The Markets Are Disappointed With the Fed, Not the Jobless Rate

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The Dow Jones Industrial Average closed down 1.29% on Friday. Does this mean that the markets were disappointed in the "Employment Situation" report from the Bureau of Labor Statistics (BLS), which was released an hour before trading began?

No, it does not.

The Dow actually opened slightly up from its close on Thursday. What disappointed the markets on Friday was the same thing that has been disappointing them all year. The Dow has declined by 7.00% during the first 25 trading days of 2016 because equity investors are (rightly) disappointed in the Federal Reserve.

The Dow is a price. Like all prices, it is a ratio. In this case, the Dow can be viewed as the ratio between the real value of a composite of the shares of the 30 companies making up the Dow and the real value of "the dollar." While the Dow ended Friday down by 7.00% year-to-date in terms of our undefined, floating, fiat dollar, it was actually up by 1.23% in terms of the CRB Index*.

In other words, if the Fed had been following a monetary rule that specified that they maintain the value of the dollar against the CRB Index (and all else had been equal), the Dow would have been 1.23% higher after the first 25 trading days of 2016, rather than 7.00% lower.

OK, on to the BLS report itself.

There's some good news about the labor market, and there's some bad news. First, the good news.

As reported by the BLS, January 2016 was another decent month for jobs. While growth in non-farm payrolls slowed to 151,000 in January from December's (revised) 262,000, the number of FTE** jobs rose by 598,000 in January, vs. a December gain of 481,000.

January's "headline" U-3 unemployment rate eased to 4.92% from December's 5.01%, and labor force participation rose for the fourth month in a row.

OK, now the bad news.

During the six-and-a-half-plus years of President Obama's economic recovery, Americans have been playing Wile E. Coyote, with prosperity playing the Road Runner. Workers have been running hard, but they have not been catching up.

Since the most recent jobs peak (November 2007), America's working age population has gone up by 19.2 million. However, during this time, the labor force has risen by only 4.4 million, and FTE jobs have increased by only 3.2 million. So, on the margin, we have created jobs for only 16.67% of potential new workers since the last employment peak. This has left America 8.3 million FTE jobs farther away from full employment than we were more than eight years ago.

While labor force participation has now increased for four straight months, this streak has only brought us back to the level of December 2014 (which was also the level of February 1978).

The "headline" (U-3) unemployment rate has fallen by almost half (from 9.5% to 4.9%) since the end of the last recession. However, almost all (92.2%) of the reported improvement has been the result of workers withdrawing from the labor force. Only 7.8% of the gain was produced by actual job creation.

Now for even more bad news.

You know the scene where Wile E. Coyote chases the Road Runner past the edge of a cliff, and hangs motionless in space for a few moments before plunging to the valley floor below? Well, that's the labor market right now, because wages have raced ahead of GDP, which provides the means to pay them.

During 4Q2015, payroll wages*** increased at an annualized rate of 4.44%, which was much higher than the 1.51% growth rate for reported for nominal GDP (NGDP) by the Bureau of Economic Analysis (BEA). And, with the Federal Reserve's "GDPNow" model currently forecasting 1Q2016 real GDP (RGDP) growth at 1.00% (which implies an NGDP growth rate of about 1.80%), there is no way that January's 10.46% annualized growth rate for payroll wages can be sustained.

Despite the efforts of Hillary Clinton and Bernie Sanders to make the 2016 elections about "inequality," the only thing that really matters with respect to prosperity is the rate of real economic growth.

If, since 1790, the U.S. had averaged the 1.40% RGDP growth rate of the first 7 Obama years (instead of the 3.66% actual achieved), our 2015 GDP would have been $126.4 billion instead of $17,937.8 billion (i.e., 99.3% lower). It is sobering to realize that, if we had had an Obama economy during our entire history, America would today be the fourth poorest nation in the world, and we would be more concerned about starvation than inequality.

Nobody was complaining about inequality during Bill Clinton's presidency, when RGDP growth averaged 3.87%. However, with growth averaging only 1.40% during the first 7 Obama years, progressives are desperate to change the subject from growth (which they have no idea how to produce) to inequality (which they would like you to believe that more government taxing and spending will fix).

During the first 7 Clinton years, RGDP grew by 30.2% and the number of FTE jobs went up by 13.6%. The corresponding numbers for the comparable period under Obama are 10.2% and 2.2%, respectively.

So, why has our economic performance been so much worse during Obama's presidency than it was under Clinton? Because we have been accumulating productive capital more slowly, and we have been getting less GDP out of each dollar of assets. The deterioration in both factors has been the result of changes in government policies.

The BEA tracks not only GDP, but also the "produced assets" that are used to generate that GDP. Over the past 64 years (1951 - 2014), the following equation has held, on average:

GDP = 0.08 (residential assets) + 0.44 (nonresidential assets)

All employment depends upon nonresidential assets, which are the tools that workers use to produce the nation's output. Capital hires (and pays) labor. Without capital to work with, labor can't produce anything. Right now, it takes about $285,000 of nonresidential assets to support one average American job.

During the first six years of Bill Clinton's presidency, nonresidential capital investment averaged 17.23% of GDP, vs. 16.08% of GDP during the comparable period under Obama (it was 19.21% under Reagan). This alone accounts for 0.51 percentage points of the RGDP growth differential between the Clinton and Obama presidencies.

The nation invested more under Clinton than it has under Obama, because Clinton's policies were friendlier to investment. Clinton acquiesced to a big capital gains tax cut, while Obama raised tax rates on savings and investment in order to pay for Obamacare. Obama has also mounted a regulatory jihad against the energy industry in the name of "fighting climate change."

However, the biggest contributor to the immense RGDP growth gap between Clinton and Obama (and, the difference between 3.87% and 1.40% is a chasm) is monetary policy. In other words, "It's the Fed, stupid."

During the 46 years 1969 - 2014 (for which the BEA has published completely comparable numbers), the GDP yield from nonresidential assets (GDP/NRA) has ranged from 37.93% (in 1982) to 48.42% (in 1999).

GDP/NRA averaged 47.25% during the first 6 years of Clinton's presidency. The corresponding number under Obama was 41.96%. In other words, the economy managed to get 12.6% more GDP out of each dollar of capital under Clinton than under Obama.

If GDP/NRA had been the same in the sixth year of Obama's presidency (2014) as it was in the sixth year of Clinton's presidency (1998), RGDP growth during Obama's first 6 years in office would have been 2.05 percentage points higher.

If you want to know why the U.S. was able to utilize its nonresidential assets more efficiently under Clinton than under Obama, you don't have to look any farther than the CRB Index. Which is to say, you don't have to look any farther than the Federal Reserve, because it is the Fed's job to supply the economy with a stable dollar.

During the periods when the CRB Index was most stable (the 1960s and the 1990s), GDP/NRA was high, and during the periods when the CRB Index was least stable (1973 - 1982 and 2001 - 2015), GDP/NRA was low. An unstable dollar confuses and disorganizes the economy, and GDP/NRA is one place where this effect shows up quantitatively.

Monetary policy is currently America's biggest economic problem. Interestingly enough, the only presidential candidate that is even talking about monetary policy is Ted Cruz, who won the Iowa Republican caucuses despite coming out against ethanol subsidies.

*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.
**FTE (full-time-equivalent) jobs = full-time jobs + 0.5 part-time jobs
***Payroll wages = non-farm payrolls X average weekly earnings for all workers


Louis Woodhill (, an engineer and software entrepreneur, and a RealClearMarkets contributor.  


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