Jobless Report Dents 'Economy is Great' Narrative
The May jobs numbers were bad. Combined with other recent data, they suggest that the 2016 election campaign will be either conducted in the middle of a declared recession, or against the backdrop of an economy that feels like a recession to many Americans.
Friday's "Employment Situation" release from the Bureau of Labor Statistics (BLS) reported that the widely followed payroll employment number increased by only 38,000 during May. This was less than the downward revision of 59,000 to the April total, leaving the number of May payroll jobs 21,000 lower than the figure originally reported for April.
FTE* employment fell by 277,000 in May, after declining by 256,000 in April. This left America 13.3 million FTE jobs away from full employment. The number of full-time jobs plunged, and the number of part-time workers soared.
The headline (U-3) unemployment rate plummeted from 5.0% to 4.7% during May, but this was pure illusion, a result of plunging labor force participation (LFP). Adjusted to the LFP that obtained when Bush 43 left office, May's unemployment rate was 9.3%, nearly twice the official number.
Falling LFP has been one of the most distinctive features of the Obama economy. May's LFP was down by 4.74 percentage points from its April 2000 peak. This is equivalent to 12.0 million Americans giving up on finding jobs.
Since November 2007, our working-age population has increased by 20.0 million. However, on the margin, only 4.5 million of these people entered the labor force, and only 3.3 million of them landed FTE jobs. This might be "the new normal," but it certainly isn't "prosperity."
It is reasonable to ask how anyone could believe that we are in or headed for a recession, when 1Q2016 real GDP (RGDP) growth was reported in positive territory (at 0.84% annualized) and 2Q2016 RGDP growth is currently forecasted by the Federal Reserve's "GDPNow" model to come in at 2.5%. The answer lies in the Fed's "Industrial Production" (IP) numbers.
According to the NBER**, there have been 11 recessions since 1948. In each case, IP peaked and began falling in, or close to, the calendar quarter that was later identified by the NBER as the peak of the business cycle. On average, the IP peak preceded the economic peak by less than one quarter. The farthest ahead of the onset of a recession that quarterly IP has ever begun to decline was 3 calendar quarters (in the case of the 2001 recession).
Based upon the latest numbers from the Fed, quarterly IP peaked in 4Q2014, and it has been falling for five quarters now. The IP Index for 1Q2016 was 2.01% below that of 4Q2014. The BEA*** will be publishing a "benchmark revision" to its GDP numbers on July 29, and it is very likely that some of the GDP growth previously reported for the past few years will be revised out of existence at that time.
If we graph IP and RGDP (with both normalized to 1Q1947 = 100) from 1Q1947 to 1Q2016, the two lines track each other closely until the end of 2007, with normalized RGDP never more than 106.02% of normalized IP. However, during the most recent recession, reported IP fell by 16.65%, vs. a decline of only 4.24% for reported RGDP. This left normalized RGDP at 120.48% of normalized IP in 2Q2009, the post-war high.
From 1Q2008 to 1Q2016, normalized RGDP averaged 113.82% of normalized IP; the average for 1947 - 2007 was only 96.21%. Clearly, something happened during the 2008 - 2009 recession that impacted the relationship between RGDP and IP.
One explanation for the divergence between normalized RGDP and normalized IP is that the RGDP numbers are simply overstated, and that the July 29 benchmark revisions will correct this by adjusting the reported RGDP numbers downward for the past several years. This would bring the government's description of the economy more in sync with what the public has been experiencing during Obama's economic recovery.
The other plausible explanation is that the Bush 43/Obama/Bernanke/Yellen economic policies have caused America to deindustrialize, in the sense of investing less capital to employ workers and make them productive. Shifting the employment mix away from factory workers and toward baristas and bartenders would produce the change observed in the relationship between RGDP and IP. It would also help explain why the reported unemployment rate can be 4.7%, and yet large numbers of Americans are demanding radical change, by supporting Donald Trump and Bernie Sanders.
Lower rates of capital investment lead to fewer jobs and lower wages for those jobs that do get created. Both of these trends make the public unhappy.
Capital investment has been low during the Obama recovery because government policies have been hostile to investors and investment. The value of the dollar (as judged by the CRB Index****) has been wildly unstable. Taxes on savings and investment were hiked in order to pay for Obamacare. And, the Obama administration has mounted a regulatory jihad against business, only part of which has been slapped down by the courts.
We are now only five months from the elections. Friday's BLS report put a huge dent in the Obama/Hillary Clinton "the economy is great" narrative. The July 29 GDP benchmark revisions could well blow a big hole in it. The question is whether Donald Trump can exploit the opening that the slowing economy gives him by offering a credible plan for economic growth.
*FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
**The National Bureau of Economic Research, a private organization that dates the business cycle.
***Bureau of Economic Analysis
****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.
