Misguided Economists Say Unemployment Rate Has Peaked

Economists are giddy once again, following news that weekly unemployment claims dropped to 440,000.

"In the week ending Feb. 6, the advance figure for seasonally adjusted initial claims was 440,000, a decrease of 43,000 from the previous week's revised figure of 483,000. The 4-week moving average was 468,500, a decrease of 1,000 from the previous week's revised average of 469,500."

Weekly Claims 2010-02-11

As good as the one week seasonally adjusted drop of 43,000 looks, the track record of the Department of Labor is to revise numbers up. Moreover, the four-week moving average did not budge. Finally, please remember that it will take a minimum of 100,000 to 120,000 jobs a month just to hold the unemployment rate steady.

Misguided Forecasts

With that backdrop, please consider U.S. Economy to Strengthen, Reducing Unemployment, Survey Says.

U.S. unemployment peaked in October and will retreat through 2011 as the economy strengthens, according to economists surveyed by Bloomberg News.

The world’s largest economy will grow 3 percent this year and next, more than anticipated a month ago, according to the median estimate of 62 economists polled this month. The jobless rate, which reached a 26-year high of 10.1 percent in October, will end the year at 9.5 percent.

Efforts to rebuild inventories, investments in new equipment and software and improving sales overseas will spur employment and household spending. Scant inflation will give Federal Reserve policy makers room to keep the target interest rate near zero through the third quarter, buying the economy enough time to reach a self-sustaining expansion.

“It’s a matter of time before strength in the economy effectively feeds on itself, with more employment leading to stronger spending, which in turn leads to more employment,” said James O’Sullivan, global chief economist at MF Global Ltd. in New York. “The key is going to be the business sector leading the way and consumer spending following.”

Seasonal Adjustment Madness

Economists are excited over BLS numbers that cannot be trusted. Heck, not only can they not be trusted, they are downright preposterous. Please consider BLS Seasonal Adjustments Gone Haywire; 11% Unemployment Coming by May?

Unadjusted Unemployment Minus Seasonally Adjusted Unemployment

click on chart for sharper image

Seasonal Adjustment Highlights

·         There is always a big BLS adjustment in January

·         There is always a reversion to the mean that overshoots to the downside between March and April

·         There is always a secondary rebound back above the 0.0% line in July, followed by a smaller overshoot to the downside in October.

The problem is in the increasing amplitude of these swings, in both directions. It really makes you wonder just what the hell the BLS is doing and why.

I have data charted all the way back to 1999. Prior to January 2009, the biggest January swing was .6 percent, in both 2004 and 2003. In 2008 the January swing was only .5 percent.

The amplitude of January swings in both 2009 and 2010 was .9 percent, way outside the data range for the last 10 years, by a factor of 50 percent (.3/.6).

Likewise, the prior swings in October peaked at -.4 percent on a couple of occasions but hit -.7% in October 2009.

Unless it's different this time (I figure it is not) a reversion to the mean that slightly overshoots in a May-June timeframe will lop off a whopping 1.3 percent off the posted seasonally adjusted rate of 9.7 percent just announced.

In other words, all things being equal (no job gains or losses), we could expect to see the unemployment rate approach 11% by May! Of course we have to factor in actual job growth (or lack thereof). We also have to factor in census bureau hiring.

Heaven knows what census hiring will do to the BLS algorithms. Your guess is as good as mine. However, whatever it does, census hiring will also revert to the mean.

Also remember that it takes 100,000 to 120,000 jobs per month just to hold unemployment rate steady. Think that's going to happen? If so (and again discounting census hiring), then you are living in Bizarro world along with everyone else who thinks the unemployment rate is going to come crashing down.

Small Businesses See No Reason To Hire

James O’Sullivan, global chief economist at MF Global Ltd says “The key is going to be the business sector leading the way and consumer spending following.”

With that in mind, let's see what small businesses say. Please consider NFIB Small Business Trends February 2010.

Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! “Stimulus” for this administration has not focused on supporting consumer spending nor been designed with a sense of urgency as central to policy formulation.

Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms, fully expecting to have it in place and implemented (10 years of taxes, seven years of “reform”) this year with unemployment at 10 percent and expected by many to rise. Lawmakers also allowed the minimum wage to rise by nearly 11 percent in July 2009, catapulting teen job loss to over 500,000 and an unemployment rate of 27 percent in the second half even though the economy started growing. This was double the loss in the first half when GDP growth was plummeting.

If the administration wants to count “jobs created and saved” it should also be accountable for “jobs destroyed or prevented.”

City, State, Municipality Cutbacks

I have no idea how economists miss what's right before their noses but cash-strapped cities, states and municipalities are hiking taxes and laying off workers. Tax hikes will devastate small businesses. They will also harm everyone for the benefit of union workers. The effects of such misguided policies have not yet been felt.

In case you missed it, note that Governor Christie Declares "New Jersey on Edge of Bankruptcy".

Pullbacks in state spending have only just begun. Watch what happens after the next election. It is very difficult for candidates to preach fiscal austerity now. It will be much easier to do so, the first year following a four-year gubernatorial election.

Also remember, the Fed is about ready (or so they claim), to halt agency and treasury purchases. The effects of that on the mortgage and housing market are also not factored in.

No V-Shaped Recovery

Economists still expect some sort of V-shaped recovery even though there is no driver for jobs. Small businesses have no reason to hire, and indeed are not hiring.

Even if by some miracle we do see 100,000+ jobs a month between now and May (discounting census hiring which may temporarily distort BLS numbers further), expect to see unemployment head towards 11% by mid-summer on simple reversion to the mean unwinding of preposterous BLS seasonal adjustments.

Participation Rate Pressures

Down the road, expect the participation rate to rise (those wanting jobs to start looking again). Here is the appropriate snip from Jobs Contract Yet Again; Unemployment Rate Drops To 9.7%

Persons Not in the Labor Force

About 2.5 million persons were marginally attached to the labor force in January, an increase of 409,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Headwinds for a rapid drop in the unemployment rate are enormous. Realistically, it simply is not going to happen.

Mish

GlobalEconomicAnalysis.blogspot.com

To sign up for a free copy of Sitka’s Monthly Client Newsletter, please register your email address at the bottom of the Sitka Pacific Commentary Page.