Monday, October 19, 2015

The Unemployment Rate Data Is A Mess

I have mentioned numerous times how the impact of the Great Recession has messed with the accuracy of traditionally reliable economic indicators.  This is important because economists and forecasters rely heavily on these indicators to analyze the economy and develop forecasts.

Fortunately, most of the indicators have “reset” to some degree as the economy has returned to a more stable (maybe still not normal) state. It still can be difficult to use some of these depending how long and how badly the recent history was corrupted by the recession.

However, one indicator is still producing numbers that are unreliable and not very useful. It is the monthly unemployment rate percentage.

This is significant because it is one of the most important economic indicators we have.  Consider how the percentage of people employed impacts the other key indicators: GDP, retail sales, government spending, industrial production, etc.

It is also the economic indicator followed by the greatest number of people, and thus reported on most by the press.  Most people have at least some interest in the unemployment rate.  People are concerned with job security, wages, the general job market, etc., and the unemployment rate gives insight to all those factors.  In addition, it is expressed in a single percentage and is perceived to be a simple, understandable concept, although it really is not. 

When the Great Recession hit in full force, it took the unemployment rate from 4.6% (start of 2007) to 10.0% in October 2009, and the number of unemployed people from 7 million to 15 million.  The unemployment rate has steadily declined, as expected during a recovery, and is currently at 5.1%.

The problem is that over the last six years there have been structural and cultural changes to the “labor force” that have significantly impacted the unemployment rate.  Because the unemployment rate only includes people actively looking for work, the labor-force participation rate becomes very relevant.  Unemployment Rate = number of people unemployed and actively seeking work/labor force (employed people + the numerator).

At the start of 2007, the labor participation rate (percentage of the population working or wanting to work) was 66.4%, it is now 62.4%.  This is a significant decline and there are several reasons for it which I will explore in a subsequent post. However, most of the drop is due to aging baby boomers retiring.  All these changes happening in a very dynamic environment creates issues with the unemployment rate.

Prior to the Great Recession, a 5.1% unemployment rate would be an indication of:

-         A strong, vibrant economy
-         Steady wage growth
-         An expanding job market, with many opportunities
-         Many employees changing jobs to become upwardly mobile
-         Great entry level positions to absorb the new college graduates

In 2015 however, we have a 5.1% unemployment rate with what would be considered a lukewarm job market.  The headlines scream “Unemployment Rate Down to 5.1%,” and then the article goes on to explain why this is not indicative of the true labor market and how things are not as good as you might believe.  I am so tired of seeing those headlines and hearing those reports. They are now basically worthless, mere noise in a crowded news world.

People are quick to counter the basic employment rate (U3) with the supposedly better (U6) which seeks to include people working part-time for economic reasons and discouraged workers.  The U6 was 8.4% in 2007, spiking to 17.1% at peak, and is now down to 10%, but something tells me this measurement also does not carry the same weight as in the past.  I do not know it is measurement related, survey related or whatever, I don’t trust the number in historical perspective.

Therefore I consider the numbers unreliable; the only benefit we receive is the direction and the basis point difference.  We know that we have moved 490
The Unemployment rate is not even correct
twice a day!
basis points (according to a mathematical formula) during this recovery, but that’s about all we know. If this is the new normal, maybe the number will become relevant again in a few years.

There is an opportunity for some economic firm or university to try to develop a new employment index that would combine the government data, job growth numbers, help wanted numbers, wage growth, some new survey data, and any other relevant data available.  I think this could be a very useful tool to replace the old, worn-out, employment rate.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, October 5, 2015

There Is No Rice Krispies Treat In The GDP

The U.S. economy registered a surprising 3.9% GDP growth in Q2 after eking out just a 0.6% gain in Q1.  Of course the extreme winter weather (for the second consecutive year) tanked Q1. I did not think there would be a strong snapback in Q2 based on the manufacturing data I analyzed. However, there was a significant snapback, here are some reasons for it:
  • Consumers delayed purchases
    Retail sales of products and services was impacted significantly by the harsh winter. People stayed hunkered down with their furnaces cranked for much of the first two months of the year.  New England was literally buried with snow for much of the quarter.  Consumers resumed consuming in Q2.  They bought stuff they would have bought in Q1. They also went out and spent the money they accumulated in Q1 while cocooning.  Consumer spending increased 3.1% in Q2.
  • Manufacturing was impacted
    There were some manufacturing disruptions, they just happened in other areas of the country this year versus last (the South and New England, instead of the Midwest).  These companies played catch up in Q2.  In addition, the bad weather caused orders to drop for other manufacturers, as demand waned in Q1.  These producers revved up the factories in Q2 in response to stronger demand and to replace inventories (but maybe too many inventories).
  • The Gas Price “Dividend” Finally Gets Spent
    Economists have been baffled because significantly lower gas prices have not caused a jump in retail sales. Consumers waited to see if prices would remain low.  They were not going to spend this extra money quickly when they thought that gas prices could spike right back up.  Now people are more confident in spending this money and it helped boost the Q2 numbers.  My Discretionary Spending Index has been strong since May.  The Restaurant Performance Index has been very strong all year (although it did fall in August).
  • The Employment Situation Continues To Improve
    The economy continues to create jobs, of course not enough. The unemployment percentage is low, of course it can’t be trusted.  Wages are growing, of course too slowly, but it is a net positive.  We have to assume there was a delay in hiring in Q1, so there was some pent-up labor demand filled in Q2.
Will This Economic Rally in Q2 Provide Momentum for the Rest of 2015?
To determine this, let’s review some of the forward-looking indicators:
  • Economic Indexes
    The ECRI (Economic Cycle Research Institute) Leading Growth Index has been sliding since June and went negative in August.  The Conference Board Index of Leading Economic Indicators slowed to “0” in July and was only 0.1 in August. Not good.
  • Manufacturing Data
    Factory Order data has been flat. New Orders (ISM) were holding up until July and then weakened in August and September. Backlogs (ISM) of course have fallen as a result. The Philadelphia FED Diffusion Index tanked big time in September. Thus the forecast is for slower manufacturing growth the rest of the year.  Also, not good.
  • Housing
    Some mixed signals here.  Builder Confidence is still higher than it’s been in many years and very positive. However, recent building permit numbers have not been that impressive.  Other housing statistics are better, but not consistent.  The overall economy has experienced a “choppy” recovery, why would we expect the housing recovery to be any better? So this is positive, but not very reliable.
  • Confidence Indexes
    Bloomberg’s Consumer Comfort Index is down slightly from earlier in the year, and the NFIB Small Business Optimism survey has been relatively flat at a moderate level for the past three months. Very neutral, if that is such a thing.
  • Other Factors
    The Chicago FED National Activity Index is close to “0” indicating current economic growth of around 2.3%.  The price of commodities has dropped to alarming levels.  So neutral, and negative.
  • The Trucking Industry
    FTR forecasts that freight growth will slow in Q4.  This is not surprising based on the manufacturing data listed previously.  The demand for new Class 8 trucks has weakened a bit recently, but remains healthy.  The demand for trailers remains robust, but should follow the Class 8 market at some point soon.  Good, but not great. 
Based on the indicators, the economy did not receive any “slingshot” momentum from the big Q2 GDP. It appears the economy has reverted back to its slow growth mode.  This is confirmed by some economists who say that the economy grew at a 2.2% annual rate in the first half of 2015.
The plate is empty this time!
The Wall Street Journal Survey of economists has Q3 at 2.0% and Q4 at 2.6%. Reportedly, inflated inventories will hinder Q3 some.  So there was a snapback, but there is no snap forward.  No extra positive momentum was generated by the strong performance of Q2.  Just as we should not have been concerned with the low GDP in Q1, there is no reason to be joyous about Q2.  There will be no Snap, Crackle, Pop! this time.
I now return you to your regularly scheduled economic programming. Nothing to see here.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)