Why Friday's Jobs Report Was Ominous

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Attention. This is a test of progressive economic policies. This is only a test. If this were a real economic recovery, you would be seeing more jobs and higher wages. We repeat. This is only a test.

Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) wasn't just bad, it was ominous. We're going to discuss what was ominous about it, and what progressive economic policies have to do with all of this. However, first, let's look at why the report was not good news.

While most pundits have focused on the BLS Establishment Survey, which reported that 165,000 payroll jobs had been created during April, the Household Survey* numbers told a much different story.

Total employment rose by 293,000 during April, but part-time jobs increased by 441,000. As a result, full-time jobs declined by 148,000.

The number of "full-time-equivalent" (FTE) jobs** only increased by 73,000. This was not enough to keep pace with the growth of our working-age population, so the "FTE jobs ratio" (the number of FTE jobs per 100 working-age Americans), fell.

While the "headline" (U-3) unemployment rate declined by 0.1 percentage points to 7.5% during April, the broader U-6 rate increased by 0.1 percentage points (to 13.9%). The even-more-comprehensive "SGS Alternative" unemployment rate also rose by 0.1 percentage points, equaling its record high of 23.0%, a level it first attained in December.

The April jobs numbers describe a mass replacement of full-time workers with part-time employees, coupled with a fall in the length of the average workweek. This happens to be precisely what you would expect, given the perverse incentives baked into Obamacare, which took effect on January 1.

OK, so that's why Friday's BLS report was bad. Now, let's look at why it was ominous.

During April, the FTE jobs ratio fell for the fifth month in a row, to 53.09. The earliest warning signal for every recession since 1955 (the first year for which the data is available) has been a significant, sustained decline in this ratio.

As of April, the fall in the FTE jobs ratio from its local peak was only 0.11. This is not yet a strong indicator of an impending recession. Only one of the recessions since 1955 (that of 1970) was presaged by this mild a decline, and there were eight instances during the past 50 years where the FTE jobs ratio declined by this much over five months, and the economy did not fall into recession.

This having been said, there also has never been a case where the FTE jobs ratio fell for five months in a row and a recession did not follow. So the recent decline is definitely something to be concerned about.

Based upon the historical record, if the current decline in the FTE jobs ratio were to continue, and to reach a cumulative 0.60, renewed recession would become a virtual certainty.

In the case of the most recent recession, the decline in the FTE jobs ratio exceeded 0.60 five months before the recession officially started, and a full 15 months before the National Bureau of Economic Research (NBER) formally declared that a recession had begun in January 2008.

But wait! How can we fall into another employment recession when we haven't even gotten out of the last one yet?

In April, America had 53.09 FTE jobs for every 100 working-age adults. This is down by 5.10 since the most recent peak (December 2006). With today's working age population, this shortfall is equivalent to 12.5 million FTE jobs.

April's FTE jobs ratio was also lower by 2.16 than when George W. Bush left office, and actually down by 0.41 since Obama's so-called "economic recovery" began 46 months ago. This metric hit its most recent low (52.53) in November 2010, and has recovered by only 0.56 since then.

It is clear that, for workers, there has been no economic recovery at all. If labor force participation had remained at the level it was when Bush 43 left office, April's unemployment rate would have been reported at 10.9%. The "official" 7.5% unemployment rate is an artifact of the unprecedented exodus from the labor force that has occurred under Obama.

Over the past five years, America has been running a full-scale test of progressive economic policies. Let's look at the results, and compare them with what happened during and after the 1981-1982 recession. Ronald Reagan attacked his recession with conservative, supply-side economics, which represent the polar opposite of progressive economics.

Progressive economic policies comprise Keynesian fiscal stimulus (intentionally increasing government spending to boost domestic "demand"), monetary stimulus (deliberate actions to weaken the dollar, with the goal of increasing export demand), higher marginal tax rates on "the rich," and increased government regulation of, well, just about everything.

Oh, and we mustn't forget the vast expansion of alternatives to working, including Social Security Disability, Food Stamps, and extended unemployment benefits.

Supply-side economics calls for a strong dollar, cuts in marginal tax rates, deregulation, efforts to hold down government spending, and an emphasis on people taking care of themselves.

Not surprisingly (except, perhaps, to Paul Krugman), the application of completely opposite policies have produced completely opposite results. Here are some basic facts about the two recessions in question, as well as the recoveries that followed each of them.

While the NBER claims that the 1981 - 1982 recession lasted 16 months, from an employment point of view, it dragged on for 22 months. That is to say, the FTE jobs ratio declined for 22 months. During that time, it fell from 54.34 to 51.55, a decline of 2.79.

According to the NBER, the recession of 2008 - 2009 was 18 months long. From a jobs perspective, it ran for 47 months, with the FTE jobs ratio falling by a total of 5.66. Nothing this bad had been seen since the Great Depression.

However, the contrast between the economic recoveries following these two recessions is even more striking-and significant.

It is now 76 months since our latest employment recession started. America's FTE jobs ratio is still down by 5.10 from its peak, and is only 0.56 above its low point of the cycle. In contrast, at the same point during the Reagan recovery, the FTE jobs ratio was 2.01 above its prior high, having risen by 4.80 from its nadir.

The numbers show that Reaganomics were vastly more effective than progressive economics during the first 76 months after the onset of their respective employment recessions. The biggest difference between the two approaches was in the area of monetary policy.

During the first 76 months of the Reagan recession/recovery, the value of the dollar in terms of gold actually went up by 6.47%. During the equivalent period during the Bush 43-Obama recession/recovery, the gold value of the dollar fell by 56.90%.

The dollar debasement under Bush 43 and Obama has been driven by three rounds of the Federal Reserve's "quantitative easing" (QE), which have produced a massive (and completely unprecedented) 257.19% increase in the monetary base.

Given the historical record, it is amazing that the "a weak dollar boosts exports" myth lives on. But it does, and it has been given a starring role in our long-running economic zombie apocalypse.

On the fiscal side, it is hard to imagine how more Keynesian stimulus could have been applied during the current recession/recovery. We got $168 billion of it from Bush 43 in early 2008, followed by Obama's $862 billion program a year later. All of this money vanished without leaving an economic wet spot. At this point, we have little to show for 76 months of frantic borrowing and spending other than a $7.0 trillion (143.7%) increase in the federal debt held by the public.

The evidence suggests that the fiscal stimulus actually cost jobs. Actual unemployment rates since Obama took office have been much higher than the architects of his stimulus program promised. They are also higher than Obama's economists warned that they would be in the absence of stimulus.

At the end of the first quarter of 2013, the reported unemployment rate was 7.6%, and the "true" unemployment rate, adjusted to the labor force participation rate that was assumed for Obama's plan, was 11.1%. This result stands in stunning contrast to the stimulus plan's prediction that at that point, the unemployment rate would have been 5.4% without the $862 billion in stimulus.

It took about 2500 years and countless deaths (including that of George Washington) before doctors figured out that bleeding patients was actually harmful. One has to wonder how much real-world data it will take to convince the likes of Paul Krugman and Jared Bernstein that Keynesian (spending) stimulus just makes the economy worse.

Oh, and by the way. The recent five-month decline in the FTE jobs ratio coincides exactly with Ben Bernanke's QE3. And yet, the "market monetarists" keep calling on the Fed to "do more".

It is a historical fact that George Washington's doctors performed three rounds of bleeding on him before he died. We can only wonder if they referred to the last one as "QB3".

Thank you for your patience during this test of progressive economics. We hope that you are enjoying having your children graduate from college and come home to live in your basements. We appreciate your continued support.


* The Household Survey reaches deeper into the recesses of the economy than does the Establishment Survey. It also does not involve conjuring jobs out of thin air, a la the Establishment Survey's "birth/death model."

**FTE jobs = full-time jobs + 0.5 part-time jobs


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


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