After writing last week that the various measures of employment and unemployment in the United States that had been released were not telling the same story I was awaited the official monthly report from the Bureau of Labor Statistics to see what light it would shine on the matter. As it turned out we had another somewhat confusing report and I was pleased that I had been mentioning issues with the seasonal adjustment for the report because it turned out to have a big role to play. If we look at the report itself we got these two main headline figures.
The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today………The number of unemployed persons decreased by 556,000 to 14.5 million in December, and the unemployment rate dropped to 9.4 percent. Over the year, these measures were down from 15.2 million and 9.9 percent, respectively.
So we had a number for unemployment which was way away from expectations in a good way i.e the initial indication was that there had been a substantial drop in US unemployment. The employment number,non-farm payrolls, was a disappointment compared to many expectations but was positive. In addition the revisions to previous months were positive and in total the figures for October were revised up 38,000, and November was revised up 32,000 so we had a total of 70,000 extra jobs created in the previous two months. At this point the report was looking very positive and markets made a knee-jerk response to reflect this. If we look at the annual comparison for US unemployment we find that the BLS was reporting that unemployment had fallen by 700,000 or 0.5%. As the holy grail of US economic policy would be falls in the unemployment rate one can see that briefly it looked that to quote from the film 2001 “something wonderful” may have happened with unemployment falling by 556,000 jobs in December.
More analysis: the swish of a scorpion’s tail
As analysts began to read further down the report more and more unsettling and disturbing figures began to emerge. Some of these indicated familiar trends to those who have been following these reports and unfortunately the recent trends have been much less positive than the headline figures.
1. The participation rate, which measures the percentage of the working age population in the labour force, fell to 64.3%. This compares with a more “normal” figure which would be 66 to 67%. This may sound minor but a drop of 2% in the US labour force is around 3 million individuals.
2. “The number of persons employed part-time for economic reasons (some-times referred to as involuntary part-time workers) was essentially unchanged in December at 8.9 million.” So there was no improvement here and we are only marginally below the peak of 9 million which is not much of an improvement.
3. The wider measure of unemployment called U-6 which adds involuntary part-time unemployment to the headline figure declined but at a slower rate than the headline figure and was at 16.7%.
4. The number for longer-term employed (over 6 months) is back rising again. According to the BLS, there are now 6,441,000 workers who have been unemployed for more than 26 weeks and still want a job whereas in November there were 6,328,000. This is important as it looked back in the summer of 2010 that long-term unemployment had peaked but now the last 3 months have seen rises.
The construction of the figures
I was asked on Friday how these figures are calculated and I thought that many might have the same question. The starting point is that the numbers here come from 2 different surveys.Fortunately they cover the same time period of a month unlike the UK for example where our unemployment rate is calculated over a different time period from registered unemployment. The unemployment rate comes from the Census Population Survey which surveys 60,000 households and the non-farm payroll numbers come from a separate survey of around 140,000 businesses. This leads to two main thoughts. Firstly whilst statistics can be helpful we are using a sample of 60,000 to tell us about a labour force of around 153 million which has obvious implications for potential flaws and secondly that there is no great reason for the two surveys to be correlated with any precision.
Just to illustrate the differences the non-farm payroll report indicated that 103,000 jobs were created in December. If you analyse the unemployment report you can calculate a figure for job creation in December and it was 297,000……
Whilst the figures initially looked good with a substantial fall in unemployment and once revisions to previous months are allowed for a solid performance in employment creation there were much more unsettling elements in the detail. The question screaming from the figures is why did so many people leave the US labour force over the period? If we do the necessary calculations we can see that approximately 60% of the reported fall in unemployment is in fact due to the drop in the participation rate. Now there were falls in this number for the 16 to 24 age group leading to suggestions that they had gone back to school. This is fine in itself perhaps but does not explain the falls in other age groups and we are left with the thought that quite a few people simply gave up looking for work.
The population in the United States is growing but the labour force is shrinking is the fundamental concept which challenges these numbers. So we are left with the familiar feeling that the employment situation may be improving but not by enough to dent unemployment by much in spite of the headline figures.
Markets which responded to the headline figures fairly quickly reversed course and the confusion led to a suspension in trading in the German bund or government bond futures market as initial selling was reconsidered.
The crisis enveloping Portugal deepens
For those who have followed the events which eventually caught up with the Irish and Greek governments the story is becoming rather familiar. I take care in using the word ennui because people’s livelihoods and futures are at stake. But the deterioration in prospects which happens in an erratic fashion where lulls are followed by further lurches downwards and are always accompanied by official pronouncements which do their best to rival the accuracy of the Iraqi general who used to appear on television and claim the Americans were being crushed just as Abrams tanks were entering Bagdad! Are familiar to followers of the Euro zone crisis.
Indeed I am reminded of the words of Karl Marx ” History repeats itself, first as tragedy, second as farce.”
If we look back and use the words of David Byrne of Talking Heads “How did I get here?” then we can see the following long-term influences on Portugal. The strongest has been low economic growth which has now extended for 20 years and coming with it has been a failure to improve her employment situation. Accordingly some Portuguese including many of the most able have chosen to emigrate. This long-term problem has been combined with joining the Euro which in some respects has helped Portugal but as we stand it is something of a noose around her neck as in effect she has no exchange rate flexibility. Also the way that fiscal rules have been ignored in the Euro zone has meant that whilst the size of Portugal’s national debt is close to Euro zone averages her fiscal deficit is higher and one or two,ahem,ruses are likely to be required for it to hit the target of 7.3% for this year. It is unfortunate to be relying on such things when you are supposed to be implementing austerity and accordingly the credibility of Portugal’s government has been on a downward slope.
Added to these problems is the fact that Portugal has problems with her trade and her external balances. Her current account deficit was some 9.5% of her economic output in the third quarter of 2010 and her private sector is heavily in debt to overseas creditors as well as being heavily in debt overall.However she does not have a housing or banking crisis at this stage and her problems are not really ones of boom and bust like Ireland and Greece more one of a steady relative decline which has been exposed by the current crisis.
As we move further into 2011 the Portuguese government will have to undertake further austerity measures as accounting ruses start to run out. Also at some point Portugal’s private-sector will need some form of deleveraging which if it happens in 2011 could lead to a fairly substantial recession developing. So the better economic growth of 2010 is likely to fizzle away. So far in the case of Ireland and Greece the height of the crisis has led to other problems emerging so there must be a danger of this in Portugal.
Added to the problems above the interest-rates on Portuguese government debt have risen again. Her ten-year government bond yield rose to 7.26% on Friday and unfortunately she has a bond issue planned for Wednesday which poses the question at what price and interest-rate she will have to issue the bonds as there is a danger that she will look solidly insolvent at such levels.
I have written for several months now that Portugal should seek international help and call in the IMF/EU/ECB troika. Her situation is quite different to that of Ireland with her banking crisis and Greece with her misrepresented statistics as it mostly reflects slow decline rather than boom and bust. Indeed with her balance of trade and external debt problems she could call in the IMF for its original purpose helping with an external balance problem! Sadly none of the Euro zone countries that have hit trouble have had the courage to try to get ahead of events and instead have relied on delay,obfuscation and on criticising (correct) opponents as “negative”.
One problem of this failed strategy is starting to emerge. In spite of all the aid that has been given/promised to Ireland and Greece neither nation’s government bond yields have improved. Indeed over the past few days some of the yields for Greece have gone above pre-crisis heights. This is an eloquent response to the strategy effected so far which looks ever more a failure and a potentially expensive one at that.