The U.S Jobless Claims Drop To 5-Year Low. Really?

Friday January 25, 20012

The media reported yesterday that weekly unemployment claims dropped by 5,000 to a 5-Year low. This is a great example of why media stories are so misleading. Here are the main points made by the Associated Press (AP) story:

1. U.S. jobless claims drop to a 5-year low of 330,000 which is a hopeful sign for the job market.

2. (This) is evidence that employers are cutting fewer jobs and may step up hiring.

3. The 330,000 to 390,000 weekly average of claims and the average increase of 150,000 new jobs per month is enough to slowly push down the unemployment rate which fell 0.7% to 7.8% last year.

As you know, this (150,000 new jobs per month) is not the reason for the drop in the employment rate.This amount just keeps up with the number of people entering the labor force. In fact, people dropping out of the labor force is the primary reason the unemployment rate dropped.

This is not an isolated example of "misinterpreted media facts" or simply one story as many news outlets use the AP releases as the basis for their stories.

Here is the problem. It's not the complete story. They did not mention that three states (California, Virginia, and Hawaii) did not report due to weather issus and a holiday. So, the government made an "educated guess" as to what the number of claims would be from those states. Then they ran all the data through their seasonally adjusted model to arrive at the 330,000 claims.

As many of you know, an important step in my critical thinking process is to always ask yourself what data is missing from the story. You also know they don't have the time or space to include every piece of information. You already knew there was a holiday last week and you knew -if you follow the weekly reports- that this is the lowest number in years. That makes this report unusual and therefore questionable. You have to put the data in context before you can evaluate the argument (a hopeful sign, may step up hiring and the reason the unemployment rate declined) before you can really evaluate this new informaiton.

By the way, this information is available on the government's website. Maybe the writer just didn't have enough time to do the story correctly.

Headlines Can Be Deceiving

Today, the January Jobs Report indicated that the economy created 243,000 jobs in January and the unemployment rate dropped to 8.3%. That sounds good and most of the “experts” were screaming that this more proof that the economy has turned around and job growth will continue. What they didn’t do is look beyond the headline.

First, I was startled when I heard the headline numbers. Here is the context behind the numbers. Last week, Chairman Bernanke said the economy was soft and lowered his GDP growth estimate, extended the zero interest rate program through 2014 and implied that he was ready to intervene with more money creation if necessary. That doesn’t sound like the environment for “surging” new job growth.

So here is some information behind the headline.

1.A record 1.2 million people fall out of the labor force (these are people who are no longer looking for a job.)

2.This means that the percent of the population that would like to work dropped to 63.7%. The long-term, historic percent is 65.8%. This is important because this is the number they use to determine the unemployment rate. This is 5 million people less looking for work than is normal; and with 5 million less people you get a much lower unemployment rate. And baby boomers are not retiring like many assume, In fact, their participation rate in increasing.

3.Part-time workers increased by 699,000 and full time jobs increased by 80,000 jobs. So about 10 percent of jobs were full time.

I am not saying there is a conspiracy to improve the numbers. It is the way the math model works. But it does demonstrate that you must look beyond the headlines to get the real story.

More Hopium On The Way

Our down trending economy and markets may have begun to levitate again with Chairman Bernanke’s Jackson Hole speech last week when he announced the Fed would keep interest rates at zero for two more years (that would be 4.5 years total.) I believe this is just the beginning of “QE3” (generally defined as more money printing.)

Because there is some opposition to more stimulus and money printing (including three of the Federal Reserve’s Presidents and members of Congress,) the Government and the Federal Reserve have to “justify” more spending. In other words, there has to be enough “pain” to justify more spending and interfering with the economy. I believe we will get more fiscal stimulus and more money printing because we have, over the years, turned our economy (and education, health insurance, parenting, retirement, etc. etc. over to the government) and stimulus and money printing are the only way they know how to fix things. Besides, there is an election coming soon and fixing will take time.

There are two data points coming this week that may give the government the “justification” they need. One is the ISM-Manufacturing Report on Thursday. I suspect it will be more negative than expected. The second is the jobs report on Friday. I think the consensus is for about 75,000 to 100,000 jobs. However, the data over the past month is so negative that we may see a much smaller number and even a negative number for August or September. A negative number will defiantly get attention.

These events will be followed up by President Obama’s speech on September 5th when he will tell us what his “plan” is for restoring the economy and creating jobs. I believe it will be a bigger, more expensive program than we have had to date. It will have to get through Congress, but did I mention an election is coming soon.

Also, on September 21st Chairman Bernanke will announce the decisions made by the Federal Reserve Board. If the data is bad enough, we should get QE3 almost immediately. If the data is not bad enough, we may have to wait. But we should not have to wait very long as the economy is sliding further into recession.

In summary, we may get some bad news with the ISM-Manufacturing Report and the August Jobs Report which would negatively impact the market. But, that would be immediately followed up by the President’s new stimulus plan and the Federal Reserves’ money printing plan. This hopium will levitate the market, if big enough, until +/- next Labor Day. Another short-term “fix” and a worsening long-term problem.

Update On Scenario One

This remains the most probable scenario at this time (of my four total scenarios.) However, other scenarios are possible depending on what the government and central banks do (more money creation or money contraction) and what banks do (possible trillions in credit to consumers which is money creation) and how individuals react (credit defaults, savings, leverage, etc.)

1. March 2010 (massive increases in money supply which artificially and temporarily increases GDP but results in malinvestments or bubbles)

a. Interest rate reduction
b. Stimulus Programs
c. Mark-to –Market rules revised (allowing banks to increase value of mortgage bonds)
d. Central Bank buys “toxic bonds” from banks (QE1) increasing ”excess reserves” at banks to $1.1 trillion from $4 billion.
e. November 2010, QE2 begins ($600 billion more pumped into banks but most of it goes into European banks)
f. Money supply increases at double digit rates for 28 of last 29 months

2. May 2011

a. Stimulus ending in June
b. QE2 ending in June (both a and b will contract money supply which will reduce GDP)
c. Debt ceiling “argument” (raise limit by $2-3 trillion or austerity) deadline by August 2

3. Labor Day (+/-) or possibly sooner depending on our central planners (government and the Central Bank

a. My guess, debt limit increased with promise to cut spending starting in 2013 (after next elections) Raising the debt limit is priced into the markets now.
b. As economy drifts lower, pressure for government to “do something.” Therefore, I expect a new stimulus program (significant tax cuts because Republicans will have to vote for them and Democrats will get their stimulus because we will borrow the money displaced by the tax cuts)
c.New QE3 program (large) so central bank can continue to buy bonds and keep interest rates low (for housing, employment, etc.) This may be called something else so it can be framed differently for public consumption.
d.Timing of new stimulus for 2012 elections will become important to allow for lag time and momentum prior to elections.

4. Top of Bubble (then significant recession)

5. S&P500 down to about 650-600

Do We Need Another Jobs Bill?

Most everyone agrees that the unemployment problem is bad (unemployment at 17%, black men at 25% and youth at 30%.) The problem is affordability. There is plenty of work to do; it is just too expensive to pay for the work to be done.

However, since the $800 billion stimulus package was passed, employment has deteriorated. Now, the President wants a new “Jobs Bill” using temporary tax credits of $13 billion to create jobs. The president wants this bill passed immediately, so I thought its time to take a look at the bill from all three points of view.

From the Keynesian (more government) point of view, they say the original stimulus bill was aimed at increasing GDP and from that growth, creating jobs. The problem was that the stimulus package was not big enough to fill drop off in consumer spending. Therefore, we need an even bigger stimulus bill this time. Unfortunately, that would be difficult to get through Congress at this time.

Paul Krugman, in an article in the NY Times, argues that government must help. It can’t just do nothing. He suggest that for a few hundred billion dollars, we could get things going by:

1. Transferring monies to state governments so they can continue to maintain and/or create new jobs,
2. Hiring people to work for the government directly like they did in the 1930’s with programs like the Workers Progress Administration (WPA),
3. Giving companies temporary tax credits (for example, pay employers share of payroll taxes up to $5,000 for each new hire.)

The Supply-Side (less government) economists have a different point of view. Brian Wesbury, Chief Economist at First Trust in Chicago, argues that the labor market is improving and will continue to improve in the year ahead. That unemployment is simply a lagging indicator. His argument is based on the following reasons:

1. Civilian employment, based on the household survey, shows that 785,000 jobs were created in December (second month of job creation.)
2. Hours worked increased over the past three months and increased hours are an early indicator of future employment.
3. Unemployment has fallen from a peak of 10.1% to 9.7%, and
4. Employment has expanded into more industries recently.

Therefore, I conclude from his argument that permanent tax reductions would help make companies more globally competitive, but more stimulus money at this time would only fuel inflation.


The third point of view, the Capitalist view, sees the unemployment problem differently, according to Henry Hazlitt, Austrian economist:

1. The goal should be maximizing production, not employment. With full production comes full employment. By separating production and employment, you make employment the goal. That’s what they did in the 1930’s with the WPA. Projects were selected by how unproductive they were or how much labor they required.
2. We need to help the unemployed get into other growing industries,
3. We need to eliminate as many barriers to employment as possible. Here are a few of Liewellyn Rockwell’s suggestions:
A. Get rid of the minimum wage,
B. Payroll taxes rob employers of resources,
C. Laws that threaten firms if they fire an employee,
D. Unemployment subsidies that pay people not to work.

Over the next few weeks as the debate begins in the House and Senate over the type of jobs bill we need and the amount of money (we need to borrow) to pay of the jobs bill, you may need to adjust your plans accordingly.