Mark Twain once remarked, “There are three kinds of lies: lies, damned lies, and statistics.” This observation may well apply to government economic reports.
A glance at the headline unemployment numbers released last Friday seems to indicate progress, with the unemployment rate for August dropping to 7.3 percent from 7.4 percent in July. This might sound encouraging.
However, a deeper look into the Labor Department report uncovers a significant omission. A growing segment of the working-age population has vanished from the labor force because they have ceased their job search. In August alone, 516,000 American workers exited the labor force, raising the total number of working-age individuals not participating in the job market to almost 90.5 million.
By excluding discouraged workers from the unemployment rate calculation, the Labor Department can report a drop in the unemployment figure. This manipulation of data raises questions about the true state of the job market. The reality remains; the U.S. economy is experiencing its lowest labor force participation rate in 35 years. So, where have these discouraged workers gone? They haven’t just disappeared.
The Real Unemployment Rate
According to author Rick Newman, “The largest decline has occurred among young workers.” He notes that the recession and the lackluster recovery have significantly reduced opportunities for entry-level jobs across nearly all sectors. Many young individuals either struggle to find work or opt to pursue further education instead of job hunting.
Unfortunately, it may take a solid economic expansion before entry-level positions become widely available again. Furthermore, young workers will need time to develop practical skills and grow their careers, which could mean some may remain stunted in their professional development.
Meanwhile, many young adults find themselves with limited choices. Through no fault of their own, numerous individuals will continue living at home while attempting to pay off substantial student loan debt. But the challenges don’t stop there.
Besides what was excluded from the unemployment report—namely, individuals who have stopped seeking jobs—the reported job creation figures were disheartening. A mere 169,000 new jobs were added in August, and the July job number was revised down significantly from 162,000 to 104,000. Yet, the Labor Department still maintains the unemployment rate at 7.3 percent.
In contrast, John Williams of Shadow Government Statistics estimates the real unemployment rate at 23.3 percent. Williams uses pre-1994 calculations, which do not exclude discouraged workers from the unemployment rate. Ultimately, which figure you choose to believe is a matter of personal judgement, but it’s crucial to have the full picture.
The Economic Recovery that Never Was
Overall, it seems that the economy is trapped in first gear, lacking the momentum necessary for genuine progress. Since the downturn in late 2007, the economy has struggled to gain sustained traction, with only sporadic bursts of growth.
Undoubtedly, a robust economic boom is desired—both by the public and the stock market, which has been optimistic for some time. Yet, the anticipated recovery remains elusive.
Nevertheless, this hasn’t deterred the stock market’s upward trajectory. Who cares if unemployment remains high while the S&P 500 has risen by 17 percent this year? However, this trend might be nearing a shift.
The main driver behind the stock market’s remarkable ascent has been the low-cost credit provided by the Federal Reserve. Some of this quantitative easing likely found its way into stock investments. However, after continuously injecting capital over the past five years, the Fed may soon begin to withdraw support.
Without the $85 billion in monthly Fed purchases, yields on 10-Year Treasury bonds are likely to rise. Increased yields will lead to higher borrowing costs and subsequently lower asset prices, including stocks.
When stock prices eventually decline, it will become clear to all that we are indeed living in the economic recovery that never materialized. For now, though, investors can take comfort in the fact that the S&P 500 rose by 1 percent yesterday.
Caveat emptor – let the buyer beware.
Sincerely,
MN Gordon
for Economic Prism
Return from The Economic Recovery that Never Was to Economic Prism
