Federal Reserve's "GDPNow" model).

Now, GDP isn't everything. For example, GDP greatly understates the improvement in the quality of our lives that has been produced by advancing technology. However, GDP is what pays the bills. Accordingly, when GDP growth stops, jobs growth collapses.

Bianco Research (which is an affiliate of Arbor Research and Trading) did the world a great service by reconstructing the monthly CRB Index back to 1749. The data is illuminating, to say the least.

The Federal Reserve was created by Congress in 1913, and given the job of providing America with stable money. Using the CRB Index as our indicator of the real value of the dollar, let's look the Fed's performance with respect to providing stable money during the worst recessions from 1913 to 2000. We'll use the official business cycle dating provided by the National Bureau of Economic Research (NBER).

• From the previous cyclical peak (January 1920) to the trough of the 1920 - 1921 recession (July 1921), the CRB Index fell by 53.13%. This is equivalent to the real value of the dollar more than doubling. As soon as the CRB Index stopped falling, and started rising, an economic recovery started.

• From the previous economic peak (August 1929) to the trough of the first leg of the Great Depression (March 1933), the CRB Index fell by 52.11%. Again, this is equivalent to the real value of the dollar more than doubling. The recovery began the same month that the CRB Index bottomed out and started rising again.

• During the April 1933 - May 1937 economic recovery, the CRB Index rose until it had regained all but 5.6% of its August 1929 level. However, during the second leg of the Great Depression (June 1937 - June 1938) the CRB Index fell by 23.88%. This is equivalent to a 31.38% increase in the real value of the dollar. Once again, as soon as the CRB Index began rising, an economic recovery started.

• By October 1982, which was one month prior to the official NBER trough of the 1981 - 1982 recession, the CRB Index had fallen by 30.17% from the previous cyclical peak. This is equivalent to the real value of the dollar rising by 43.20%. One month after the CRB Index bottomed out and began rising, the economy began to recover.

This brings us to the Fed's catastrophic performance since 2001.

Over the 73 months from the trough of the 2001 recession (November 2001) to the official cyclical peak (December 2007), the CRB Index rose by 86.19%. This is equivalent to the dollar losing 48.24% of its real value.

This extended period of monetary inflation touched off a classic "flight to the real," as investors reallocated capital from productive assets to inflation hedges, like gold and real estate. The result was tepid RGDP growth and a massive housing bubble.

During the first half of 2008, was not clear that America was actually in a recession. While the number of FTE jobs had peaked in November 2007, 2Q2008 RGDP growth was positive. It wasn't until December 1, 2008 that the NBER was able to declare that a recession had begun a year earlier.

The (monthly) CRB Index peaked in June 2008. At that point, the dollar had lost 59.88% of its November 2001 value.

The Fed then caused/allowed the most precipitous rise in the value of the dollar since 1782. During the ensuing three quarters, the real value of the dollar more than doubled. The result was the worst economic crash since the Great Depression. During those 9 months, NGDP fell by 2.9%, RGDP declined by 3.9%, and FTE jobs plunged by 4.8%.

By March 2009, the real economy was in such a steep dive that the recession didn't end until 4 months after the CRB Index bottomed out and began rising again. And, even though RGDP grew during 3Q2009 and 4Q2009, FTE jobs didn't bottom out until December 2009.

The CRB Index ended March 2015 at 211.86. This essentially the same level at which it bottomed out in February 2009. That the Fed is contemplating interest rate hikes (which they seem to believe are needed to fight inflation) right now is positively frightening.

It would certainly be nice to avoid another unnecessary, lives-shattering recession. However, the larger point is that an unstable dollar, no matter whether it is rising or falling, is bad for the economy.

For the sake of America's workers, we can only hope that the Fed pulls its head out of the central planning/Phillips Curve/interest rate manipulation sand, and stabilizes the value of the dollar at some reasonable level (e.g., a CRB Index of 300).


*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs

**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.

 

 

Louis Woodhill (louis@woodhill.com), an engineer and software entrepreneur, and a RealClearMarkets contributor.  

 

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