The Last Hurrah For Job Growth

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Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) showed that December was a very good month for jobs. FTE* employment rose by 481,000. This complemented the unexpectedly large increase of 292,000 in payroll employment. Labor force participation edged upward in December, providing welcome relief from the relentless slide of this important indicator that has occurred during the Obama years.

Unfortunately, December's numbers may very well be the last hurrah for jobs, as the economy slips into recession. It is worrisome that the Dow Jones Industrial Average fell by 2.23% during 2015, after rising during each of the six previous years. And, it's difficult to interpret the 6.19% plunge in the Dow during the first week of 2016 trading as anything other than a recession warning sign.

If the economy had a bridge like the starship Enterprise, red lights would be flashing right now, and sirens would be sounding. Yes, the Federal Reserve's "GDPNow" model is still predicting that real GDP (RGDP) grew at a 0.8% annualized rate during 4Q2015, but it is important to remember that the 2008 - 2009 recession was not recognized for what it was until a full year after it started. And, the RGDP numbers that were reported during that period were subsequently revised sharply downward.

Even if the economy did, in fact, enjoy positive growth during 4Q2015, there is no way that FTE jobs can continue to grow at a 2.56% annual rate while the economy is growing at 0.80%. The unemployment rate has traditionally been a "lagging indicator" of the state of the economy, so we would expect to see other signs of an oncoming recession before we observed a downturn in jobs.

And, we are seeing such recession warning signs-lots of them.

There are many theories swirling around concerning why the outlook for the world economy is darkening. However, in this case, as in the case of every recession since 1913, the answer is, "It's the Fed, stupid."

Recessions occur when individuals and companies suddenly, and en mass, change their purchasing behavior. Obviously (although this doesn't seem to be obvious to economists), when something like this happens, there has to be a systemic factor at work. Otherwise, the economy would behave like an ideal gas, with chaos at the atomic (individual) level yielding calm predictability at the macro level. And, the only logical suspect for this systemic factor is "money. " And, since 1913, "money" means the Fed.

There is a reason that an economy needs a stable dollar just as much as it needs a stable foot, pound (mass), and second. If the dollar rises significantly in value, this makes everything in the economy more expensive in real terms. And, even academic economists know that if prices go up, demand goes down.

The best indicator of the real value of the dollar is the reciprocal of the CRB Index**. This is because the markets know everything that there is to know about the factors that impact the supply and demand for these commodities, and this information is factored into today's prices. Also, given that the CRB Index is diversified among 19 different commodities, changes in "real" factors impacting the prices of its individual components could be expected to tend to cancel each other out.

Prices are ratios. The dollar price of "A" is equal to the real market value of "A" divided by the real market value of "the dollar." At current prices, the total value of the annual world output of the commodities comprising the CRB Index is over $3 trillion. Accordingly, it is reasonable to conclude that if the CRB Index changes (especially drastically and quickly) the value of the shared denominator, the dollar, has changed.

From the end of June 2014 to December 15, 2015, which was the day before the Fed announced its decision to raise its Fed Funds interest rate target, the CRB Index fell from 308.22 to 174.23. This means that the value of the dollar rose by 76.90% against the CRB Index during this period.

Despite this large and worrisome monetary deflation, on December 16, the Fed went ahead with an action ("raising interest rates") that was intended to "tighten monetary conditions."

If the Fed's goal was to produce even more deflation, they were successful, in the sense that the CRB Index has fallen even further since December 15, closing at 168.58 on Friday. However, if the Fed's goal was to "raise interest rates," they failed. The market interest rate on the benchmark 10-year Treasury was considerably lower on January 8 than it was before the Fed announced its recent action.

Emerging markets are being impacted by the rising U.S. dollar even more severely than is the U.S. Emerging markets have struggled since 2011, which, not coincidently, was when the CRB Index reached its post-2008 peak. The U.S. dollar is the world currency, and the dollar crunch that the Fed has caused (or at least allowed) is impacting the entire world.

Now would be a good time for Republican presidential candidates to call for the Fed to reverse the deflation that it has caused/allowed, and to permanently stabilize the real value of the dollar. If something isn't done to correct the Fed's errors, we will look back at the December employment report as the last hurrah for American jobs.

*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 (, an engineer and software entrepreneur, and a RealClearMarkets contributor.  


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