The fall in the US Unemployment rate hides underlying problems,whilst Portugal’s leaders dither as her fortunes decline

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.”

Portugal’s situation

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.


15 thoughts on “The fall in the US Unemployment rate hides underlying problems,whilst Portugal’s leaders dither as her fortunes decline

  1. I’m merely wondering when will this slippery slope halt, somehow.

    Greece was (for better or for worse), first, Ireland as expected followed suit, Portugal will definitely follow suit…Then what?

    I can’t see a sustained attack to Spain / Italy / Belgium / et al continued for too long… The question is, what will EU and the Eurozone do about it eventually?

  2. Ionnis hi

    I agree with you, but personally can only see 2 alternatives:

    – Some sort of ‘financial union’ or at least agreement that ‘all for one and one for all’ so far as debts etc are concerned, – surely with Germany setting down rules as to how countries run their economies (as they will be the ultimate paymaster).

    – Some form of break up, – ie a German dominated Euro, and the rest going their own way.

    I can’t see any other alternative (Chinese help???), and would be interested to hear if I have missed anything.

    Personally I suspect the first alternative will ultimately win through, as there is far more political will in Continental Europe to keep the European project going than is appreciated in the UK. Secondly because if there was a break up, then the cost to the banks (and ultimately the Governments of Germany etc in N Europe) would be higher than bailing out the countries suffering at present.

    As I say personal thoughts, but whatever happens, I would think the cost will be high, and defaults still probable. Will this happen in 2011…or will we muddle through to 2012???

    • I agree that sooner or later (perhaps later after a lot of pain, some necessary and some unnecessary) the final solution will be some sort of common fiscal policy, which inevitably will involve some sort of money transfer from the rich to the poor but with some strict conditions for the public sector finances of the poor, necessary haircuts included. There is no other realistic alterantive. The other alternative (break up) will be more painful for the whole of Europe with unpredictable geopolitical consequences.

      • So for a German politician the choice is domestic political suicide or being blamed for the breakup of EMU?

        In the words of Brewster ,they may vote for “none of the above”.

  3. Hi Robert

    I think it unlikely the likes of Greece, Ireland Portugual etc could leave the euro. Nobody would want their currency. So on that basis I thnk it more likely that Germany and France plus possibly a few others might leave the euro and either get their old currencies back (there would be demand), or create a new currency. Of course this means that their euro loans are noww denominated in a different currency so their banks are about to take a big hit as you mentioned. However, if I were German I would be wondering what price unity.

    One alternative would be for Germany to agree to underwrite other countries but on the condition that they take over the running of their finance ministries. Thus they would backhandedly take over much of national policy. They would only do so where invited. I can’t see this one going anywhere either.

    Frankly let’s just get the haircuts over and done with. One big hit rather than death by a thousand cuts.50%+ write offs on Greek and Irish debt. Banks take a huge hit. New rules saying debts belong to country in trouble etc and that haircuts are the way forward. Greece etc al then have no choice but to significantly cut spending as they would probably have to live within their means for some years (cost of new borrowing being far too high).

    Whichever way we look at this the problem is tto big to trade our way out of it. Let’s just get it over and done with so we can move on.

  4. Portugal is in an interesting situation. Since joining the EU, it has received quite massive subsidies in the form of the CAP and the regional development funds. Nevertheless, the economy is moribund. Why is this? I lived and worked in Lisbon for three years at the start of their EU membership and things seemed to be going rather well. A huge amount of infrastructure was replaced or upgraded and prosperity seemed finally to have arrived. Tourism was booming, though perhaps that is not enough. Unlike Spain, there has been no huge real estate bubble. The juicy subsidies continue but what has gone wrong? Is it incompetence, corruption, an oversized public sector or is the country just too small to make its way within the EU?

    • Actually, I don’t think it is accurate to say that the Portuguese economy is moribund at this stage. GDP growth in 2010 is expected to be 1.3″%-1.5%; from September to November, exports increased by by 12.8% and imports by 4.6%; here are today’s statistics on new orders in industry:
      Not that it makes much difference to the market perceptions.

      • Hi Isabel and welcome to my blog

        Actually Carys may well be referring to a chart I put on here a while ago and which I refer to from time to time. It was from a Portuguese economist who looked at economic growth since 1990 and the trend was downwards. I will look for it again and put in in another article as I believe it to be revealing.Unfortunately it is also disappointing

        I have enjoyed my trips there and have Portuguese friends but even so the arithmetic is working against her as a nation and whilst markets have many faults there are usually far more accurate than official pronouncements…..

    • Hi Carys
      I remember more than a few years ago the road from Faro to Lisbon being made a motorway and always assumed that was EU moneythanks for reminding me of that from my past. And as you say she has benefiited from the Common Agricultural Policy. But the subsidy system has hit the problem that to solve the current problems with it you have to pay even more. Put another way the CAP,CFP and other EU policies have been in effect regional policies and the message as we stand is that such a policy does not work.

      The message I receive is that Portugal is very bureaucratic and not business friendly and increasingly I am heearing about higher prices too.

      Having confessed above to visiting the Algarve on my theme of song titles I guess the DJ is cueing up he’s just a stereotype by the Specials…..

  5. @andy of yarm
    I think I will say the obvious.
    I believe that if German politicians explain frankly to the electorate where their long-term interests lie, the dangers of alternatives etc. the German people are reasonable and they will be persuaded to support a balanced policy which of course involves some unpleasant drastic measures and structural reforms to the weak players.
    Everybody thought it was impossible but Papandreou managed to get significant cuts to salaries in the public sector within a background of higher prices with very small resistance. He explained frankly the situation and managed this. Of course it is not enough and much more should be done, but let’s not underestimate the possibility for rational reactions if things are explained properly and logically.
    Simply, if the problem spreads and it is not isolated to a country, you cannot have just a couple of countries that prosper while the rest are suffering in comparison within a union (which is more than monetary). It is impossible to have a union then, and within union is that you prosper. There is no other alternative than some redistribution of wealth. It is very simple.

  6. Germany may be pragmatic enough to recognise that a cornerstone of its export boom was/is a (relatively) low Euro, due to the presence within the Eurozone of a bunch of weak economies.

    If the Eurozone split, with either Germany going its own way, or at the core of a Teutonic “New Eurozone”, Germany’s exchange rate with the rest of the world would be much higher than at present. While its commodity costs would be reduced, these benefits would be far outweighed by the increased costs to overseas purchasers of German goods due to the exchange rate effects. Thus, German exports would plummet.

    As currently structured, Germany’s economy needs the weak Eurozone members almost as much as they need it. While German voters won’t like this, if the facts are explained to them, they’ll recognise that, between a rock and a hard place, it’ll be in their own interests to keep the Eurozone intact, whatever the huge fiscal transfers that are required to ensure this.

    So, it’ll come down to the skill and political capital of Angela Merkel to convince its electorate. Hopefully, she’ll have the ability, else chaos beckons.

  7. Hi Shaun.. well ZH is reporting that the Bank of Portugal has said it “could use external financial support”.. this is either a really badly timed and worded statement by an insignificant bank official (which I don’t discount) or the opening cords of crying uncle. This report is short on details, but this is not how you calm bond markets to say the least:

    Tomorrow’s action will definitely be interesting..

  8. It is the first time I visit your blog (How do you do?), but I think I know the chart you are referring to.

    I am not even an economist, so I don’t know the reasons for that sluggish growth. But I do like to read the original statistics (on economy or anything else) and I am forever puzzled by the disconnect that often exists between them and the perceptions that are expressed (generated?) in the media. I don’t think market agents are much different from those people that answer to surveys that they think that crime is rising, but they, personally, have not been a victim, nor do not know personally any victim of crime in the past year.

    There have been quite a few improvements in the past 5 years, say (and a lot of waste, no doubt), even in burocracy, for example, and the profile of exports has definitely changed. But this will not make any difference tomorrow, of course. Portugal will ask for help from the ESF and maybe that will not be a doomsday scenario (except for Socrates, for the rest of the people the austerity measures can hardly be harsher without breaking the back of the economy completely). But do you really believe it will protect Spain, Belgium? This whole story looks anything but rational to me.

  9. @ Basil,

    are you so convinced that the German long term intrest is in the Euro zone?

    I am not. I agree with you that in the short term it will bring chaos if Germany were to leave.

    But in the longer term it seems to me that the choice for the German electorate is between getting their own stable currency back or (near) permanent transfers of wealth from Germany to other weaker European nations, as unlike you seem to believe I do not believe that the Germans would see any reverse transfers in my lifetime.

    Even if Germany would be better of overall under such a permanent net transfer scheme, if I were German I would vote against such an arrangement out of principle.

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