He who makes the most money?
The Ride of the Keynesian Cowboys
by John Mauldin
October 8, 2010
To ease or not to ease? That is the question we will take up this week. And if we do get another round of quantitative easing (QE2), will it make any difference? As I asked last week, what if they threw an inflation party and no one came? We will take as our launching pad today's unemployment numbers, which serve to demonstrate just why the Fed may in fact be ready for some monetary shock and awe.
Teachers Don't Count?
As the jobs report came out a number of headlines trumpeted the "strong" private-sector job growth of 64,000 jobs, trying to soften the overall loss of 95,000 jobs. If you exclude the loss of census workers, the job losses were "only" 18,000. However, for the first time since December of last year, we lost jobs in a month. That is not the right direction.
"Moreover, when you adjust for the slide in the participation rate this cycle, the byproduct of a record number of discouraged workers withdrawing from their job search, the unemployment rate is actually closer to 12% than the 9.6% official posted rate in September, which masks the massive degree of labour market slack in the system. This is underscored by the broad U6 jobless rate measure, which spiked to a five-month high of 17.1% from 16.7% in August." (David Rosenberg)
Let's go to Table A-1 in the BLS website. You find that the total number of "civilian noninstitutional population" has risen by exactly 2 million over the last year to 238,322,000. That is the number of people over 16 available to work. But the actual civilian labor force has only risen by 541,000. Over the last 12 months we have added only about 344,000 jobs, according to the data from the Establishment survey, or just about a month's worth in the good old days.
Here's an interesting note I picked up while looking at employment data by age and education (with seven kids, these things are important to me!). There is a cohort that has seen its employment level rise. That would be men and women over 65. The total number of people over 65 who are employed has risen by 318,000 over the last year, accounting for nearly all the job growth (although one bit of data is from the establishment survey and the other is from the household survey, but that should be close enough for government work).
Think about that. Almost all the job growth has come from those who have reached "retirement age" (whatever that is) continuing to work or going back to work. The unemployment rate for young people 16-19 is 26%. The unemployment rate for black youth is an appalling 49%. (This is not an abstract piece of data. I have two adopted black sons, so this figure means something in the Mauldin household.) Next time you go into malls, Barnes and Nobles, fast food places, notice again the work force. These are the jobs that traditionally went to those starting out.
As my friend Bill Dunkelberg, chief economist of the National Federation of Independent Business, wrote yesterday:
"Officially, the recession ended in June, 2009 according to the National Bureau of Economic Research, historical arbiters of recession and recovery dates. But in July, 2009, Congress raised the minimum wage by over 10% and 580,000 teen jobs were lost in the second half of the year even as GDP posted growth of 4% (annual rate). This was more than double the losses in the first half of the year when GDP declined at a 4% rate and fewer workers were needed. This was one of many policies implemented or proposed by Congress that made no sense as a measure to blunt the impact of the recession. The minimum wage determines the minimum value an unskilled worker must add to a business to justify employment. Congress has made this hurdle higher and more teens find they cannot get over it. This is just one of many barriers to hiring that are institutionalized in our economy, for example restrictions in the stimulus legislation that required union labor on projects."
Let's hear it for unintended consequences.
The Rise of the Temporary Worker
17,000 jobs in the latest survey were from new temporary jobs. I caught this graph from uber data slicer and dicer Greg Weldon (
www.weldononline.com). Notice that part-time workers "for economic reasons" is the highest on record at 9.4 million. My take on this is that part-time workers are no longer a leading indicator but simply a manifestation of the new reality that employers don't want to take on the burden of a full-time employee who may not be needed or who comes with costly benefits under the new regulatory and health-care regimes.
State and local governments shed 39,000 jobs, the largest percentagewise loss since 1982. Those jobs mean something, and as state and local governments lose their stimulus money they will continue to shed jobs as they are forced to work with less revenue. Even after many places have raised taxes, revenues are down 3%. The consumption that government workers contribute to final consumer demand is just as important as that resulting from private jobs.
20% of personal income is now coming from the US government, and wages are flat. If you take into account the tax that is rising energy prices, that means many workers are falling behind the disposable-income curve.
Where Will the Jobs Come From?
Back to Dunk from the NFIB: "The percent of owners with unfilled (hard to fill) openings remained at 11% of all firms, historically a weak showing. Over the next three months, 13 percent plan to reduce employment (up 3 points), and 8 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net -3 percent of owners planning to create new jobs, 4 points worse than August. The urge (based on economic factors) to create new jobs is clearly missing in the current economy and expectations for future business conditions are not supportive of job creation. Plans to create new jobs have lagged other recovery periods significantly.
"Overall, the job creation picture is still bleak. Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending. Economic policies enacted or proposed continue to fail to address the most important players in the economy - the consumer. The President promised to continue to push his agenda for higher energy costs, few believe the health care bill will actually help them, and there is huge uncertainty about a VAT tax and the fate of the "Bush tax cuts". Deficits are at "trauma" level, incomprehensible to the average citizen. No relief, just promises that the consumer sector will be asked to pay more of their income to support government spending. This has left consumer and business owner sentiment in the "dumpster", unwilling to spend or hire."
The employment surveys mentioned above are basically completed by the middle of the month. But yesterday a Gallup poll suggested that unemployment may be headed back to over 10%, and that the latter half of September was weaker than the first half. From the release:
"The rate of those 'underemployed' - mostly part-time workers - increased slightly to 18.8 percent, suggesting that the number of workers employed part-time but seeking full-time work is declining as the unemployment rate increases. Gallup explains 'this may reflect a reduced company demand for new part-time employees.'
"This rate is likely to not be reflected by federal numbers to be released Friday, Gallup says, because the government numbers are based on conditions around the middle of September.
"Nevertheless, Gallup says the trend shows continuing high unemployment which does not help the economy, and could hurt retail sales during the holiday season.
"Gallup concludes by saying, 'The jobs picture could be deteriorating more rapidly than the government's job release suggests.'"
OK, the job picture is terrible. GDP is clearly slowing down. Consumer spending and retails sales are abysmal. Consumer credit creation is visibly falling, down for seven months in a row. Housing construction is not coming back any time soon. Commercial real estate is sick, with mall vacancy rates at almost 10%. Inflation (except in commodity and energy prices) is under 1%. The approximately 3% GDP growth we have seen the last four quarters was almost 2/3 inventory rebuilding, not a sustainable growth source.
It is pretty clear there will not be much more coming from the US government in the way of new stimulus. If you're a Keynesian and in charge of the Fed or Treasury (which is the case), what are you to do?
The Ride of the Keynesian Cowboys
The Fed is basically down to one bullet in its policy gun. It cannot lower rates beyond zero, although it can pull down longer-term rates if it so chooses. But lower rates so far have not been the answer to creating jobs and inflation. All less-subtle instruments of monetary policy have been tried. The final option is massive quantitative easing, the monetization of US government debt. As the saying goes, if all you have is a hammer, all the world looks like a nail. And after the last FOMC meeting, the markets have openly embraced quantitative easing. And for good reason: that is the talk coming from the leadership of the Fed.
Since my friend Greg Weldon has so thoughtfully collected some of the more salient parts of some recent Fed speeches, let's turn the next few paragraphs over to him.
"We note the following quotes, starting with the would-be-hero, maybe-headed-for-monetary-hell, Fed Chairman, Ben Boom-Boom Bernanke himself ...
... "'I do think that additional purchases, although we do not have precise numbers for how big the effects are, I do think they have the ability to ease financial conditions.'
"Next we note commentary that sparked Monday's extension lower in US Treasury Note yields, from New York Fed President William Dudley:
"'Fed action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.'
"Indeed, the Fed will keep pumping, until it sees the proverbial whites-of-their-eyes, as it relates to inflation, and job growth.
"More from Dudley ...
... "'The outlook for US job growth and inflation is unacceptable. We have tools that can provide additional stimulus at costs that do not appear to be prohibitive.'
"Indeed, when we first used the word 'deflation' in the Money Monitor, back in the nineties, and into the first part of the last decade, people scoffed, as this was a word equated to 'monetary blasphemy'... and I might have been 'charged' as a 'heretic' for suggesting that, someday, the Fed would PURSUE INFLATION as a POLICY GOAL.
"Now, the New York Fed President openly states that subdued inflation is ...
... 'UNACCEPTABLE'!!!!
"Welcome to the new world order, where deflation is openly discussed, and inflation is, in fact, pursued by the Federal Reserve, as a policy goal."
Greg goes on to quote Chicago Fed president Charles Evans as favoring easing, and you can bet vice-chair Janet Yellen is on board.
But there are voices that question the need for QE2. From the Bill King Report:
"Hoenig Opposes Further Fed Easing, Warns About Prices
"Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank shouldn't expand its balance sheet by purchasing more Treasury securities in an effort to spur economic growth... The Kansas City Fed official repeated his view that the Fed should raise its short-term target rate to 1 percent, then pause to assess the economy's recovery. He also rejected the idea of raising the Fed's informal inflation target above 2 percent because of concern over the possibility of falling prices.
"'I have to tell you it horrifies me,' Hoenig said, responding to an audience question. "It assumes you can fine-tune things like interest rates." 'I have never agreed to' an informal inflation target, he said. 'Two percent inflation over a generation is a big impact.'"
http://www.moneynews.com/StreetTalk/HoenigOpposesFurtherFed/2010/10/07/id/372979 
