Sunday, September 9, 2012

The Other Side of the Job Numbers

Super Pacs have dolled out countless dollars to sway the few fence sitters in this endless presidential election. I have ceased to hear the Pacs. Like Charlie Brown's teacher's voice, both parties have become the "mwah mwah mwah mwah" trombone.

Now and then, a financial story will ascend above the din. Usually, it's a story about which everyone agrees. For instance, the job numbers.

They were bad - even worse than they looked on the surface.

Before we continue, allow me to give you some insight into my interest in security analysis and economics. I'm a math dork. I love math more than I love Republicans, Democrats, Independents, Green Parties, Libertarians, and other parties combined. I love the process of analysis, regardless of where it leads.
After decades of refining a macroeconomic risk model and investing and advising other about their investments, I have found three hypotheses to be very reliable
  1. Don't follow the crowd.
  2. If something is said often enough, most people will believe it.
  3. Follow the money.
We'll start with 2 and 3, since it's Super Pac money that is financing the current endless blather about the jobs report. In 2005, well into the recent housing bubble, Barney Frank insisted that there was no housing bubble. Lots and lots of people signed documents that indebted themselves at ten times their annual income to buy a home because there was no housing bubble. I often wonder whether these were the same people who bought internet stocks in the 1990s when there was no internet stock bubble. Now, big money says the jobs report is bad. Over and over and over again.

As to not following the crowd, you may have heard Warren Buffett say, in his predictably folksy fashion, "Be greedy when others are fearful; be fearful when others are greedy." When everybody was buying and selling houses in the mid 2000s, that was a bad idea. When everybody was loading up on internet stocks, that was a bad idea. Now everyone agrees that the job numbers were bad.  As a personality type, it's easy for me to go against the crowd. And this is one of those time that the data supports it.

What factors contributed to a lack of job growth in the U.S.?
  1. First Quarter GDP was +3.9%
  2. Second Quarter GDP was +3.8% – Beginning of European Debt Crisis
  3. Third Quarter GDP was +2.5%
  4. Fourth Quarter GDP was +2.3%
  1. First Quarter GDP was +0.4% – Egyptian President steps down, Libyan
  2. conflict begins, President Obama ratchets up sanctions on Libya, Oil prices pass $90/barrel, Japanese earthquake/tsunami
  3. Second Quarter GDP was +1.3% – Government shutdown narrowly diverted in Debt Limit debate, US Debt Rating lowered
  4. Third Quarter GDP was +1.8% – Oil prices below $90/barrel, Debt Limit debate resolved
  5. Fourth Quarter GDP was +3.0% – Oil prices again pass $90/barrel
  1. First Quarter GDP was +2.0%
  2. Second Quarter GDP was 1.7%
The Debt Limit debate was a ridiculous example of Congress shooting the economy in the foot. Luckily, the Fed's QE program has ensured that our borrowing costs for our national debt did not increase because our Congressional representatives are unable to do their job, so that effect did more to make us look foolish than add to our borrowing cost.

Assuming that the European Debt Crisis shaves 1% from GDP growth, and oil prices account for -.2%, the effect of these two crises on 2012 growth total about 1.2%. Adjusting for these issues, 2012 growth would have been just over 3%, which would keep job growth about even with population growth.

This is sub-par for after a recession, but definitely a better picture than the one we see.
Second, there is the ubiquitous argument that the decrease in the percentage of unemployed from 8.3% to 8.1% was due to a decline in the labor force. That statement is not consistent with the measure of labor I use, which is its broadest measure. The U-6, published by the Bureau of Labor Statistics, showed a decrease in the percentage of unemployed in August. Even the Economics Editor of "Barron's Magazine" says he's not so sure that there has been a decline in the labor force, saying, "Follow-ups on declines in the rate of joblessness accompanied by the decline in the labor force generally show that the labor force has a tendency to bounce back, while the fall in the unemployment rate has a tendency to confirm."

8.1% unemployment is high. But to look at that number and assume that is it low because it doesn't include people who have dropped out of the workforce, is not supported by the data.

Even if you don't want to take the time to check out the links in this article, think about the wisdom of following the crowd.  Going your own way will shield you from dogma, and lead to unexpected, and hopefully accurate conclusions.

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