Pulling The Wagon

The markets reacted to what appeared to be good news last week with the announcement that the unemployment rate had dropped to 8.3%.  However, as I have written before, I am more focused on the number of people working as a more reliable indicator of how the economy is doing.  January's data is also more challenging to interpret than other months because there is typically a drop in employment in January as a lot of seasonal hiring for the holiday season is not longer necessary.  Therefore, the Bureau of Labor Statistics data used for the unemployment rate is "seasonally adjusted" with its best guess of what the real story is taking into account these seasonal variances.

You can see the difference between actual employment and seasonally adjusted employment in the chart below that Lee Adler of the Wall Street Examiner used to explain the differences between actual and BLS with the unemployment rate (the seasonally adjusted numbers).   The trend has definitely improved since the beginning of 2010.  However, we still have about 6 million fewer Americans working today than we did four years ago using either data series.

You get a better view of the deviation between actual employment and seasonally adjusted employment as reported by the BLS in this chart by Adler that just looks at the last 13 months.  The reported number states that 243,000 jobs were created in January.  The actual survey number showed a decrease of 2.7 million jobs!  What is real and what is not?  I think it is going to take a few months to see how this sorts out.

A further complication in the numbers this month is the fact that adjustments to the workforce and the overall population are always done in the month of January.  This is the one month they adjust the numbers for population changes rather than distribute these revisions throughout the year.  The adjustments were even bigger this year since the latest 2010 census data was incorporated into the data series in January.   This means that a decade of changes went into January's numbers.  

These adjustments increased the civilian population by 1.5 million but BLS is assuming that over 80% of these people are "retired" or ages 16-24 and were not seeking employment.  As I have stated before, the unemployment rate only takes into account those actively seeking employment. Therefore, if the BLS assumes that you are retired, a student or are not actively looking for employment, you are not considered unemployed.

These are big assumptions and it will also take time to see if it is correct.  However, as Tyler Durden at Zero Hedge points out, it is the largest absolute jump in "Persons Not in the Labor Force" on record.  It does raise questions as to whether the BLS is trying a bit too hard to produce some good news on the employment front.  It does not seem to follow that an increase in population of 1.5 million would produce only 256,000 that wanted to work.   Of course, that also may be part of the problem.

This chart shows what happened.

This means that the labor force participation rate is now at a new 30 year low of 63.7%.  This is the percentage of all Americans working who are age 16+.  I continue to believe that this is the number to keep our eyes on as I wrote about in last month's report..  It is less subject to the need for assumptions (whether people are looking for jobs or not or retired or not) and adjustments (seasonality).

It also is the best indicator of our true fiscal health as it shows how many people are actually working and paying taxes to support everybody else.   These are the people pulling the wagon.  We need as many people pulling the wagon as we can right now.  If we can't get more people out of the wagon and to start pulling the wagon, we will continue to struggle. We will also inevitably reach the day that those in the wagon who have no other choices at this stage of their lives, will be hurt most of all.

Update:  Bruce Krasting has the same concerns that I do about the implications of a declining labor participation rate.  He also provides a warning about dishonest economists!

If the current labor force participation rate (LFPR ) is, in fact, the new normal (I think it is), it has profound implications on the macro economic outlook for the USA. Virtually all of the economic models used by CBO, OMB, SSA and private economists are assuming that the long-term LFPR will be in the mid-to upper 60s. The consensus is 2-3% higher than where it is today. 

If you plug in a rate of 63% versus 67% over the next ten-years, it makes a huge difference on the size of the deficit and the public debt. It would cause the deficits at Social Security and Medicare to explode. The percentage of GDP attributable to the government would inevitably rise. The economy, and society in general, would be socialized. 

I don’t think there is a macro economist or economic policy deep-thinker out there that does not recognize the significance of the LFPR, or that it’s hitting new lows.

Update:  I had to laugh when I came across this explanation from Betsey Stevenson, the former Chief Economist at the Department of Labor and now an Academic Economist at Princeton, about the finding that the civilian population had increased by 1.5 million in this month's but the assumption that only 256,000 wanted to work.  Ms. Stevenson posted this statement on her Twitter account on Friday.

"There was not a big increase in discouraged workers. What happened, was Census found a bunch of old people we had assumed died."

It just goes to show you the depth of thought and analysis of a liberal economist.